VMUK FY23 Financial Results

Virgin Money UK PLC

23 November 2023

 

Virgin Money UK PLC

Full Year 2023

Financial Results

Announcement

BASIS OF PRESENTATION Virgin Money UK PLC ('Virgin Money', 'VMUK' or 'the Company'), together with its subsidiary undertakings (which together comprise 'the Group'), operate under the Clydesdale Bank, Yorkshire Bank and Virgin Money brands. This results announcement covers the results of the Group for the year ended 30 September 2023. Statutory basis Statutory information is set out on page 17 and within the financial statements. Underlying basis Management exclude certain items from the Group's statutory position to arrive at an underlying performance basis. A reconciliation from the underlying results to the statutory basis is shown on page 17 and rationale for the adjustments is shown on page 133. Alternative performance measures (APMs) The KPIs and performance metrics used in monitoring the Group's performance and reflected throughout this results announcement are determined on a combination of bases (including statutory, regulatory and alternative performance measures), as detailed at 'Measuring the Group's performance' on pages 122 to 132. APMs are closely scrutinised to ensure that they provide genuine insights into the Group's progress; however statutory measures are the key determinant of dividend paying capability. 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. The information contained within this announcement is deemed by the Group to constitute inside information as stipulated under the Market Abuse Regulation No 596/2014. Upon the publication of this announcement via Regulatory Information Service, this inside information is now considered to be in the public domain.

FORWARD-LOOKING STATEMENTS

This document and any other written or oral material discussed or distributed in connection with the results (the 'Information') 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 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, trends in its operating industry, changes to customer behaviours and covenant, macroeconomic and/or geo-political factors, the repercussions of the outbreak of coronaviruses (including, but not limited to, the COVID-19 outbreak), changes to its Board and/or employee composition, exposures to terrorist activity, IT system failures, cybercrime, fraud and pension scheme liabilities, risks relating to environmental matters such as climate change including the Group's ability along with the government and other stakeholders to measure, manage and mitigate the impacts of climate change effectively, 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, tax and national insurance rates, changes in the liquidity, capital, funding and/or asset position and/or credit ratings of the Group, future capital expenditures and acquisitions, the repercussions of Russia's invasion of Ukraine, the repercussions of the UK's exit from the European Union (EU) (including any change to the UK's currency and the terms of any trade agreements (or lack thereof) between the UK and the EU), Eurozone instability, any referendum on Scottish independence, and any UK or global cost of living crisis or recession.

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 and should be viewed as hypothetical. 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 (each a 'VMUK Party') gives any representation, warranty or 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 the Information. All forward-looking statements should be viewed as hypothetical. No representation or warranty is made that any forward-looking statement will come to pass. While every effort has been made to ensure the accuracy of the Information, no VMUK Party takes any responsibility for the Information or to update or revise it. They will not be liable for any loss or damages incurred through the reliance on or use of it. The Information is subject to change. No representation or warranty, express or implied, as to the truth, fullness, fairness, merchantability, accuracy, sufficiency or completeness of the Information is given.

Certain industry, market and competitive position data contained in the Information comes from official or third-party sources. There is no guarantee of the accuracy or completeness of such data. While the Group reasonably believes that each of these publications, studies and surveys has been prepared by a reputable source, no member of the Group or their respective directors, officers, employees, agents, advisers or affiliates have independently verified the data.

In addition, certain industry, market and competitive position data contained in the Information comes from the Group's own internal research and estimates based on the knowledge and experience of the Group's management in the markets in which the Group operates. While the Group reasonably believes that such research and estimates are reasonable and reliable, they, and their underlying methodology and assumptions, have not been verified by any independent source for accuracy or completeness, and are subject to change. Accordingly, undue reliance should not be placed on any of the industry, market or competitive position data contained in the Information.

The Information does 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. The distribution of the Information in certain jurisdictions may be restricted by law. Recipients are required to inform themselves about and to observe any such restrictions. No liability to any person is accepted in relation to the distribution or possession of the Information in any jurisdiction.

Virgin Money UK PLC Full Year Results 2023

David Duffy, Chief Executive Officer:

"We made good progress executing our strategy in 2023, growing both our relationship customer base and target lending segments. With the momentum we carry into 2024, we are confident in the outlook for our business and we expect to deliver around £800m in distributions to our investors by the end of the three-year period ending in 2024.

"Under the Virgin brand, our ambition is to create the UK's best digital bank. To help achieve this goal, we are stepping up investment in our technological capability to future proof our business and protect our customers from the growing risk of fraud strategies driven by advances in AI."

Summary financials

						2023		2022		Change
						£m			£m	%
Underlying net interest income (NII)							1,716		1,592	8
Underlying non-interest income(1)							157		150	5
Total underlying operating income							1,873		1,742	8
Underlying operating and administrative expenses							(971)		(914)	6
Underlying operating profit before impairment losses							902		828	9
Impairment losses on credit exposures							(309)		(52)	n.m.
Underlying profit on ordinary activities before tax							593		776	(24)
Adjusting items(1)							(248)		(181)	37
Statutory profit on ordinary activities before tax							345		595	(42)
Key performance indicators(2)
Total customer lending							72,754		72,565	0.3%
Net interest margin (NIM)							1.91%		1.85%	0.06%pts
Underlying cost: income ratio (CIR)							51.9%		52.5%	(0.6)%pts
Statutory return on tangible equity (RoTE)							3.9%		10.3%	(6.4)%pts
Dividends and share buybacks announced							272		267	2%
Common equity tier 1 (CET1) ratio (IFRS 9 transitional)							14.7%		15.0%	(0.3)%pts
(1)    Hedge ineffectiveness is now presented as an adjustment to underlying earnings as detailed on page 133. The comparative periods have been adjusted accordingly. (2)    For definitions of the KPIs, refer to 'Measuring the Group's performance' from page 122.

Delivered strong financial performance and attractive shareholder distributions

·      NIM expanded to 1.91% (2022: 1.85%), supported by early management of deposit migration, hedge re-investment & lending mix

·      Total income up 8%, reflecting 8% growth in NII and positive fair value movements benefitting non-interest income

·      CIR stable at 51.9% in line with guidance; underlying costs of £971m 6% higher as gross savings offset by inflation and investment

·      Underlying operating profit before impairments of £902m up 9% on FY22, reflecting positive jaws

·      Credit impairment charge of £309m (42bps cost of risk) reflecting prudent macroeconomics and provision build from higher modelled ECL; credit quality remains robust with low arrears; provision coverage of 84bps significantly above pre-pandemic levels

·      Adjusting items £67m higher YoY, primarily reflecting higher restructuring charges as anticipated, including 30% reduction in the store network, and an intangible asset write-down, given deferred implementation and redesign of the new mortgage platform

·      Statutory profit decreased 42% YoY, reflecting higher impairments and adjusting items; statutory RoTE of 3.9% (2022: 10.3%)

·      CET1 ratio remains strong at 14.7% (2022: 15.0%); announced further £150m buyback, above prior guidance, taking FY23 buybacks to £200m; 5.3p full-year dividend means total shareholder distributions of £272m for FY23, c.2% higher than FY22

Driving continued growth in target lending segments and relationship deposits

·      5% growth in active relationship customer accounts during FY23 to 3.8m accounts

·      Relationship deposits 2% higher in FY23 at £35.4bn, remaining 53% of total deposits; total deposits also increased 2% to £66.6bn

·      Strong growth in target segments; Unsecured +5.8%, driven by growth in cards; Business lending +6.0% as growth in BAU balances offset a reduction in Government scheme lending; resilient performance in Mortgages (1.1)% leaving overall lending stable

 Strong strategic delivery for customers

·      Re-launched Virgin Money Investments, including pensions; launched Digital Wallet to Virgin Atlantic customers with good take-up

·      18% YoY growth in business current account (BCA) sales; net growth in BCA accounts for 22 consecutive months

·      Call waiting times down c.65% from peak following additional resource costs to support customer service 

·      Embedded Consumer Duty requirements; supporting customers through Mortgage Charter and our Cost of Living hub

FY24 and medium-term outlook

·      NIM of 190-195bps in FY24, supported by structural hedge re-investment, deposit mix & ongoing growth in target segments

·      Continued loan growth in Unsecured & BAU Business, while maintaining mortgage market share in the medium term; volume growth and improving margin to drive income growth in medium term

·      Underlying cost:income ratio⁽³⁾ expected to remain broadly stable in FY24; continue to target less than 50% in medium term

·      Expect cost of risk for FY24 to be in the range of 30-35bps, following strengthened provision coverage in FY23

·      Now expect higher annualised gross cost savings of £200m (previously £175m); anticipate majority of remaining c.£60m restructuring charges in FY24

·      Anticipate c.£40m investment in financial crime prevention in FY24 with c.£130m FY24-26 (excluded from underlying performance)

·      CET1 to be in target 13-13.5% range in FY24 with total shareholder distributions in FY24 to be around FY23 nominal level⁽⁴⁾; total shareholder distributions between FY22-24 now expected to be around £800m⁽⁴⁾

·      Expect to deliver Underlying RoTE of c.10% in FY24⁽⁵⁾ reflecting good business momentum with statutory RoTE of c.8%

·      Committed to generating sustainable double-digit statutory returns in the medium term

(3)    Excluding financial crime prevention programme from FY24 (4) Buybacks subject to Board and regulatory approval (5) Excluding financial crime prevention programme from FY24 and cash flow hedge reserve.

Contact details

For further information, please contact:

Investors and Analysts
Richard Smith Head of Investor Relations & Sustainability	[phone] [e-mail]
Amil Nathwani Senior Manager, Investor Relations	[phone] [e-mail]
Martin Pollard Senior Manager, Investor Relations	[phone] [e-mail]
Media
Simon Hall	[phone]
Senior Media Relations Manager	[e-mail]
Press Office	[phone]
	[e-mail]
Teneo
Doug Campbell (UK)	[phone]
Julia Henkel (Australia)	[phone]

Virgin Money UK PLC will today be hosting a presentation for analysts and investors covering the 2023 full year financial results starting at 08:30 GMT (19:30 AEDT) and this will be webcast live and is available at:

https://webcast.openbriefing.com/vmuk-fy23/

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

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

A call for fixed income investors will be held today at 14:00 GMT (01:00 AEDT on Friday 24^th November 2023): Dial-in details: UK 0800 358 1035; Australia [phone]; All other locations: [phone]; Access code: 944297

Announcement authorised for release by Lorna McMillian, Group Company Secretary.

LEI number: 213800ZK9VGCYYR6O495

Business and financial review

Chief Executive Officer's introduction

Delivering against our strategy

We made good progress executing our Purpose-led strategy in 2023 and are entering 2024 with good momentum in our key target segments across the business.

David Duffy

Chief Executive Officer

We are delivering positive financial performance and strong capital distributions despite a challenging backdrop

Dear stakeholder

During the second year of our current strategic cycle, the Group has continued to execute well against our Purpose-led ambition to become the UK's best digital bank.

2023 has been another year of significant change in the operating environment and I am pleased that we have continued to deliver against this backdrop. The combination of the higher rate environment and our strategy is increasingly translating into growth in relationship customer accounts and income. We've made good progress on our journey to digitise the Bank, and I would like to thank our colleagues for a significant year of execution.

There remains more to do as we enter the final year of our current 3-year plan, but we have good momentum across key areas of the business, a robust balance sheet, and a continued focus on ensuring we support and reward our customers' ongoing loyalty. We will remain vigilant in safeguarding against new and emerging threats, and adapting accordingly, we are increasingly well placed to generate strong, sustainable returns. These will support shareholder distributions, investment in the business and our long-term growth ambitions.

Strategic delivery in 2023

Throughout the year, I have been pleased with our commercial momentum across the business. Our balance sheet strength helped us withstand the broader turbulence in the sector earlier in the year as we retained resilient liquidity, funding and capital positions.

Our refreshed digital products are delivering growth in balances across our target segments of Business, Unsecured and relationship deposits. Business, in particular, demonstrated good momentum across both sides of the balance sheet, with a second year of robust current account sales, and lending growth despite a weaker market backdrop. Within Unsecured, our cards business continued to drive good growth, increasing our market share steadily, while also focusing on long-term profitability against the higher rate backdrop. Relationship deposits grew in line with the overall deposit base at a time when many banks have seen significant deposit migration and attrition. Our early management of the trend for customers to seek higher yields, offering attractive products such as our linked savers, demonstrated how we can offer good value to customers while also delivering a more resilient margin outlook.

Earlier in the year the Group took action to invest in improving our service position, and we are seeing an improvement in the key customer satisfaction metrics, albeit we have more to do. As we reaccelerated our digitisation work in the second half of the year, we continued to deliver the gross savings outlined at FY21, mitigating the backdrop of inflationary pressure.

Continuing to build an efficient and sustainable platform to support long-term returns remains a key ambition. However, we must recognise the need to adapt to changes in the environment, including emerging threats and new technology. We have therefore decided to invest c.£130m over 3 years, as we deliver our response to the emerging risks and technologies, including AI, in the evolving financial and cybercrime space. Additional savings have been identified to offset this however, taking the original c.£175m target for cost savings to c.£200m, with no additional cost to achieve.

Business and financial review

Chief Executive Officer's introduction

The improving rate environment, combined with our commercial momentum, saw continued strong underlying capital generation to support the Group's ambitions. Our CET1 ratio remained robust throughout the period and we saw another strong set of results through our second BoE stress testing process.

The Board and I remain committed to continuing to deliver capital distributions for shareholders. We are recommending a 5.3p ordinary dividend for 2023, supplemented by our announcement today of a higher than guided £150m share buyback in respect of FY23, to be executed during H1 2024. This takes total shareholder returns announced for the year to £272m, in line with 2022 (£267m).

Robust financial performance in 2023

The significantly higher rate environment, combined with our strategic execution in the year, resulted in underlying operating profit before impairment charges 9% higher than a year ago. However, statutory profit before tax of £345m was lower than 2022 (£595m), firstly given higher impairments relative to last year's low charge, which primarily reflected higher modelled provisions, and secondly, higher adjusting items due to ongoing restructuring activity and intangible asset writedowns (see CFO review for full details). Altogether, this resulted in a lower Statutory RoTE of 3.9% (2022: 10.3%), with a Statutory cost:income ratio of 64% (2022: 62%).

Underlying income increased 8% in the year, primarily driven by stronger net interest income (NII). NIM expanded again to 1.91% (2022: 1.85%), supported by a higher yield on our structural hedge, early management of deposit migration trends and growth in higher yielding lending. These developments have helped offset a continued competitive market for mortgages and an increasingly competitive market for deposits.

Underlying operating costs of £971m increased 6% on the prior year. We have continued to deliver against our cost reduction programme, with gross savings broadly offsetting additional costs from inflation and balance sheet growth. However, the additional costs to resolve service challenges and higher levels of investment drove the increase in total costs.

While our overall credit quality remains resilient, we saw a higher credit impairment charge this year, equivalent to a cost of risk of 42bps (2022: 7bps), as we incorporated a more conservative economic outlook and updated credit bureau data. This is reflected in our increased expected credit loss (ECL) provision, and coverage of 84bps, which is significantly higher compared to 62bps at FY22. The key driver of the increased credit provision is credit cards, reflecting a higher modelled view of future losses, given updated assumptions. This leaves the Bank well placed against any future credit deterioration.

Overall lending balances were stable at £72.8bn, despite a muted market backdrop. We achieved 9% growth across our target segments of Unsecured and business-as-usual (BAU) Business lending, while the mortgage book reduced 1%, as market demand slowed against the higher rate backdrop. Pleasingly given the competitive backdrop, deposit balances grew 2% to £66.6bn, with relationship deposits also 2% higher.

Our ongoing profitability supports a robust capital position, reflected in a CET1 ratio of 14.7% (2022: 15.0%) supporting further capital distributions. The liquidity coverage ratio (LCR) of 146% and loan to deposit ratio (LDR) of 109% also highlight the strength of our funding position and the robustness of our balance sheet.

Responding to evolving technology

As the backdrop continues to evolve and new technologies emerge, the Group remains focused on safeguarding the Bank and our customers. We remain vigilant to the emerging expectations, threats and challenges we face, as well as rising stakeholder expectations.

The rapidly increasing prevalence of online channels and social media are driving higher instances of fraud and financial crime in the UK. Increasingly, this will become an area where banks bear the full extent of fraud losses and associated penalties. Cybercrime represents another area of significant development, with new technologies including AI increasing the sophistication and risk of attacks. Underpinning the defence against such attacks and broader reporting is strong data management, including adoption of the Basel Committee on Banking Supervision (BCBS) 239 data standard, and this will be an area of increased focus for us in the years ahead.

To maintain our vigilance against all forms of fraud and financial crime, we have decided to increase our digital investment in this area from FY24. We will implement new and improved technology and increase the sophistication of our processes, with the goal of providing our customers with upgraded protection against criminal actors.

As a result, we are announcing a c.£130m investment programme over the next three years, of which c.£40m will be spent in FY24. This investment will significantly upgrade our financial crime prevention and cyber defence capabilities, while also delivering increasingly rich data and analytical capabilities, including AI models, to underpin our risk data aggregation and internal risk reporting practices, in line with regulatory requirements.

This is the right thing to do for customers and the Bank in the long term, safeguarding and protecting both as the environment evolves, and will support sustainable shareholder returns over time. While the investment will impact on returns in the short term, we believe it mitigates against the risk of greater impact on the Bank and our customers in the future.

We will also seek to offset the higher costs incurred through additional cost saving initiatives. We are increasing the scope of our existing cost savings programme and are now targeting c.£200m of gross cost savings, up from c.£175m previously. These will be delivered primarily by further strategic rationalisation of our real estate portfolio, outsourcing and systems simplification. This will be delivered within the existing c.£275m restructuring budget set at FY21.

Delivering against our strategic priorities

We continue to progress our strategic shift towards digital banking, as set out at FY21. This outlined a three-year programme of change and investment towards achieving our strategic ambition of becoming the UK's best digital bank. A summary of our progress against our four key strategic priorities during 2023 is below.

Delighted Customers and Colleagues

We have made significant improvements in addressing the challenges faced earlier in the year around service. Call waiting times are on average 65% lower compared to their October 2022 peak, and after investing more in the first half, we have been able to reduce the numbers of third-party resources and additional colleagues employed to address the backlog of complaints. Having addressed these issues, over the second half of the year we have re-accelerated efforts to digitise and automate the business as planned.

Business and financial review

Chief Executive Officer's introduction

As a result of these actions, the Group's Smile scores improved for the first time in three years, increasing to 49%. Complaints per 1,000 have reduced to 4.0, as we addressed complaint backlogs and improved processes.

While this investment drove a higher cost out-turn for 2023 than was initially expected, it was right we invested for both our customers and the long-term health of the business. However, we want to do more and remain focused on continuing to improve service levels.

Over the course of the year, we have fully implemented new regulatory requirements including Consumer Duty and the Mortgage Charter as well as supporting additional regulatory focus on the savings market. These new requirements are well aligned to our Purpose and how we conduct our business, meaning we were well placed to deliver them.

Given the current environment, we are also fully committed to supporting customers as they deal with higher living costs, including via our online cost of living hub.

We have made good progress in the development of our digital wallet and this has now been launched to our closed user group made up of Virgin Atlantic credit card users. This work will form the foundation of our all-encompassing integrated app for Virgin Money in 2024 and we are well placed to launch the first iteration of this through the next year.

For colleagues, our A Life More Virgin flexible working proposition continues to garner strong support, with colleague engagement scores rising to 80% (2022: 79%), validating our differentiated strategy. We are also advancing our Diversity, Equity and Inclusion work, seeing some improvement in our key metrics and launching our BRAVER initiative.

Pioneering Growth

We have made good progress in 2023 in our target segments, with total active relationship customer accounts increasing by 5% to 3.8m, driven mainly by credit card sales and new Business Current Account (BCA) customers.

I was particularly pleased with our 6% growth in business lending, despite the ongoing reduction in government lending scheme balances. Our Business bank has benefited from our sector specialisms at a time when the market has been muted and we remain well placed to continue to grow profitably.

We delivered 6% growth in unsecured lending, primarily driven by growth in credit cards including a strong performance in our VAA co-branded card. Taken together, we saw 9% growth across our target lending segments of BAU business and unsecured (2022: 7%).

In mortgages, our aim is to maintain our market share over time at around 3.5%. During the year, we traded well against lower market activity levels and strong competition. Given the tougher backdrop, we traded tactically and focused on maintaining margins, as balances reduced by 1%.

Our deposit performance throughout the year has been robust. Maintaining our relationship deposits as a share of deposit mix at 53% (2022: 53%) remains an important strategic focus. We attracted c.110k new Personal Current Account (PCA) sales in 2023 (2022: 131k) by leveraging our attractive linked savings propositions and reward offerings, rather than competing on up-front cash incentives. Our cashback offering also continues to see good utilisation with over 860k customers now enrolled (2022: c.650k).

In the Business bank, our award-winning BCA proposition and improved digital journeys have now driven 22 months of consecutive net customer account growth, via c.39k new BCA sales in 2023 (2022: c.33k).

During 2023, we also completed the build-out of our full product proposition with the launch of Virgin Money Investments. Since launch this has attracted new customers as we offer a Purpose-led, simple approach to investing.

Super Straightforward Efficiency

Since we announced our strategy at FY21, inflation has been higher and more enduring than expected, resulting in key costs across salaries, suppliers and change delivery moving significantly higher and providing a major cost headwind. In addition, the technological environment continues to evolve at pace, with new opportunities, threats and regulatory requirements, which we have needed to consider in our investment portfolio.

Digital primacy, which measures the proportion of active PCA and Card customers who are digital only in their engagement with the Bank, improved to 61% (2022: 56%). From a property perspective, the Group announced in H2 that it will be closing an additional 39 stores, as it adapts to changing customer demand, reducing our store network by 30% to 91 stores. The Group's property footprint is now at c.440k sq ft, against a target of c.300k sq ft by FY24, from our c.900k sq ft start point; a 51% reduction.

Having paused some restructuring activity to focus on supporting customer service during the first half of the year, we picked up the pace in the second half, and have now incurred £213m of the anticipated total c.£275m investment programme. We have made good progress, delivering £130m of annualised run rate savings and helping to offset cost pressures from inflation, growth and investment. These savings have been driven by ongoing digitisation, property and organisational changes, and sourcing benefits. Our work in H2 included digitising key customer journeys, which remains central to our strategy, and we have now fully automated 50% of key journeys (2022: 43%).

During the year, we also deployed our latest chatbot Redi across credit cards. This has been well received by customers, attracting favourable Smile scores and supporting a reduction in call volumes.

Following an assessment of the progress of the project to upgrade the mortgage platform and challenges identified during testing, we now anticipate a significant deferral and redesign as we implement the upgraded capability. We remain committed to launching improved capability for our mortgage customers and brokers over time, and there remains no impact on day-to-day trading.

Looking ahead, we believe that delivering greater efficiency will support sustainable value creation for shareholders, a lower cost:income ratio and will enhance our ability to compete effectively in a rapidly changing digital marketplace.

Business and financial review

Chief Executive Officer's introduction

Discipline and Sustainability

Our focus has always been on ensuring that our Bank is delivering consistent, sustainable positive outcomes for our customers, investors and other stakeholders. Aligned to that, in 2023 we have been particularly focused on ensuring our resilience against the challenging external backdrop.

The Group has remained well positioned given our strong capital, high-quality customer base and robust asset quality. We maintained our disciplined approach to credit, achieving modest, profitable lending growth in our target areas, while ensuring the resilience of our funding and deposits. Our liquidity metrics remain well above regulatory minimums, and we have maintained good access to wholesale funding markets, all of which demonstrate our prudent approach and market confidence in our business model. We have also now repaid £1.0bn of TFSME funding, ahead of its contractual maturity.

The Group's resilient performance in the BoE's Annual Cyclical Scenario (ACS), remaining significantly in excess of its reference rates on both a transitional and non-transitional basis, demonstrates the sustainability of our franchise against even a severe macro downturn.

We've also made good progress on ESG metrics, maintaining our 'low risk' status from Sustainalytics and AA 'Leader' status from MSCI, evidencing the Group's enhanced disclosure and commitment to continual improvement of our sustainability agenda.

In 2023, the Group has further developed its Commercial net zero targets and road maps, as well as setting targets in relation to its own operations for the first time.

Leadership changes

I have further strengthened the Group's Executive Leadership Team this year, ensuring we have the required digital leadership capabilities to deliver now and in the future, against the higher expectations of a tier 1 bank.

As announced last year, Sarah Wilkinson joined the Group as Chief Operating Officer in early 2023, bringing together the Group's Customer Experience and Digital & Innovation functions under new, focused leadership. In late 2023 we appointed Allegra Patrizi as Managing Director, Business and Commercial. Allegra has worked in the financial services sector for over 20 years having started her career at McKinsey & Company where she rose to Partner, before being Chief Product Officer at F&C Asset Management, Group Risk Director at Prudential plc and most recently CEO of Aegon in the Netherlands. Hugh Chater will remain with us as a senior adviser until the end of 2024, and I thank him for all his hard work and leadership over the last seven years.

Outlook

The Group's underlying momentum is strong. NIM has continued to expand in FY23, and we expect a NIM of 190-195bps in FY24. This will be supported by re-investment of the structural hedge at higher rates and further growth in higher margin lending, where we expect to grow our business and unsecured segments between 5% and 10%.

We will continue to invest in strengthening our business for all stakeholders, including the digital investment in financial crime prevention and as we focus on improving legacy components of our infrastructure. We will improve digital customer experience further, deliver the second phase of Consumer Duty and launch new digital propositions, while delivering against our expanded, £200m gross cost saving programme. We now anticipate that the underlying cost:income ratio in FY24 will be broadly stable on this financial year, excluding our investment in financial crime prevention.

Having updated our economic outlook under the IFRS 9 methodology, we feel well provided, and expect our cost of risk for the year to be in the range of 30-35bps, subject to the macroeconomic outlook remaining consistent.

The Group remains strongly capital generative and I'm pleased to confirm that, as previously announced, we plan further buybacks through 2024, subject to Board and regulatory approval, following on from £150m today, as we return to operating within our target CET1 range of 13% - 13.5% by FY24. We expect nominal shareholder distributions in FY24 to be in line with FY23; delivering this would mean we have returned around £800m of capital distributions to shareholders over the three years of our strategy.

As a result of the increased level of investment in the financial crime prevention programme, we do now expect to take longer to achieve our double digit statutory return ambition. We expect to generate an underlying RoTE of c.10% in FY24, excluding the financial crime prevention programme and cash flow hedge reserve, with a statutory RoTE of c.8%. We are committed to generating double digit returns in the medium-term and I look forward to communicating more details about the next phase of our strategy at a Capital Markets Day next year.

In the meantime I would like to thank all our colleagues for their hard work, and our customers for their loyalty and support as we continue to execute our strategy and deliver on our Purpose of Making you happier about money. I look forward to updating the market on our further progress during 2024.

David Duffy

Chief Executive Officer
22 November 2023

Business and financial review

Chief Financial Officer's review

Resilient performance despite a challenging operating environment

We've delivered a strong operating performance in FY23 and enter FY24 with good business momentum. We're investing to safeguard the bank and customers, supporting sustainable returns over time.

Clifford Abrahams

Chief Financial Officer

2023 was an important year as we demonstrated momentum in strategic delivery and profitable growth, while maintaining a robust balance sheet, funding and capital position

Review of the year

The Group performed resiliently this year, with solid financial momentum and further strategic delivery. During the year, the Group made further improvements to customer propositions, supporting a 5% growth in total active relationship customer accounts to 3.8m customers. Operating profit improved relative to 2022, supported by the combination of the higher rate environment and growth in targeted lending and deposits. Alongside this, an increased credit impairment charge and higher adjusting items relative to last year resulted in lower statutory profit and a statutory RoTE of 3.9%, down from 10.3% in FY22. Capital remained strong during the period, with CET1 at 14.7% (2022: 15.0%), supporting total returns to shareholders of £272m, including a full year dividend of 5.3p and the announcement of a total of £200m of share buybacks for FY23.

We were pleased to deliver lending growth in our target areas during the year, while overall customer lending was stable at £72.8bn. Mortgage balances reduced 1.1% during the period to £57.5bn, as the higher rate environment and wider cost of living pressures tempered purchase activity. Business lending increased 6% overall, as growth in BAU balances offset ongoing reductions in government-backed lending. Unsecured balances continued to perform strongly, growing 6% during the year to £6.5bn. This year, we reduced the pace of growth in Unsecured lending relative to 2022, reflecting a disciplined approach to profitability. We continued to attract new deposits during the year, despite a competitive backdrop, supporting overall deposit growth of 1.9%.

The Group maintained a conservative balance sheet position, including strengthened provision coverage and robust funding and liquidity. Credit provisions of £617m (2022: £457m) are equivalent to a coverage ratio of 0.84% (2022: 0.62%). Funding and liquidity remain strong, with the 12-month average LCR ratio increasing to 146% (2022: 140%) and 12-month average NSFR stable at 136% (2022: 134%).

Underlying profit before tax in 2023 was £593m, a reduction compared to last year (2022: £776m), as higher operating income was more than offset by a higher level of impairments compared to last year's low charge. NIM of 1.91% (2022: 1.85%) improved year-on-year, given the higher rate environment and strategic execution, supporting growth in underlying income of 8% relative to 2022. Underlying costs were 6% higher compared to 2022 as gross cost savings from the restructuring programme helped to mitigate inflation, but with higher investment and temporary customer service related costs. Taken together, this resulted in a stable underlying cost:income ratio of 52% (2022: 52%). Credit impairments of £309m (2022: £52m) were significantly higher year-on-year, mainly reflecting higher modelled expected credit loss (ECL) given updated macroeconomic assumptions and bureau data, in anticipation of a continued increase in arrears, resulting in an increased level of provision coverage overall.

Business and financial review

Chief Financial Officer's review

Financial highlights
Statutory profit before tax		Underlying profit before tax		Statutory RoTE
£345m		£593m		3.9%
2022: £595m		2022 (restated)(1): £776m		2022: 10.3%
NIM		Underlying cost: income ratio		Cost of risk
1.91%		51.9%		42bps
2022: 1.85%		2022: 52.5%		2022: 7bps
CET1 ratio		Capital distributions announced		Dividend per share
14.7%		£272m		5.3p
2022: 15.0%		2022: £267m		2022: 10p
LCR (12-month average)		NSFR (12-month average)		Relationship deposit growth
146%		136%		+2%
2022: 140%		2022: 134%		2022: +13%

⁽¹⁾    Hedge ineffectiveness is now presented as an adjustment to underlying earnings as detailed on page 133. The comparative period has been adjusted accordingly. This restatement does not impact the statutory results of the Group.

The Group continues to expect to return to its target CET1 range of 13 - 13.5% in FY24, as capital generation through profitable growth supports ongoing shareholder distributions, growth and investment back into the business. The £150m share buyback announced at FY23, which adds to the £50m share buyback announced in August, will be deducted from CET1 in Q1 2024.

Looking ahead, we will be undertaking a new three year investment programme, expected to cost c.£130m. This investment will improve our financial crime prevention capabilities, as well as supporting the enhanced data quality work required of tier 1 banks. While this delays delivery of our previously announced FY24 targets, it is critical we adapt to the fast-evolving environment in order to safeguard the Bank and our customers further.

Business and financial review

Chief Financial Officer's review

I am confident that the Group is well positioned to navigate the current economic backdrop with good financial momentum, including a strong margin, targeted growth, and a robust balance sheet. We remain focused on investing to digitise the Bank in the near term, which will drive further cost efficiency and improved customer experience, while also investing to improve our overall resilience across the medium term. The combination of these factors will support improved shareholder returns over the coming periods and delivery of our commitment to distribute surplus capital in line with our capital framework.

Underlying income

	2023 £m	Restated 2022 £m	Change
Underlying net interest income	1,716	1,592	8%
Underlying non-interest income(1)	157	150	5%
Total underlying operating income	1,873	1,742	8%
NIM	1.91%	1.85%	6bps
Average interest-earning assets	89,810	86,275	4%

⁽¹⁾    Hedge ineffectiveness is now presented as an adjustment to underlying non-interest income as detailed on page 133. The comparative period has been adjusted accordingly. This restatement does not impact the statutory results of the Group.

NII and NIM

Net interest income (NII) increased by £124m or 8% relative to 2022, driven by an expansion of the Group's NIM as it continued to benefit from higher rates, including from the reinvestment of the structural hedge.

Asset yields increased 171bps compared to 2022, reflecting the rising interest rate environment throughout the year. Average mortgage lending was broadly stable during the period, reflecting weaker market demand in light of higher rates and lower new purchase activity. Customer rates for new and retained mortgages increased as a function of the base rate environment, though spreads remained tighter reflecting continued strong competition. Taken together, the average mortgage yield increased by 46bps, supporting higher mortgage interest income. In Business, interest income increased by £251m in the year, driven by higher average balances, while the yield of the book also improved, given the rate environment and a reduced proportion of lower-yielding government-backed lending. In Unsecured, interest income increased by £67m in the year, driven by growth in average balances, owing mainly to growth in the credit card book. Elsewhere, the average yield on the Group's liquid assets increased 321bps reflecting the higher rate environment across the financial year.

The balance of the Group's structural hedge reduced in the second half of the year from c.£32.0bn to c.£29.5bn, reflecting the impact of deposit migration from behaviourally stable deposits. During the year, the Group generated £401m of total gross interest income from the structural hedge, including the legacy hedge contribution, benefiting from ongoing hedge reinvestment at higher prevailing rates.

Liability rates on average interest bearing liabilities increased 185bps relative to 2022. During the year, the Group continued with its strategy to grow relationship deposits, and these balances grew by 2%. This was despite the impact of the higher rate environment, which drove increased levels of deposit migration from current accounts across the industry. The Group also participated in the market for term funding during the year, offsetting migration from non-linked variable savings balances. Wholesale funding costs increased in the year, driven by higher average balances, change in mix following issuance throughout the year, and higher rates corresponding to the rate environment.

Non-interest income

Non-interest income of £157m was 5% higher when compared with 2022 and 7% lower when excluding fair value movements. Mortgage fee income was broadly stable during the period, while Unsecured fee income was modestly lower in the second half of the year, reflecting changes to packaged accounts and reduced associated fees, aligned with Consumer Duty regulations. Business fee income was lower relative to 2022, following the strategic decision by the Group to change its payments partner and expand its relationship with Global Payments, resulting in an initial reduction of merchant services income.

Business and financial review

Chief Financial Officer's review

Average balance sheet	2023			2022
	Average  balance £m	Interest  income/ (expense) £m	Average yield/(rate) %	Average  balance £m	Interest  income/ (expense) £m	Average yield/(rate) %
Interest earning assets
Mortgages	57,980	1,537	2.65	57,996	1,272	2.19
Unsecured lending	6,547	474	7.24	6,100	407	6.67
Business lending(1)	8,496	582	6.85	8,263	331	4.00
Liquid assets	16,000	657	4.11	13,059	117	0.90
Due from other banks	782	13	1.67	853	2	0.22
Swap income/other	-	600	n/a	-	104	n/a
Other interest earning assets	5	-	n/a	4	-	n/a
Total average interest earning assets	89,810	3,863	4.30	86,275	2,233	2.59
Total average non-interest earning assets	2,378			3,229
Total average assets	92,188			89,504
Interest bearing liabilities
Current accounts	15,739	(203)	(1.29)	15,829	(46)	(0.29)
Savings accounts	26,005	(433)	(1.67)	30,895	(147)	(0.48)
Term deposits	19,603	(597)	(3.05)	12,894	(149)	(1.16)
Wholesale funding	18,321	(909)	(4.96)	16,169	(296)	(1.83)
Other interest bearing liabilities	170	(5)	n/a	145	(3)	n/a
Total average interest bearing liabilities	79,838	(2,147)	(2.69)	75,932	(641)	(0.84)
Total average non-interest bearing liabilities	6,531			7,903
Total average liabilities	86,369			83,835
Total average equity	5,819			5,669
Total average liabilities and average equity	92,188			89,504
Net interest income		1,716	1.91		1,592	1.85

(1)   Includes loans designated at fair value through profit or loss (FVTPL).

Business and financial review

Chief Financial Officer's review

Underlying costs

For the year ended 30 September	2023 £m	2022 £m	Change
Staff costs	367	375	(2)%
Property and infrastructure	40	42	(5)%
Technology and communications	126	116	9%
Corporate and professional services	173	114	51%
Depreciation, amortisation and impairment	95	116	(18)%
Other expenses	170	151	12%
Total underlying operating and administrative expenses	971	914	6%
Underlying cost: income ratio	51.9%	52.5%	(0.6)%pts

Underlying operating expenses increased 6% year-on-year to £971m, while the cost:income ratio remained stable at 52%. During the year, the Group's restructuring activity delivered further cost-efficiencies, taking the total annualised gross savings since FY21 to £130m. Relative to last year, the Group also benefited from a c.£25m higher net pension benefit, and a lower depreciation charge following past changes to depreciation and amortisation practices. These benefits were offset, mainly by higher staff costs (net of the pension benefit), given wage inflation and higher corporate and professional services fees, mainly reflecting additional resource to support the improvement of customer service levels, and additional regulatory related investment.

Impairments

As at 30 September 2023	Credit provisions £m	Gross  lending £bn	Coverage ratio bps	Net cost of risk bps	% of loans in Stage 2	% of loans in Stage 3
Mortgages	57	57.8	10	-	4.7	1.0
Unsecured:	429	6.8	665	430	24.1	1.7
of which credit cards	392	6.1	688	483	21.7	1.8
of which personal loans and overdrafts	37	0.7	488	86	44.3	0.9
Business	131	8.7	160(1)	44	22.8	4.7
Total	617	73.3	84	42	8.6	1.5
of which Stage 2	400	6.3	633
of which Stage 3	128	1.1	1,393

(1)   Government-guaranteed element of loan balances excluded for the purpose of calculating the Business and total coverage ratio.

As at 30 September 2022	Credit provisions £m	Gross  lending £bn	Coverage ratio bps	Net cost of risk bps	% of loans in Stage 2	% of loans in Stage 3
Mortgages	56	58.5	9	(5)	5.3	1.0
Unsecured:	284	6.5	466	322	17.3	1.2
of which credit cards	246	5.5	481	347	13.9	1.3
of which personal loans and overdrafts	38	1.0	388	161	34.9	0.9
Business	117	8.1	159(1)	(112)	18.7	4.6
Total	457	73.1	62	7	7.8	1.4
of which Stage 2	268	5.7	472
of which Stage 3	104	1.0	1,124

(1)   Government-guaranteed element of loan balances excluded for the purpose of calculating the Business and total coverage ratio.

ECL provisions increased to £617m at FY23 (2022: £457m), resulting in higher aggregate provision coverage of 84bps (2022: 62bps). This was mainly due to higher modelled ECL, particularly in credit cards, in anticipation of a continued increase in arrears and reflecting revised macroeconomic assumptions and credit bureau data. The updated economic outlook forecasts a slower recovery in the outer years compared to September 2022, whilst updated credit bureau data was also weaker.

Accordingly, the modelled and individually assessed (IA) ECL increased by £168m to £540m (2022: £372m), while Management Adjustments (MAs) reduced to £76m (2022: £85m). The combination of these factors resulted in a £309m impairment charge during the period (2022: £52m), equivalent to a cost of risk of 42bps (2022: 7bps).

Business and financial review

Chief Financial Officer's review

The key macroeconomic assumptions used in the Group's IFRS 9 modelling were updated based on scenarios provided by our third party provider Oxford Economics. The weightings applied to the scenarios were unchanged from FY22 and included 10% to the Upside scenario, 55% to the Base scenario and 35% to the Downside scenario. The weighted macroeconomic scenario includes a 0.6% contraction in GDP in 2024, peak unemployment of 5.1% in 2025 and a decline in the House Price Index (HPI) across 2023-2025.

To supplement the modelled ECL provision, the Group applied expert credit risk judgement through MAs, designed to account for factors that the models do not incorporate. Through this process, the Group applied MAs of £76m (2022: £85m). These include cost of living MAs of £15m (2022: £57m), which were lower in the year given these impacts are now better reflected in the modelled ECL outcome. During the period, the new Loss Given Default (LGD) model in Business lending was fully implemented, resulting in the removal of a negative MA (£(15)m) that was held at 2022, given it is now reflected in the modelled output. There was also an increase in Unsecured MAs, relating to a revised debt sale agreement.

During the year, loans classified as Stage 2 increased from 8% of the portfolio at FY22 to 9%. 96% of stage 2 balances remain <30 days past due (DPD). Stage 3 assets as a percentage of Group lending remained broadly stable at 1.5% (2022: 1.4%). The Group's credit provisioning assumes that arrears continue to increase over the next financial year.

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

Unsecured lending book coverage ratio of 665bps encompasses both the 688bps of coverage for our credit card portfolio, and 488bps of coverage for our smaller personal loans and overdrafts book. In addition to the impact of current macroeconomics, the modelled provision increased due to a weakening of credit bureau data, and higher early-stage arrears compared with prior years. Overall arrears levels remain modest across the portfolio with 97% of balances not past due (2022: 98%).

In Business, the coverage ratio of 160bps is stable relative to FY22. There has been a limited change in underlying asset quality performance and, as yet, no significant increase in specific provision recognition. The lending book continues to be biased away from sectors likely to experience more disruption from higher inflation such as hospitality and retail, towards sectors expected to be resilient, such as agriculture, health and social care.

Adjusting items and statutory profit

	2023 £m	Restated 2022 £m
Underlying profit on ordinary activities before tax	593	776
Adjusting items
- Restructuring charges	(131)	(82)
- Acquisition accounting unwinds	(29)	(35)
- Legacy conduct costs	(12)	(8)
- Hedge ineffectiveness(1)	(16)	13
- Other items	(60)	(69)
Statutory profit on ordinary activities before tax	345	595
Tax expense	(99)	(58)
Statutory profit for the year	246	537
Underlying RoTE	7.6%	13.3%
Statutory RoTE	3.9%	10.3%
TNAV per share	359.8p	383.0p

(1)   Hedge ineffectiveness is now presented as an adjustment to underlying as detailed on page 133. The comparative period has been adjusted accordingly. This restatement does not impact the statutory results of the Group.

Overview

The Group made a statutory profit before tax of £345m (2022: £595m) after deducting £248m of adjusting items (2022: £181m).

TNAV per share reduced 23.2p in 2023 to 359.8p. The key drivers of the reduction were -14.4p of negative cash flow hedge reserve movements in the year, given rate changes and -25.2p from a lower pension surplus, offsetting +9.8p from retained earnings and +8.4p from share buybacks during the year.

Restructuring charges

Restructuring charges totalled £131m in the year, driven by charges related to the Group's digital investment. This included c.£58m for the delivery of IT changes and c.£73m for the closure of stores, changes to the operating model and lower property footprint. The Group continues to expect to incur a total of c.£275m of restructuring costs to implement its digital strategy across FY22-24; after spending £213m to date, the majority of the remaining costs are expected to be incurred in FY24.

Acquisition accounting unwinds

The Group recognised fair value accounting adjustments at the time of the Virgin Money acquisition that unwind through the income statement over the remaining life of the related assets and liabilities. The £29m charge during the year included an £8m accelerated charge related to mortgage balances which were in their promotional period on the date of acquisition but have now expired. There are now c.£15m of IFRS 3 balances remaining, which are expected to materially unwind in 2024.

Business and financial review

Chief Financial Officer's review

Legacy conduct

Charges of £12m were incurred relating to legal proceedings and legacy claims arising in the ordinary course of the Group's business.

Hedge ineffectiveness

Hedge ineffectiveness largely represents timing differences that will reverse out over the lives of derivatives that are used in economic hedges but can result in volatility between reporting periods. Charges of £16m were incurred in respect of hedge ineffectiveness and rate volatility in the period.

Other items

Other items includes a c.£45m intangible write-off recognised in the year in relation to the Group's mortgage digitisation programme. This follows challenges identified during testing, resulting in a significant deferral and redesign as we implement the upgraded capability.

Taxation

There was a £99m tax charge in respect of £345m of statutory profit before tax, reflecting an effective tax rate of 29%.

Balance sheet

As at 30 September	2023	2022	Change
Mortgages	57,497	58,155	(1.1)%
Unsecured	6,519	6,163	5.8%
Business(1)	8,738	8,247	6.0%
Total customer lending	72,754	72,565	0.3%
Relationship deposits(2)	35,394	34,649	2.2%
Non-linked savings	9,741	17,048	(42.9)%
Term deposits	21,474	13,663	57.2%
Total customer deposits	66,609	65,360	1.9%
Wholesale funding	16,658	17,012	(2.1)%
of which TFSME	6,200	7,200	(13.9)%
Loan to deposit ratio (LDR)	109%	111%	(2)%pts
Liquidity coverage ratio (LCR) (12-month average)	146%	140%	6%pts

(1)   Of which, £625m government lending (2022: £963m).

(2)   Current account and linked savings balances.

Customer lending and deposits

At an aggregate level, Group lending was broadly stable at £72.8bn, as growth in Business and Unsecured lending offset a reduction in Mortgages. Total customer deposits increased by 1.9% to £66.6bn.

Mortgage balances reduced 1.1% to £57.5bn, with reduced demand reflecting slower market activity and demand, owing to the higher rate environment, affordability pressures and wider cost of living considerations. Against this subdued market backdrop, the Group traded to preserve profitability, although competition remained intense resulting in completion spreads remaining below book spreads during the financial year.

Business lending increased overall by 6.0% during the year to £8.7bn, driven by growth in non-government scheme lending, which increased by 11.4% to £8.1bn. This performance was supported by the strength of our franchise and sector specialisms in our target market segments. Government-scheme balances declined 35.1% to £0.6bn as expected, as borrowers made contractual repayments.

Unsecured lending increased 5.8% in the year, driven mainly by credit card growth. This performance was supported by resilient demand from existing customers and ongoing new credit card sales as the Group maintained its c.8% market share of balances. During the year, the Group observed customer behavioural activity outperforming assumptions, resulting in the card EIR asset performing better than expected. Personal loans and overdraft balances reduced £0.2bn during the year to £0.7bn, in line with expectations.

Customer deposits increased by £1.2bn or 1.9% during the financial year to £66.6bn. The Group continued to execute against its strategy and optimise its mix of deposits during the period, as relationship deposits grew by £0.7bn, supported by strong customer propositions and competitive rates. The Group actively increased its participation in the term deposit market early in the year to offset deposit migration. Term deposits increased by £7.8bn and were acquired at attractive spreads, locking in term funding at pricing below swaps. Non-linked saving balances reduced by £7.3bn during the period, given higher attrition and churn from the back book and as the Group prioritised the good value opportunities initially available in the term deposit market.

Wholesale funding and liquidity

During the period, the Group's LDR reduced to 109% (2022: 111%). The Group has a stable funding base with customer deposits representing c.80% of total funding. The Group's customer deposits are weighted towards retail customers (75%), with the balance being from business customers, predominantly small and medium sized enterprises. Of the total customer deposit book, 72% is insured via the Financial Services Compensation Scheme. Of balances that are uninsured, a proportion are fixed term and/or would incur a charge if customers wanted to withdraw their money.

Business and financial review

Chief Financial Officer's review

The Group has a number of well-established wholesale funding programmes and proven markets access. During the year, the Group successfully issued €500m and £300m of MREL senior notes and c.£1.8bn of RMBS and covered bonds, while at the same time repaying £1.0bn of its TFSME drawings (£6.2bn outstanding as at 30 September 2023). On an overall basis, wholesale funding reduced from £17.0bn at FY22 to £16.7bn as at FY23. Of our total debt securities in issue, only 19% (£1.9bn) has less than one year to effective maturity, reflecting term issuance roll-downs (the Group has negligible short-term wholesale funding). The Group has £0.3bn of TFSME maturing in FY24, £2.5bn maturing in FY25, and £2.5bn maturing in FY26, with the remaining £0.9bn subject to term extension beyond FY26. The Group plans to continue to repay TFSME well ahead of contractual maturity to reduce the refinancing risk further.

The stability of the Group's funding sources is highlighted in its NSFR ratio, which remained stable on a 12-month average basis at 136%. The Group's 12-month average LCR increased 6% points to 146% (2022: 140%), continuing to comfortably exceed both regulatory requirements and the Group's more prudent internal risk appetite metrics. The Group's c.£14bn prime liquid asset portfolio is primarily comprised of cash at the BoE (c.65%), UK Government securities (Gilts) (c.10%) and AAA rated listed securities (e.g. bonds issued by supra-nationals and corporate covered bonds) (c.25%). The liquid asset portfolio is fully hedged from an interest rate, inflation and FX risk perspective and any movements in fair value are recognised in CET1 via the Income Statement or FVOCI reserve.

The Group also has unencumbered pre-positioned collateral at the BoE representing c.£6.9bn of secondary liquidity drawing capacity via the Bank's Sterling Monetary Framework, which does not form part of the liquid asset portfolio for LCR or internal stressed outflow purposes. This has increased from c.£4.3bn at FY19 and over time, the stock of unencumbered pre-positioned collateral will increase as remaining TFSME drawings are repaid. In addition, the Group has a further c.£18.4bn of unencumbered assets eligible and readily available but not currently pre‑positioned at the BoE.

Capital

	2023	2022	Change
CET1 ratio (IFRS 9 transitional)	14.7%	15.0%	(0.3)%pts
CET1 ratio (IFRS 9 fully loaded)	14.3%	14.6%	(0.3)%pts
Total capital ratio	21.2%	22.0%	(0.8)%pts
MREL ratio	31.9%	32.1%	(0.2)%pts
UK leverage ratio(1)	5.0%	5.0%	-%pts
RWAs (£m)	25,176	24,148	4.3%
of which Mortgages (£m)	9,072	9,155	(0.9)%
of which Unsecured (£m)	4,819	4,817	-%
of which Business (£m)	6,990	6,196	12.8%

Unless where stated, data in the table shows the capital position on a Capital Requirements Directive (CRD) IV 'fully loaded' basis with International Financial Reporting Standard (IFRS) 9 transitional adjustments applied.

(1)   The prior year leverage ratio has been restated from 5.1% following an adjustment to exclude encumbered note cover and payments system collateral balances.

Overview

The Group maintained a robust capital position with a CET1 ratio of 14.7% and a total capital ratio of 21.2% (IFRS 9 transitional basis). The Group's CET1 ratio on an IFRS 9 fully loaded basis was 14.3%. The Group's latest Pillar 2A requirement has a CET1 element of 1.7%. Overall, the Group continues to maintain a significant surplus above its CRD IV CET1 capital requirement, inclusive of the combined capital buffer (or MDA threshold) of 10.7%.

CET1 capital

The Group's transitional CET1 ratio reduced by 30bps over the year. Total underlying capital generation of 145bps was driven by 199bps of underlying profit, offset by 38bps from higher RWAs (including the anticipated impact of implementing mortgage hybrid models) and 16bps of AT1 distributions and related costs. Adjusting items consumed c.60bps while there was 29bps of accrual for expected dividends and 41bps from £100m of share buybacks executed during the period. Dividends of c.£72m relating to FY23 resulted in a payout level of 37%. This is higher than the Group's 30% payout level in its dividend policy, reflecting a one-off adjustment in FY23 for certain non-cash adjusting items. The announcement of an additional £150m share buyback will reduce CET1 resources in Q1 2024

RWAs

Overall, RWAs increased by c.4% during 2023 to £25.2bn. In Mortgages, RWAs reduced by £0.1bn as the impact of lower exposures and stronger HPI more than offset a c.£0.4bn post model adjustment for the expected impact of implementing mortgage hybrid models. In Business, RWAs increased by £0.8bn mainly as a result of higher customer balances, excluding government-backed balances that carry a 0% risk weight. Unsecured RWAs were broadly stable in the period, despite the increase in customer lending during the financial year, due to higher provisions reducing the EAD for the cards portfolio. Non-credit RWAs were £3.3bn, c.£0.2bn higher than 2022, driven by higher operational risk RWAs.

MREL

The Group's transitional MREL ratio remained broadly stable during the period at 9.3% (2022: 9.0%) of Leverage Exposures, or 31.9% when expressed as a percentage of RWAs (2022: 32.1%). This provides prudent headroom of £1.3bn or 1.5% above the binding loss-absorbing capacity (LAC) requirement of 7.8% of Leverage Exposures, or 5.3% above the binding LAC requirement of 26.6% when expressed as a percentage of RWAs.

Business and financial review

Chief Financial Officer's review

CET1 capital movements(1)	2023
Opening CET1 ratio	15.0%
Capital generated (bps)	199
RWA growth (bps)	(38)
AT1 distributions (bps)	(16)
Underlying capital generated (bps)	145
Restructuring charges (bps)	(40)
Acquisition accounting unwind (bps)	(9)
Conduct (bps)	(4)
Hedge ineffectiveness (bps)	(5)
Hybrid mortgage impact (bps)	(28)
Foreseeable ordinary dividends (bps)	(29)
Share buyback (bps)	(41)
Other (bps)	(19)
Net capital absorbed (bps)	(30)
Closing CET1 ratio	14.7%

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

FY24 outlook

In FY24, we anticipate full year NIM of 190-195bps, reflecting the benefit of structural hedge reinvestment and a higher yielding asset mix, offset by ongoing competitive pricing pressures in mortgages and deposits.

The Group continues to expect to incur restructuring charges reflecting its ongoing digitisation programme, with the majority of the remaining c.£60m expected to be incurred in FY24. We now expect our strategy to digitise the Bank to deliver around £200m (previously c.£175m) of annualised gross cost savings, generating headroom to absorb inflation and reinvestment, as we focus on improving legacy components of our infrastructure. The Group will also invest c.£130m across FY24-26 in its financial crime prevention programme, of which c.£40m is expected to be incurred in FY24.

The Group now expects to deliver a broadly stable underlying cost: income ratio in FY24. This excludes the additional costs associated with the financial crime prevention programme in FY24, which will be excluded from underlying performance and reported separately as a notable item. The Group expects its cost of risk for FY24 to normalise around its through the cycle average of c.30-35bps.

Consistent with our strategy to diversify the balance sheet, we anticipate 5-10% growth in target lending segments of Unsecured and Business relative to FY23 and to trade tactically in the mortgage market to maintain market share across the medium term.

The Group expects to issue £1.5bn-2.0bn of secured issuance in FY24 subject to deposit flows and relative cost. Capital and MREL issuance is expected to be broadly limited to maintaining the current surplus to regulatory requirements.

By FY24, the Group expects to be operating in its target CET1 range of 13-13.5%. The Group anticipates nominal shareholder distributions in FY24 around the same level as FY23, comprising a target 30% full year dividend payout level, supplemented with buybacks, which will be subject to Board and regulatory approval, reflecting an ongoing assessment of surplus capital, regulatory developments, market conditions and the macroeconomic outlook.

Overall, the Group now expects to deliver a c.10% underlying RoTE in FY24, excluding costs associated with the financial crime prevention programme and the cash flow hedge reserve. The Group expects to deliver a c.8% statutory RoTE in FY24.

Medium-term outlook

In the medium term the Group's digital acceleration will support the delivery of valuable and differentiated propositions to drive profitable growth. The Group will continue to target diversification on both sides of the balance sheet, delivering growth in Unsecured and Business lending, while maintaining our mortgage market share.

The Group continues to target an underlying cost:income ratio of <50%, while we are committed to delivering sustainable double-digit statutory returns in the medium-term, with further detail to be provided at a Capital Markets Day during FY24.

Clifford Abrahams

Chief Financial Officer

22 November 2023

Business and financial review

Chief Financial Officer's review

Guidance
	FY24 outlook				Medium-term outlook
	NIM				Income
	FY24 NIM of 190-195bps				Volume growth and improving margin to drive expansion
	Underlying costs				Underlying costs
	Cost:income to remain broadly stable in FY24(1)				Cost:income ratio to reduce below 50%
	Cost of risk				Growth
	Cost of risk to be in the range of 30-35bps				Targeting lending growth in Unsecured and Business; maintaining mortgage market share over medium term
	Investment				Investment
	c.£275m across FY22-24; majority of remaining c.£60m to be incurred in FY24 Expect to spend c.£40m in financial crime prevention programme in FY24				Expect to spend c.£130m in financial crime prevention programme between FY24-26
	CET 1				CET 1
	CET1 in target range of 13-13.5%				Remain in target CET1 range
	Capital distribution				RoTE
	FY24 distributions around FY23 nominal level; dividends (30% payout); buybacks subject to Board and regulatory approval				Committed to generating sustainable double-digit statutory returns
	RoTE
	Underlying RoTE of c.10%(2) Statutory RoTE of c.8%

(1)   Excluding financial crime prevention programme from FY24.

(2)   Excluding financial crime prevention programme from FY24 and cash flow hedge reserve.

Business and financial review

Chief Financial Officer's review

Summary income statement - statutory basis

For the year ended 30 September	2023 £m	2022 £m
Net interest income	1,687	1,576
Non-interest income	140	140
Total operating income	1,827	1,716
Operating and administrative expenses	(1,173)	(1,069)
Operating profit before impairment losses	654	647
Impairment losses on credit exposures	(309)	(52)
Statutory profit on ordinary activities before tax	345	595
Tax expense	(99)	(58)
Statutory profit after tax	246	537

The Group has recognised a statutory profit before tax of £345m (2022: £595m). The reduction in statutory profit is primarily driven by higher credit impairment losses, following the low charge last year and higher adjusting items, primarily reflecting restructuring costs in the year. From FY24, the Group will no longer report on both an underlying and a statutory basis; the income statement will be reported on a statutory basis, with notable items separated out to enable the reporting of Adjusted Income and Expenditure.

Performance measures⁽¹⁾

	2023	2022	Change
Profitability
RoTE	3.9%	10.3%	(6.4)%pts
Cost: income ratio	64%	62%	2%pts
Return on assets	0.27%	0.60%	(0.33)%pts
Basic earnings per share (EPS)	14.0p	32.4p	(18.4)p

(1)   For a definition of each of the performance measures, refer to 'Measuring the Group's performance' on pages 122 to 132.

Reconciliation of statutory to underlying results

The statutory basis presented within this section reflects the Group's results as reported in the financial statements. The underlying basis reflects the Group's financial performance as presented to the CEO, Executive Leadership Team and Board and excludes certain items that are part of the statutory results. The table below reconciles the statutory results to the underlying results, and full details on the adjusted items to the underlying results are included on page 133.

2023 income statement	Statutory results £m	Restructuring charges £m	Acquisition accounting unwinds £m	Legacy conduct £m	Hedge ineffectiveness(1) £m	Other £m	Underlying results £m
Net interest income	1,687	-	29	-	-	-	1,716
Non-interest income	140	-	-	-	16	1	157
Total operating income	1,827	-	29	-	16	1	1,873
Total operating and administrative expenses before impairment losses	(1,173)	131	-	12	-	59	(971)
Operating profit before impairment losses	654	131	29	12	16	60	902
Impairment losses on credit exposures	(309)	-	-	-	-	-	(309)
Profit on ordinary activities before tax	345	131	29	12	16	60	593
Financial performance measures
RoTE	3.9%	2.0%	0.4%	0.2%	0.2%	0.9%	7.6%
Cost: income ratio	64.2%	(6.5)%	(1.5)%	(0.6)%	(0.7)%	(3.0)%	51.9%
Basic EPS	14.0p	7.1p	1.6p	0.6p	0.9p	3.2p	27.4p

Business and financial review

Chief Financial Officer's review

2022 income statement	Statutory results £m	Restructuring charges £m	Acquisition accounting unwinds £m	Legacy conduct £m	Hedge ineffectiveness(1) £m	Other £m	Restated Underlying results £m
Net interest income	1,576	-	16	-	-	-	1,592
Non-interest income	140	-	16	-	(13)	7	150
Total operating income	1,716	-	32	-	(13)	7	1,742
Total operating and administrative expenses before impairment losses	(1,069)	82	3	8	-	62	(914)
Operating profit before impairment losses	647	82	35	8	(13)	69	828
Impairment losses on credit exposures	(52)	-	-	-		-	(52)
Profit on ordinary activities before tax	595	82	35	8	(13)	69	776
Financial performance measures
RoTE	10.3%	1.4%	0.6%	0.1%	(0.2)%	1.1%	13.3%
Cost: income ratio	62.3%	(4.5)%	(1.9)%	(0.4)%	0.7%	(3.7)%	52.5%
Basic EPS	32.4p	4.3p	1.8p	0.4p	(0.7)p	3.6p	41.8p

(1)   Hedge ineffectiveness is now presented as an adjustment to underlying non-interest income as detailed on page 133. The comparative period has been adjusted accordingly. This restatement does not impact the statutory results of the Group.

Risk management

Credit risk

At a time of ongoing challenge for the UK economy, our lending portfolios remain well positioned.

A disciplined approach to credit risk management supports the Group's operations and has underpinned its resilience in recently challenging times.

Credit risk is the risk that a retail or business borrower or counterparty fails to pay the interest or capital due on a loan, or other financial instrument. Credit risk needs to be managed through the life cycle of each loan from origination to repayment, redemption, write off or sale. Credit risk manifests itself in the financial instruments and products that the Group offers, and in which it invests, and can arise in respect of both on- and off-balance sheet exposures.

Close monitoring, clear policies and a disciplined approach to credit risk management support the Group's operations, and have underpinned its resilience in recently challenging times. The emergence of the significant inflationary headwinds and cost of living pressures have the potential to affect customer resilience and debt affordability. The Group has taken a number of steps to support customers through this period of heightened affordability pressure, and ensure that its credit risk framework and associated policies and credit strategies remain effective and appropriate.

Managing credit risk within our asset portfolios

Risk appetite

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

The Group maintained a controlled approach to portfolio management and appetite for new lending origination in an increasing inflationary environment, with updates to underwriting lending assessment to reflect the uncertain economic environment and interest rate pressures. The FY24 RAS continues to consider the impact of higher interest rates combined with inflationary headwinds and cost of living pressures, and is focused on supporting customers through this challenging period. Climate risk is an increasingly important component of the broader RMF and we have recognised this through the inclusion of climate risk as a principal risk. The framework has been updated to embed climate risk considerations across various aspects of customer lending and credit risk management practices.

Measurement

The Group uses a range of statistical models, supported by both internal and external data, to assess credit risk exposures. These models underpin the IRB capital calculation for the Mortgage and Business portfolios, and account management activity for all portfolios. Further information on the measurement and calculation of ECL and the Group's approach to the impairment of financial assets can be found on page 21.

Political and economic risk is an emerging risk for the Group and includes the future impact on macroeconomic variables, which are used in the calculation of the Group's modelled ECL output. Further detail on the Group's use of macroeconomic variables in the year can be found on pages 40 to 47.

Mitigation

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

The mitigation of credit risk within the Group is achieved through approval and monitoring of automated credit strategies, individual transactions, asset quality, analysis of the performance of the various credit portfolios, and oversight of credit portfolios across the Group. Portfolio monitoring techniques include customer, product, industry, geographic concentrations, and delinquency trends, as well as considering layered risks where customers may have more than one higher risk characteristic.

The Group has taken additional steps to update affordability assessments in response to the inflationary and cost of living pressures facing customers. Credit risk mitigation is also supported, in part, by obtaining collateral, and corporate and personal guarantees where appropriate.

The key mitigating measures are described below.

Credit assessment and mitigation

Credit risk is managed in accordance with lending policies, the Group's risk appetite and the RMF. Lending policies and performance against risk appetite are reviewed regularly.

The Group uses a variety of lending criteria when assessing applications for Mortgage and Unsecured customers. The approval process uses credit scorecards, credit strategies and affordability assessments, and involves a review of an applicant's previous credit history using information held by credit reference agencies as well as internal information. Manual underwriting assessments are also used as and when required. The Group also utilises quantitative thresholds, for example debt to income ratios, as well as the ratio of borrowing to collateral. Some of these limits relate to internal approval levels and others are hard limits above which the Group will reject the application.

For residential mortgages, the Group's policy is to accept only within the maximum percentage loan to value (LTV) limit that may be offered subject to loan size and customer income. Product availability may be altered depending on market conditions and outlook. Product types such as BTL and residential interest-only mortgages are controlled by transactional limits covering both LTV and value.

Risk management

Credit risk

For business customers, credit risk is further mitigated by focusing on business sectors where the Group has specific expertise, and through limiting exposures on higher value loans and to certain sectors. When making credit decisions for business customers the Group will routinely assess the primary source of repayment, most typically the cash generated by the customer through its normal trading cycle. Secondary sources of repayment are also considered and while not the focus of the lending decision, collateral will be taken when appropriate. The Group seeks to obtain security cover and, where relevant, guarantees from borrowers.

Specialist expertise

Credit quality is managed and monitored by skilled teams including, where required, specialists that provide dedicated support for vulnerable customers experiencing financial or other types of difficulties. These specialists act within agreed delegated authority levels set in accordance with experience and capabilities.

Credit strategy and policy

Credit risks associated with lending are managed through the application of detailed lending policies and standards that outline the approach to lending, underwriting criteria, credit mandates, concentration limits and product terms.

For complex credit products and services, the Chief Credit Officer and Credit Risk Committee provide a policy framework that identifies, quantifies and mitigates credit risk. These policies and frameworks are delegated to, and disseminated under, the guidance and control of the Board and senior management, with appropriate oversight through governance committees.

Specialist credit teams provide oversight of credit portfolio performance as well as adherence to credit risk policies and standards. Activities include targeted risk-based reviews, providing an assessment of the effectiveness of internal controls and risk management practices. Bespoke assignments are also undertaken in response to emerging risks and regulatory requirements. Independent assurance reviews are regularly undertaken by Internal Audit.

Portfolio oversight

The Group's credit portfolios, and the key benchmarks, behaviours and characteristics that are used to manage portfolios, are regularly monitored, with portfolio monitoring packs provided for review by senior management.

Controls over rating systems

The Group has a Model Risk Management team that sets common minimum standards for risk models and associated rating systems to ensure these are developed and monitored consistently, and are of sufficient quality to support business decisions and meet regulatory requirements. The Group performs an annual self-assessment of its rating systems to ensure ongoing CRR compliance.

The Group also utilises other instruments and techniques across its wider balance sheet. These are summarised below:

Derivatives

The Group maintains control limits on net open derivative positions. At any one time, the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Group (i.e. assets where the fair value is positive) and in relation to derivatives, may only be a small fraction of the contract, or notional values associated with instruments outstanding. This credit risk is managed as part of the customer's overall exposure together with potential exposures from market movements.

Master netting agreements

The Group further restricts its exposure to credit losses by entering master netting arrangements with counterparties with whom it undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross basis. However, credit risk associated with the favourable contracts is reduced by a master netting arrangement to the extent that, if any counterparty failed to meet its obligations in accordance with the agreed terms, all amounts with the counterparty are terminated and settled on a net basis. Derivative financial instrument contracts are typically subject to the International Swaps and Derivatives Association (ISDA) master netting agreements, as well as Credit Support Annexes, where relevant, around collateral arrangements attached to those ISDA agreements. Derivative exchange or clearing counterparty agreements exist where contracts are settled via an exchange or clearing house.

Collateral

The Group evaluates each customer's creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Group upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held as security, and other credit enhancements include the following:

Residential mortgages

Residential property is the Group's main source of collateral on mortgage lending and means of mitigating loss in the event of the default risk inherent in its residential mortgage portfolios. All lending activities are supported by an appropriate form of valuation. This valuation is applied using either a physical valuation, or another method that is not reliant on a physical inspection, but utilises data and modelled information, such as desktop, automated valuation model or indexed valuations (subject to policy rules and requirements).

It is the Group's policy to dispose of repossessed properties, with the proceeds used to reduce or repay the outstanding balance. The Group does not occupy repossessed properties for its own business use.

Commercial property

Commercial property is a source of collateral on business lending and means of mitigating loss in the event of default. For commercial loans, collateral comprises first legal charges over freehold, or long leasehold property (including formal Companies House registration where appropriate). All commercial property collateral is subject to an independent, professional valuation when taken and thereafter subject to periodic review in accordance with policy requirements.

Risk management

Credit risk

Non-property related collateral

In addition to residential and commercial property-based security, the Group also takes other forms of collateral when lending. This collateral can involve obtaining security against the underlying loan through the use of cash collateral and/or netting agreements, both of which reduce the original exposure by the amount of collateral held, subject to volatility and maturity adjustments where applicable. It can also include specific or interlocking guarantees, and loan agreements, which include affirmative and negative covenants and, in some instances, guarantees of counterparty obligations.

The Group also provides asset-backed lending in the form of asset and invoice finance. Security for these exposures is held in the form of direct recourse to the underlying asset financed.

Generally, the Group does not take possession of collateral it holds as security, or call on other credit enhancements, that would result in recognition of an asset on its balance sheet.

Monitoring

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

·   Credit Risk Committee: has oversight of the quality, composition and concentrations of the credit risk portfolio. It also determines and approves strategies to adjust the portfolio for changes in market conditions.

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

·   Risk concentration: Concentration of risk is managed by counterparty, product, geographical region and industry sector. In addition, single name exposure limits exist to control exposures to a single counterparty. Concentrations are also considered through the RAS process, focusing particularly on the external environment, outlook and comparison against market benchmarks, as well as considering layered risks where customers may have more than one higher risk characteristic.

·   Single large exposure excesses: Excesses on exposures under the delegated commitment authority of the Transactional Credit Committee are reported to the committee when above defined limits. All excess reports include a proposed route to remediation. Exposures are also managed in accordance with the large exposure reporting requirements of the Capital Requirements Regulation (CRR).

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

Forbearance

Forbearance is considered to exist where customers are experiencing, or about to experience, financial difficulty and the Group grants a concession on a non-commercial basis. The Group's forbearance policies and definitions comply with the guidance established by the EBA for financial reporting. Forbearance concessions include the granting of more favourable terms and conditions than those provided at drawdown of the facility, or conditions that would not ordinarily be available to other customers with a similar risk profile. Forbearance parameters are regularly reviewed and refined as necessary to ensure they are consistent with the latest industry guidance and prevailing practice, as well as ensuring that any assessment adequately captures and reflects the most recent customer behaviours and market conditions.

Measuring credit risk within asset portfolios

At each reporting date, the Group assesses financial assets measured at amortised cost, as well as loan commitments and financial guarantees, for impairment. The impairment loss allowance is calculated using an ECL methodology and reflects: (i) an unbiased and probability weighted amount; (ii) the time value of money, which discounts the impairment loss; and (iii) reasonable and supportable information that is available without undue cost or effort about past events, current conditions and forecasts of future economic conditions.

The Group adopts two approaches in the measurement of credit risk: (i) collectively assessed - where the Group uses a combination of strategies and statistical models that utilise internal and external data to measure the exposure to credit risk within the portfolios (supplemented by management adjustments (MAs) where necessary); and (ii) individually assessed - where a charge is taken to the income statement when an individually assessed provision (IA) has been recognised, or a direct write-off has been applied to an asset balance.

ECL methodology

ECL methodology is based upon the combination of probability of default (PD), loss given default (LGD) and exposure at default (EAD) estimates that consider a range of factors that impact on credit risk and the level of impairment loss provisioning. The Group uses reasonable and supportable forecasts of future economic conditions in estimating the ECL allowance. The methodology and assumptions used in the ECL calculation are reviewed regularly and updated as necessary.

The calculated model ECL is determined using the following classifications:

Stage	ECL calculation period	Description
1	12-month	An exposure that is not credit-impaired on initial recognition and has not experienced a significant increase in credit risk (SICR) since initial recognition.
2	Lifetime	An exposure that has experienced a SICR since initial recognition but is not yet deemed to be credit impaired.
3	Lifetime	An exposure that is credit impaired.

Risk management

Credit risk

A Stage 2 ECL is required where a SICR has been identified, such as a deterioration in the PD since origination. Absent any specific SICR factors, the Group operates a 30 DPD backstop for classification as Stage 2, and 90 DPD for Stage 3. Forborne exposures can be classed as either Stage 2 or Stage 3 depending on the type of forbearance programme that has been applied to the customer. IA provisions are classed as Stage 3. When a loan is deemed uncollectable, and all necessary internal procedures have been completed, it is written off against the related impairment loss. Subsequent recoveries of amounts previously written off reduce the expense in the income statement.

Purchased or originated credit-impaired (POCI) financial assets are those that are assessed as being credit-impaired upon initial recognition, and once classified as POCI, remain in Stage 3 until derecognition irrespective of any change in credit quality. The Group regards the date of acquisition as the origination date for purchased portfolios.

SICR criteria and triggers are parameters subject to the same governance pathway as the Group's IFRS 9 models; with changes to triggers initially submitted to and endorsed by the Credit Model Technical Forum and formal approval provided by the MGC.

The Credit Risk Committee provides oversight on the adequacy of ECL provisioning with reviews and robust challenge of the calculation and management judgement recommendations. This includes the rationale behind the inclusion of MAs. The Boards' Audit Committee provides oversight to the ECL calculation and measurement, with reviews and robust challenge of all calculated outcomes and management judgements.

Further detail on the accounting policy applied to ECLs can be found in note 3.1.1 to the financial statements.

Accounting and regulatory credit loss frameworks

The approach to calculating credit losses differs between the accounting and regulatory frameworks applicable to the Group, with the most significant difference being that the concept of SICR, which moves exposures from a 12-month to a lifetime ECL calculation in the accounting framework, does not exist under the regulatory framework. The approach to staging under IFRS 9 is also not applicable under regulatory credit loss reporting.

Both frameworks calculate credit losses under a PD x LGD x EAD approach, with the regulatory IRB approach assessing these in the next 12 months, whereas the accounting framework under IFRS 9 requires these losses to be assessed on a forward-looking view, with a lifetime loss calculated where appropriate. Credit losses are supplemented by MAs, where required, under the accounting framework.

Both the accounting and regulatory definitions of default are materially aligned, with default being triggered at 90 DPD, with the exception of the heritage Virgin Money mortgage models, that apply a 180 DPD regulatory default trigger under existing approved permissions. The definition of default will be fully aligned to 90 DPD when the regulatory models are updated in line with the hybrid model adoption, which is anticipated in FY24.

Cure periods

The Group aligns the regulatory cure periods for forborne exposures in its IFRS 9 staging criteria (as Stage 2 or 3) at a minimum period of either 24, or 36 months, depending on the forbearance programme utilised. Where exposures are classified as Stage 2 or 3 as a result of not being in a forbearance programme, these can cure and transfer to the appropriate stage when the relevant staging trigger is no longer applicable (i.e., there is no identifiable SICR or the exposure is no longer considered credit-impaired).

Risk management

Credit risk

Group credit risk exposures

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

The Group is also exposed to credit risk on its other banking and treasury-related activities, and holds £11.3bn (2022: £12.2bn) of cash and balances with central banks and £0.7bn (2022: £0.7bn) due from other banks at amortised cost, with a further £6.2bn (2022: £5.1bn) of financial assets at fair value through other comprehensive income (FVOCI). Cash and balances with central banks includes £10.2bn of cash held with the BoE (2022: £11.0bn). Balances with other banks and financial assets at FVOCI are primarily held with senior investment grade counterparties. All other banking and treasury-related financial assets are classed as Stage 1 with no material ECL provision held.

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

The following tables show the levels of concentration of the Group's financial assets and credit-related commitments:

	2023			2022
	Gross loans and  advances to  customers £m	Credit-related  commitments £m	Total £m	Gross loans and  advances to  customers £m	Credit-related commitments £m	Total £m
Mortgages	57,797	2,685	60,482	58,464	4,200	62,664
Unsecured	6,814	11,242	18,056	6,513	11,057	17,570
Business	8,684	4,073	12,757	8,169	4,102	12,271
Total	73,295	18,000	91,295	73,146	19,359	92,505
Impairment provisions on credit exposures(1)	(612)	(5)	(617)	(454)	(3)	(457)
Fair value hedge adjustment	(492)	-	(492)	(941)	-	(941)
Maximum credit risk exposure on lending assets	72,191	17,995	90,186	71,751	19,356	91,107
Cash and balances with central banks			11,282			12,221
Financial instruments at FVOCI			6,184			5,064
Due from other banks			667			656
Other financial assets at fair value			61			78
Derivative financial assets			135			342
Maximum credit risk exposure on all financial assets(2)			108,515			109,468

(1)   The total ECL provision covers both on and off-balance sheet exposures, which are reflected in notes 3.1.1.1 and 3.7 respectively. All tables and ratios that follow are calculated using the combined on- and off-balance sheet ECL, which is consistent for all periods reported.

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

In addition to the balance sheet position above, key metrics of relevance are as follows:

Key credit metrics	2023 £m	2022 £m
Impairment charge on credit exposures
Mortgage lending	2	(30)
Unsecured lending	269	178
Business lending	38	(96)
Total Group impairment charge	309	52
Underlying impairment charge(1) to average customer loans (cost of risk)	0.42%	0.07%
Key asset quality ratios
Loans in Stage 2	8.63%	7.76%
Loans in Stage 3	1.47%	1.41%
Total book coverage(2)	0.84%	0.62%
Stage 2 coverage(2)	6.33%	4.72%
Stage 3 coverage(2)	13.93%	11.24%

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

(2)   Excludes the guaranteed element of government-backed loan schemes.

Risk m--anagement

Credit risk

The total gross lending to customers has remained broadly stable overall with £73.3bn at 30 September 2023 (2022: £73.1bn). The total lending in the Mortgage portfolio reduced to £57.8bn at September 2023 (2022: £58.5bn) with the demand for new lending slightly reduced due to the higher rate environment, stressed affordability pressure and wider cost of living considerations. The underlying Business lending portfolio (excluding the repayments of the government backed loan schemes) has grown to £7.9bn at 30 September 2023 (2022: £7.1bn) with broad based growth across the sector specialisms in our target market segments. The Unsecured lending book has grown to £6.8bn at 30 September 2023 (2022: £6.5bn), mainly driven by credit card growth.

The performance of the portfolio and overall asset quality remains robust, and whilst there are signs of deterioration in some metrics, the proportion of the Stage 2 portfolio not past due, remains high at 94% at September 2023 (2022: 93%). The Group remains focused on reaching good customer outcomes and deploys a range of customer support measures combined with the Group's risk appetite and continued focus on responsible lending.

The impact of significant external economic and geopolitical factors continues to have the potential to impact the short to medium-term performance of the portfolio, with the most significant of these being the cost of living pressures.

The selection of appropriate MAs is a major component in determining the Group's ECL; a detailed analysis is shown on page 45.

The Group has recorded a total impairment provision of £617m at 30 September 2023, reflecting a 35% increase from £457m at 30 September 2022, and a corresponding increase in coverage from 62bps to 84bps. Within this, the modelled and IA provision has increased to £541m (2022: £372m) driven by the updated macroeconomic inputs, model calibrations and growth in the Business and Unsecured lending portfolios. MAs have reduced in the period to £76m (2022: £85m). The increase in provision coupled with the individually assessed impairment charge of £142m in the year (2022: £107m) results in a net charge to the income statement of £309m (2022: £52m) and an associated cost of risk of 42bps (2022: 7bps).

Gross loans and advances⁽¹⁾ ECL and coverage

2023	Mortgages		Unsecured						Business(2)		Total
			Cards		Loans and Overdrafts		Combined
	£m	%	£m	%	£m	%	£m	%	£m	%	£m	%
Stage 1	54,540	94.3%	4,658	76.5%	398	54.8%	5,056	74.2%	6,293	72.5%	65,889	89.9%
Stage 2 - total	2,704	4.7%	1,321	21.7%	321	44.3%	1,642	24.1%	1,980	22.8%	6,326	8.6%
Stage 2: 0 DPD	2,405	4.2%	1,250	20.5%	316	43.6%	1,566	23.0%	1,951	22.4%	5,922	8.1%
Stage 2: < 30 DPD	98	0.2%	37	0.6%	2	0.3%	39	0.6%	14	0.2%	151	0.2%
Stage 2: > 30 DPD	201	0.3%	34	0.6%	3	0.4%	37	0.5%	15	0.2%	253	0.3%
Stage 3(3)	553	1.0%	109	1.8%	7	0.9%	116	1.7%	411	4.7%	1,080	1.5%
	57,797	100%	6,088	100%	726	100%	6,814	100%	8,684	100%	73,295	100%
ECLs(4)
Stage 1	13	22.6%	42	10.8%	4	12.1%	46	10.9%	30	22.6%	89	14.5%
Stage 2 - total	27	47.9%	294	74.9%	28	73.5%	322	74.8%	51	39.4%	400	64.7%
Stage 2: 0 DPD	23	42.0%	256	65.3%	25	67.1%	281	65.5%	51	39.2%	355	57.6%
Stage 2: < 30 DPD	1	1.3%	17	4.3%	1	1.9%	18	4.1%	-	0.2%	19	3.0%
Stage 2: > 30 DPD	3	4.6%	21	5.3%	2	4.5%	23	5.2%	-	-	26	4.1%
Stage 3(3)	17	29.5%	56	14.3%	5	14.4%	61	14.3%	50	38.0%	128	20.8%
	57	100%	392	100%	37	100%	429	100%	131	100%	617	100%
Coverage
Stage 1		0.02%		0.98%		1.07%		0.99%		0.49%		0.13%
Stage 2 - total		0.99%		23.16%		8.16%		20.07%		2.66%		6.33%
Stage 2: 0 DPD		0.98%		21.31%		7.56%		18.38%		2.67%		6.02%
Stage 2: < 30 DPD		0.74%		48.66%		35.30%		47.94%		1.56%		12.19%
Stage 2: > 30 DPD		1.28%		64.90%		56.02%		64.16%		0.95%		10.38%
Stage 3(3)		3.03%		54.15%		77.16%		55.57%		19.76%		13.93%
		0.10%		6.88%		4.88%		6.65%		1.60%		0.84%
Undrawn exposures
Stage 1	2,560	95.4%	10,493	96.2%	280	82.1%	10,773	95.8%	3,453	84.7%	16,786	93.3%
Stage 2	114	4.2%	387	3.6%	60	17.6%	447	4.0%	597	14.7%	1,158	6.4%
Stage 3(3)	11	0.4%	21	0.2%	1	0.3%	22	0.2%	23	0.6%	56	0.3%
	2,685	100.0%	10,901	100.0%	341	100.0%	11,242	100.0%	4,073	100.0%	18,000	100.0%

Risk management

Credit risk

2022	Mortgages		Unsecured						Business(2)		Total
			Cards		Loans and Overdrafts		Combined
	£m	%	£m	%	£m	%	£m	%	£m	%	£m	%
Stage 1	54,791	93.7%	4,712	84.8%	612	64.1%	5,324	81.8%	6,270	76.7%	66,385	90.8%
Stage 2 - total	3,090	5.3%	774	13.9%	335	35.1%	1,109	17.0%	1,526	18.7%	5,725	7.8%
Stage 2: 0 DPD	2,763	4.7%	723	13.0%	327	34.3%	1,050	16.1%	1,499	18.4%	5,312	7.2%
Stage 2: < 30 DPD	158	0.3%	27	0.5%	3	0.3%	30	0.5%	9	0.1%	197	0.3%
Stage 2: > 30 DPD	169	0.3%	24	0.4%	5	0.5%	29	0.4%	18	0.2%	216	0.3%
Stage 3(3)	583	1.0%	72	1.3%	8	0.8%	80	1.2%	373	4.6%	1,036	1.4%
	58,464	100.0%	5,558	100.0%	955	100.0%	6,513	100.0%	8,169	100.0%	73,146	100.0%
ECLs(4)
Stage 1	10	17.9%	57	23.2%	6	15.8%	63	22.2%	12	10.3%	85	18.6%
Stage 2 - total	32	57.1%	156	63.4%	25	65.8%	181	63.7%	55	47.0%	268	58.6%
Stage 2: 0 DPD	28	49.9%	129	52.4%	22	57.9%	151	53.1%	55	47.0%	234	51.2%
Stage 2: < 30 DPD	2	3.6%	14	5.7%	1	2.6%	15	5.3%	-	-	17	3.7%
Stage 2: > 30 DPD	2	3.6%	13	5.3%	2	5.3%	15	5.3%	-	-	17	3.7%
Stage 3(3)	14	25.0%	33	13.4%	7	18.4%	40	14.1%	50	42.7%	104	22.8%
	56	100.0%	246	100.0%	38	100.0%	284	100.0%	117	100.0%	457	100.0%
Coverage
Stage 1		0.02%		1.29%		1.06%		1.26%		0.22%		0.13%
Stage 2 - total		1.02%		21.94%		7.29%		17.22%		3.75%		4.72%
Stage 2: 0 DPD		1.02%		19.41%		6.41%		15.09%		3.76%		4.43%
Stage 2: < 30 DPD		0.81%		57.37%		33.67%		54.48%		3.57%		8.53%
Stage 2: > 30 DPD		1.25%		59.03%		52.92%		58.01%		1.47%		8.57%
Stage 3(3)		2.28%		50.96%		73.14%		53.51%		19.96%		11.24%
		0.09%		4.81%		3.88%		4.66%		1.59%		0.62%
Undrawn exposures
Stage 1	4,060	96.7%	10,494	97.8%	288	89.5%	10,782	97.5%	3,612	88.1%	18,454	95.3%
Stage 2	132	3.1%	236	2.2%	33	10.2%	269	2.4%	464	11.3%	865	4.5%
Stage 3(3)	8	0.2%	5	0.0%	1	0.3%	6	0.1%	26	0.6%	40	0.2%
	4,200	100.0%	10,735	100.0%	322	100.0%	11,057	100.0%	4,102	100.0%	19,359	100.0%

(1)   Excludes loans designated at fair value through profit or loss (FVTPL), balances due from customers on acceptances, accrued interest and deferred and unamortised fee income.

(2)   Business and total coverage ratio excludes the guaranteed element of government-backed loans.

(3)   Stage 3 includes POCI for gross loans and advances of £48m for Mortgages and £1m for Unsecured (2022: £56m and £1m respectively); and ECL of (£1m) for Mortgages and (£1m) for Unsecured (2022: (£1m) and (£2m) respectively).

(4)   Includes £5m ECL held for the undrawn exposures shown (2022: £3m), of which £1m (2022:1m) is held under Stage 1 and £4m (2022: £2m) under Stage 2.

Risk management

Credit risk

Stage 2 balances

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

2023	Mortgages		Personal						Business		Total
			Cards		Loans and Overdrafts		Combined
	£m	%	£m	%	£m	%	£m	%	£m	%	£m	%
PD deterioration	1,739	65%	777	59%	317	99%	1,094	67%	1,229	62%	4,062	64%
Forbearance	81	3%	16	1%	1	-	17	1%	281	14%	379	6%
AFD or Watch List(1)	1	-	-	-	-	-	-	-	455	23%	456	7%
> 30 DPD	201	7%	34	3%	3	1%	37	2%	15	1%	253	4%
Other(2)	682	25%	494	37%	-	-	494	30%	-	-	1,176	19%
	2,704	100%	1,321	100%	321	100%	1,642	100%	1,980	100%	6,326	100%
ECLs
PD deterioration	18	67%	143	49%	26	93%	169	52%	23	45%	210	52%
Forbearance	3	11%	5	2%	-	-	5	2%	14	28%	22	6%
AFD or Watch List(1)	-	-	-	-	-	-	-	-	14	27%	14	4%
> 30 DPD	3	11%	21	7%	2	7%	23	7%	-	-	26	7%
Other(2)	3	11%	125	42%	-	-	125	39%	-	-	128	31%
	27	100%	294	100%	28	100%	322	100%	51	100%	400	100%

2022	Mortgages		Personal						Business		Total
			Cards		Loans and Overdrafts		Combined
	£m	%	£m	%	£m	%	£m	%	£m	%	£m	%
PD deterioration	2,084	69%	401	52%	329	99%	730	66%	826	55%	3,640	64%
Forbearance	106	3%	9	1%	1	-	10	1%	235	15%	351	6%
AFD or Watch List(1)	6	-	-	-	-	-	-	-	447	29%	453	8%
> 30 DPD	169	5%	24	3%	5	1%	29	3%	18	1%	216	4%
Other(2)	725	23%	340	44%	-	-	340	30%	-	-	1,065	18%
	3,090	100%	774	100%	335	100%	1,109	100%	1,526	100%	5,725	100%
ECLs
PD deterioration	18	55%	73	47%	23	92%	96	53%	26	47%	140	53%
Forbearance	5	16%	3	2%	-	-	3	2%	12	22%	20	7%
AFD or Watch List(1)	-	-	-	-	-	-	-	-	17	31%	17	6%
> 30 DPD	2	6%	13	8%	2	8%	15	8%	-	-	17	6%
Other(2)	7	23%	67	43%	-	-	67	37%	-	-	74	28%
	32	100%	156	100%	25	100%	181	100%	55	100%	268	100%

(1)   Approaching Financial Difficulty (AFD) and Watch markers are early warning indicators of Business customers who may be approaching financial difficulties. If these indicators are not reversed, they may lead to a requirement for more proactive management by the Group.

(2)   Other refers primarily to rules using additional credit reference agency data as well a number of smaller value drivers.

Risk management

Credit risk

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

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

2023		Stage 1		Stage 2		Stage 3(1)		Total
		Lending £m	ECL £m	Lending £m	ECL £m	Lending £m	ECL £m	Lending £m	ECL £m
Mortgages	PD range
Strong	0 - 0.74	52,612	8	1,355	2	-	-	53,967	10
Good	0.75 - 2.49	1,540	2	553	3	-	-	2,093	5
Satisfactory	2.50 - 99.99	388	3	796	22	-	-	1,184	25
Default	100	-	-	-	-	553	17	553	17
Total		54,540	13	2,704	27	553	17	57,797	57
Unsecured
Strong	0 - 2.49	4,443	29	123	12	-	-	4,566	41
Good	2.50 - 9.99	607	16	1,063	148	-	-	1,670	164
Satisfactory	10.00 - 99.99	6	1	456	162	-	-	462	163
Default	100	-	-	-	-	116	61	116	61
Total		5,056	46	1,642	322	116	61	6,814	429
Business
Strong	0 - 0.74	1,860	2	158	-	-	-	2,018	2
Good	0.75 - 9.99	4,360	27	1,441	30	-	-	5,801	57
Satisfactory	10.00 - 99.99	73	1	381	21	-	-	454	22
Default	100	-	-	-	-	411	50	411	50
Total		6,293	30	1,980	51	411	50	8,684	131

(1)   Stage 3 includes POCI for gross loans and advances of £48m for Mortgages and £1m for Unsecured (2022: £56m and £1m respectively); and ECL of (£1m) for Mortgages and (£1m) for Unsecured (2022: (£1m) and (£2m) respectively).

2022		Stage 1		Stage 2		Stage 3(1)		Total
		Lending £m	ECL £m	Lending £m	ECL £m	Lending £m	ECL £m	Lending £m	ECL £m
Mortgages	PD range
Strong	0 - 0.74	52,184	6	1,864	10	-	-	54,048	16
Good	0.75 - 2.49	2,302	2	641	5	-	-	2,943	7
Satisfactory	2.50 - 99.99	305	2	585	17	-	-	890	19
Default	100	-	-	-	-	583	14	583	14
Total		54,791	10	3,090	32	583	14	58,464	56
Unsecured
Strong	0 - 2.49	4,795	42	413	26	-	-	5,208	68
Good	2.50 - 9.99	524	20	459	72	-	-	983	92
Satisfactory	10.00 - 99.99	5	1	237	83	-	-	242	84
Default	100	-	-	-	-	80	40	80	40
Total		5,324	63	1,109	181	80	40	6,513	284
Business
Strong	0 - 0.74	4,808	5	719	17	-	-	5,527	22
Good	0.75 - 9.99	1,455	7	751	31	-	-	2,206	38
Satisfactory	10.00 - 99.99	7	-	56	7	-	-	63	7
Default	100	-	-	-	-	373	50	373	50
Total		6,270	12	1,526	55	373	50	8,169	117

(1)   Stage 3 includes POCI for gross loans and advances of £48m for Mortgages and £1m for Unsecured (2022: £56m and £1m respectively); and ECL of (£1m) for Mortgages and (£1m) for Unsecured (2022: (£1m) and (£2m) respectively).

Risk management

Credit risk

In terms of the credit quality of the loan commitments and financial guarantee contracts, at least 90% classified as either 'Good' or 'Strong' under the Group's internal PD rating scale with the overall portfolio at 96% (2022: 97%) and the level of default remaining low.

The migration of business lending from the Strong to the Good PD grouping has been predominately driven by the updates to model economic scenarios (MES) received during the year, rather than an observed deterioration in the customer portfolio.

IFRS 9 staging

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

2023	Stage 1		Stage 2		Stage 3(1)		Total gross loans £m	Total provisions £m	Income statement £m
	Gross loans £m	ECL  £m	Gross loans  £m	ECL £m	Gross loans £m	ECL £m
Opening balance at 1 October 2022	66,385	85	5,725	268	1,036	104	73,146	457
Transfers from Stage 1 to Stage 2	(8,561)	(46)	8,535	414	-	-	(26)	368	368
Transfers from Stage 2 to Stage 1	6,077	16	(6,125)	(129)	-	-	(48)	(113)	(113)
Transfers to Stage 3	(96)	-	(586)	(109)	686	138	4	29	29
Transfers from Stage 3	121	-	134	8	(266)	(10)	(11)	(2)	(2)
Net movement	(2,459)	(30)	1,958	184	420	128	(81)	282	282
Changes to model methodology	-	-	-	-	-	-	-	-	-
New assets originated or purchased(2)	20,489	57	629	44	161	34	21,279	135	135
Repayments and other movements(3)	(2,990)	12	(558)	(22)	140	(4)	(3,408)	(14)	(14)
Repaid or derecognised(3)	(15,536)	(35)	(1,428)	(74)	(490)	(127)	(17,454)	(236)	(236)
Write-offs	-	-	-	-	(187)	(187)	(187)	(187)	-
Cash recoveries	-	-	-	-	-	38	-	38	-
Individually assessed impairment charge	-	-	-	-	-	142	-	142	142
Closing balance at 30 September 2023	65,889	89	6,326	400	1,080	128	73,295	617	309

2022	Stage 1		Stage 2		Stage 3(1)		Total gross loans £m	Total provisions £m	Income statement £m
	Gross loans £m	ECL  £m	Gross loans  £m	ECL £m	Gross loans £m	ECL £m
Opening balance at 1 October 2021	61,416	111	10,178	302	957	91	72,551	504
Transfers from Stage 1 to Stage 2	(8,287)	(45)	8,227	294	-	-	(60)	249	249
Transfers from Stage 2 to Stage 1	10,218	27	(10,282)	(145)	-	-	(64)	(118)	(118)
Transfers to Stage 3	(91)	-	(562)	(84)	650	101	(3)	17	17
Transfers from Stage 3	42	-	137	8	(187)	(12)	(8)	(4)	(4)
Net movement	1,882	(18)	(2,480)	73	463	89	(135)	144	144
Changes to model methodology	443	1	(442)	(8)	-	-	1	(7)	(7)
New assets originated or purchased(2)	22,162	187	2,055	159	187	32	24,404	378	378
Repayments and other movements(3)	(3,434)	(42)	(155)	(65)	56	(15)	(3,533)	(122)	(122)
Repaid or derecognised(3)	(16,084)	(154)	(3,431)	(193)	(498)	(101)	(20,013)	(448)	(448)
Write-offs	-	-	-	-	(129)	(129)	(129)	(129)
Cash recoveries	-	-	-	-	-	30	-	30
Individually assessed impairment charge	-	-	-	-	-	107	-	107	107
Closing balance at 30 September 2022	66,385	85	5,725	268	1,036	104	73,146	457	52

(1)   Stage 3 includes POCI for gross loans and advances of £48m for Mortgages and £1m for Unsecured (2022: £56m and £1m respectively), and ECL of (£1m) for Mortgages and (£1m) for Unsecured (2022: (£1m) and (£2m) respectively). Nil for Business in both periods.

(2)   Includes assets where the term has ended, and a new facility has been provided.

(3)   'Repayments' comprises payments made on customer lending which are not yet fully paid at the reporting date and the customer arrangement remains live at that date. 'Repaid' refers to payments made on customer lending which is either fully repaid or derecognised by the reporting date and the customer arrangement is therefore closed at that date.

The IFRS 9 staging movements are driven by a variety of factors at individual product portfolio levels, with further detail provided in the following portfolio performance pages. Overall portfolio activity remains in line with expectations, with the net movements across staging slightly higher than prior year with gross flows in and out of Stage 2 the predominant movement. The increase in write offs has been primarily driven from the credit card portfolio in addition to a small number of individually significant business write offs. The levels of default across the portfolio remain low.

Risk management

Credit risk

The contractual amount outstanding on loans and advances that were written off during the reporting period or are still subject to enforcement activity was £5.1m (2022: £4.3m). The Group has not purchased any lending assets in the year (2022: none). Further information on staging profile is provided at a portfolio level in the respective portfolio performance section on the following pages.

Mortgage credit performance

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

Breakdown of Mortgage portfolio

2023	Gross lending £m	Modelled & IA ECL £m	MA £m	Total ECL £m	Net lending £m	Coverage %	Average LTV %
Residential - capital repayment	35,085	10	5	15	35,070	0.04%	54.2%
Residential - interest only	7,503	8	1	9	7,494	0.12%	47.0%
BTL	15,209	7	26	33	15,176	0.21%	52.8%
Total Mortgage portfolio	57,797	25	32	57	57,740	0.10%	52.9%
2022
Residential - capital repayment	36,417	13	5	18	36,399	0.05%	54.2%
Residential - interest only	7,041	3	1	4	7,037	0.05%	45.4%
BTL	15,006	6	28	34	14,972	0.22%	52.4%
Total Mortgage portfolio	58,464	22	34	56	58,408	0.09%	52.7%

Mortgage lending has reduced on a net basis to £57.8bn (2022: £58.5bn) with a reduced demand for new lending owing to the higher rate environment, stressed affordability pressure and wider cost of living considerations, being outpaced by repayments and redemptions.

The portfolio continues to evidence solid underlying credit performance, with the majority (98%) of lending not yet past due at the balance sheet date (2022: 98%), and 94% of loans held in Stage 1 (2022: 94%). A significant proportion of the portfolio is rated Strong or Good at the balance sheet date under the Group's internal PD rating scale (97%, consistent with 30 September 2022), and the volume and value of loans in forbearance has reduced to 3,801/£498m from 4,636/£640m, primarily due to customers successfully completing the forbearance reporting probation period and returning to fully performing status.

Stage 3 balances have remained low at 1.0% (2022: 1.0%) and 91% of the portfolio has an LTV of less than 75% (2022: 93%), with the weighted average LTV relatively stable through the year at 52.9% (2022: 52.7%). Further detail on LTV bandings and forbearance measures is provided on the following pages.

The selection of appropriate MAs is a major component in determining the Group's ECL, a detailed analysis of which is shown on page 45. Asset quality metrics for the BTL mortgage book remain robust, but the Group continues to hold a prudent level of provisioning for this customer cohort, with the related MA held stable at £25m (2022: £25m). A £5m MA for economic uncertainty was introduced during the year to reflect the economic circumstances and cost of living pressures such as rising interest rates and inflation which may impact customers. Other small MAs totalling £2m (2022: £4m) have been retained, taking total MAs held to £32m, down from £34m at 30 September 2022.

This has resulted in an impairment charge of £2m in the income statement (2022: credit of £30m) and associated cost of risk of nil bps (2022: (4)bps). The total book coverage has increased in the year to 10bps and is appropriate in the current environment where increased arrears and deterioration are expected to emerge in this portfolio.

Mortgage Portfolio - interest rate profile

	2023		2022
	£m	%	£m	%
Fixed rate	52,841	91.5%	53,387	91.3%
Variable rate	3,081	5.3%	2,106	3.6%
Standard variable rate	1,875	3.2%	2,971	5.1%
Total	57,797	100.0%	58,464	100.0%

The Group is a signatory to the government mortgage charter announced by the chancellor of the exchequer on 23 June 2023, to support regulated residential mortgage borrowers impacted by higher mortgage interest rates, in particular borrowers whose existing fixed rate deal is due to end in the immediate future.

During FY23 there has been a shift and increase in the volume of customers opening tracker mortgages as customers monitor the interest rate movements. The increase in interest rates has also driven a reduction in the volume of customers on the standard variable rate.

Risk management

Credit risk

Collateral

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

Average LTV of Mortgage portfolio by staging

2023 LTV(1)	Stage 1			Stage 2			Stage 3(2)			Total
	Loans £m	%	ECL £m	Loans  £m	%	ECL  £m	Loans  £m	%	ECL  £m	Loans  £m	%	ECL £m
Less than 50%	22,680	42%	4	1,551	58%	5	282	50%	2	24,513	42%	11
50% to 75%	26,913	49%	6	1,009	37%	14	203	37%	4	28,125	49%	24
76% to 80%	2,270	4%	1	81	3%	2	22	4%	1	2,373	4%	4
81% to 85%	1,408	3%	1	33	1%	1	13	2%	1	1,454	3%	3
86% to 90%	992	2%	-	23	1%	-	9	2%	1	1,024	2%	1
91% to 95%	236	-	-	3	-	-	11	2%	1	250	-	1
96% to 100%	8	-	-	2	-	1	3	1%	-	13	-	1
Greater than 100%	33	-	1	2	-	4	10	2%	7	45	-	12
	54,540	100%	13	2,704	100%	27	553	100%	17	57,797	100%	57

2022 LTV(1)	Stage 1			Stage 2			Stage 3(2)			Total
	Loans £m	%	ECL £m	Loans  £m	%	ECL  £m	Loans  £m	%	ECL  £m	Loans  £m	%	ECL £m
Less than 50%	23,069	43%	2	1,659	54%	3	288	49%	2	25,016	43%	7
50% to 75%	27,452	50%	5	1,270	41%	19	242	42%	2	28,964	50%	26
76% to 80%	2,412	4%	1	103	3%	3	17	3%	1	2,532	4%	5
81% to 85%	1,108	2%	1	26	1%	1	11	2%	1	1,145	2%	3
86% to 90%	547	1%	1	25	1%	1	6	1%	-	578	1%	2
91% to 95%	154	-	-	4	-	1	8	1%	1	166	-	2
96% to 100%	16	-	-	-	-	-	3	1%	-	19	-	-
Greater than 100%	33	-	-	3	-	4	8	1%	7	44	-	11
	54,791	100%	10	3,090	100%	32	583	100%	14	58,464	100%	56

(1)   LTV of the Mortgage portfolio is defined as Mortgage portfolio weighted by balance. The portfolio is indexed using the MIAC Acadametrics indices at a given date.

(2)   Stage 3 includes £48m (2022: £56m) of POCI gross loans and advances and (£1m) ECL (2022: (£1m)).

The Mortgage portfolio remains highly secured with 91.1% of mortgages, by loan value, having an indexed LTV of less than 75% (2022: 92.3%), and an average portfolio LTV of 52.9% (2022: 52.7%). The total portfolio has reduced by 1.1% with the highest reduction in proportion and value in Stage 2.

Risk management

Credit risk

Forbearance

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

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

2023	Total loans and advances subject to forbearance measures			Impairment allowance on loans and advances subject to forbearance measures
	Number of loans	Gross carrying  amount  £m	% of total portfolio	Impairment allowance  £m	Coverage %
Formal arrangements	1,027	134	0.24%	5.0	3.77%
Temporary arrangements	566	93	0.16%	4.5	4.82%
Payment arrangement	1,194	130	0.23%	1.4	1.09%
Payment holiday	362	45	0.08%	0.2	0.35%
Interest only conversion	460	76	0.13%	0.5	0.66%
Term extension	40	3	-	-	0.47%
Other	55	7	0.01%	0.3	3.69%
Legal	97	10	0.02%	0.3	2.83%
Total mortgage forbearance	3,801	498	0.87%	12.2	2.44%
2022
Formal arrangements	1,145	137	0.23%	8.6	6.23%
Temporary arrangements	518	82	0.14%	4.4	5.38%
Payment arrangement	1,211	133	0.23%	0.6	0.49%
Payment holiday	381	47	0.08%	0.1	0.27%
Interest only conversion	1,193	225	0.39%	0.8	0.35%
Term extension	66	5	0.01%	-	0.45%
Other	14	1	-	-	0.92%
Legal	108	10	0.02%	0.3	2.42%
Total mortgage forbearance	4,636	640	1.10%	14.8	2.31%

As at 30 September 2023, forbearance totalled £498m (3,801 loans), a decrease from the 30 September 2022 position of £640m (4,636 loans). This level represents 0.87% of total mortgage balances (2022: 1.10%), with the decrease primarily driven by customers successfully completing the forbearance reporting probation period and returning to fully performing status.

When all other avenues of resolution, including forbearance, have been explored, the Group will take steps to repossess and sell underlying collateral. In 2023, there were 55 repossessions of which 4 were voluntary (2022: 73 including 7 voluntary). The Group remains committed to supporting the customer and places good outcomes for them at the centre of this strategy.

Risk management

Credit risk

IFRS 9 staging

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

2023	Stage 1		Stage 2		Stage 3(1)		Total gross loans £m	Total provisions  £m	Income statement £m
	Gross loans £m	ECL £m	Gross loans £m	ECL £m	Gross loans £m	ECL £m
Opening balance at 1 October 2022	54,791	10	3,090	32	583	14	58,464	56
Transfers from Stage 1 to Stage 2	(5,237)	(3)	5,203	63	-	-	(34)	60	60
Transfers from Stage 2 to Stage 1	4,827	1	(4,852)	(49)	-	-	(25)	(48)	(48)
Transfers to Stage 3	(58)	-	(273)	(5)	328	7	(3)	2	2
Transfers from Stage 3	112	-	104	7	(222)	(3)	(6)	4	4
Net movement	(356)	(2)	182	16	106	4	(68)	18	18
Changes to model methodology	-	-	-	-	-	-	-	-	-
New assets originated or purchased(2)	8,372	2	-	-	-	-	8,372	2	2
Repayments and other movements(3)	(2,366)	4	(99)	(15)	(9)	3	(2,474)	(8)	(8)
Repaid or derecognised(3)	(5,901)	(1)	(469)	(6)	(126)	(3)	(6,496)	(10)	(10)
Write-offs	-	-	-	-	(1)	(1)	(1)	(1)	-
Cash recoveries	-	-	-	-	-	-	-	-	-
Individually assessed impairment charge	-	-	-	-	-	-	-	-	-
Closing balance at 30 September 2023	54,540	13	2,704	27	553	17	57,797	57	2
of which:
Residential - capital repayment	33,328	3	1,489	6	268	6	35,085	15
Residential - interest only	6,651	1	657	2	195	6	7,503	9
BTL	14,561	9	558	19	90	5	15,209	33

Risk management

Credit risk

2022	Stage 1		Stage 2		Stage 3(1)		Total gross loans £m	Total provisions  £m	Income statement £m
	Gross loans £m	ECL £m	Gross loans £m	ECL £m	Gross loans £m	ECL £m
Opening balance at 1 October 2021	50,596	4	7,192	64	653	19	58,441	87
Transfers from Stage 1 to Stage 2	(5,854)	(1)	5,821	55	-	-	(33)	54	54
Transfers from Stage 2 to Stage 1	8,820	3	(8,851)	(55)	-	-	(31)	(52)	(52)
Transfers to Stage 3	(49)	-	(191)	(5)	238	4	(2)	(1)	(1)
Transfers from Stage 3	29	-	108	5	(140)	(3)	(3)	2	2
Net movement	2,946	2	(3,113)	-	98	1	(69)	3	3
Changes to model methodology	-	-	-	-	-	-	-	-	-
New assets originated or purchased(2)	9,971	1	7	-	1	-	9,979	1	1
Repayments and other movements(3)	(2,484)	(4)	(154)	(23)	(26)	(3)	(2,664)	(22)	(22)
Repaid or derecognised(3)	(6,238)	(1)	(842)	(9)	(142)	(2)	(7,222)	(12)	(12)
Write-offs	-	-	-	-	(1)	(1)	(1)	(1)
Cash recoveries	-	-	-	-	-	-	-	-	-
Individually assessed impairment charge	-	-	-	-	-	-	-	-	-
Closing balance at 30 September 2022	54,791	10	3,090	32	583	14	58,464	56	(30)
of which:
Residential - capital repayment	34,396	7	1,650	4	371	7	36,417	18
Residential - interest only	6,063	2	838	1	140	1	7,041	4
BTL	14,332	1	602	27	72	6	15,006	34

(1)   Stage 3 includes POCI for gross loans and advances of £48m (2022: £56m) and ECL of (£1m) (2022: (£1m)).

(2)   Includes assets where the term has ended, and a new facility has been provided.

(3)   'Repayments' comprises payments made on customer lending that are not yet fully paid at the reporting date and the customer arrangement remains live at that date. 'Repaid' refers to payments made on customer lending, which is either fully repaid or derecognised by the reporting date and the customer arrangement is therefore closed at that date.

The Mortgage portfolio continues to evidence strong performance with levels of delinquency and impairment remaining relatively low.

The level of mortgage lending classed as Stage 1 increased from 93.7% in 2022 to 94.3%, with a decrease of assets in Stage 2 from 5.3% to 4.7%. Within the Stage 2 category, 89% of balances are not yet past due at the balance sheet date (2022: 89%). The proportion of mortgages classified as Stage 3 remains modest at 1.0% (2022: 1.0%). The net movements across the stages show reductions, primarily in the Stage 2 and 3 portfolios, driven by a wide variety of factors, but broadly they are all successful outcomes in either restoring customers to fully performing or resuming satisfactory repayment schedules, as the Group is committed to the delivery of good customer outcomes.

Mortgage lending classed as 'Strong' has increased modestly to 93.4% from 92.4% at 30 September 2022, with over 97% (2022: 97%) of the Mortgage portfolio classed as 'Good' or 'Strong.' The sustained quality in the internal PD ratings and high quality of collateral underpinning the book are key factors supporting the provision coverage of 10bps (2022: 7bps).

Unsecured credit performance

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

Breakdown of Unsecured credit portfolio

2023	Gross lending £m	Modelled ECL £m	MA £m	Total ECL £m	Net lending £m	Coverage %
Credit cards	6,088	364	28	392	5,696	6.88%
Personal loans	699	32	1	33	666	4.59%
Overdrafts	27	4	-	4	23	11.62%
Total Unsecured lending portfolio	6,814	400	29	429	6,385	6.65%
2022
Credit cards	5,558	216	30	246	5,312	4.81%
Personal loans	925	32	2	34	891	3.57%
Overdrafts	30	4	-	4	26	12.57%
Total Unsecured lending portfolio	6,513	252	32	284	6,229	4.66%

Risk management

Credit risk

Unsecured gross lending balances have increased to £6.8bn (2022: £6.5bn) with underlying growth in the credit card portfolio the primary driver, slightly offset by the personal loan portfolio which continues to contract in line with expectations.

Credit card lending increased circa 10% in the year reflecting resilient demand from existing customers and ongoing new credit card sales as the Group market share steadily grew to circa 8.5% of balances. During the period, in line with the downturn in the broader UK economy, we have seen a migration of customers from Stage 1 to Stage 2 with the value of lending in Stage 2 increasing to £1,321m (2022: £774m). However the proportion of lending in Stage 1 and Stage 2 not past due remains high at 97.2% (2022: 97.5%).

The level of forbearance concessions agreed in the unsecured portfolio, particularly in credit cards, has increased in line with portfolio arrears, driven by continued portfolio maturation, VMs diversification strategy and the wider economic environment.

The impact of the current macroeconomic scenarios together with a weakening of credit bureau data and early-stage arrears compared to prior year has led to an increase in modelled ECL. This increase in ECL resulted in book coverage increasing to 688bps (2022: 481bps). The value of credit cards written off, net of recoveries, increased to £116m (2022: £79m).

The personal loan portfolio continues to reduce on a managed basis.

The selection of appropriate MAs is a major component in determining the Group's ECL, a detailed analysis of key factors on them is shown on page 45.

Taking the modelled ECL and MA together, the total ECL provision held as at 30 September 2023 is £429m (30 September 2022: £284m), which, in addition to a net write off impairment charge of £124m, results in a total impairment charge of £269m (30 September 2022: £178m).

Total book coverage of 665bps has increased from 466bps as at 30 September 2022. The increased coverage is appropriate in the current environment where increased arrears and deterioration are expected to emerge in this portfolio.

Forbearance

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

2023	Total loans and advances subject to forbearance measures			Impairment allowance on loans and advances subject to forbearance measures
	Number of loans	Gross carrying  amount  £m	% of total portfolio	Impairment allowance  £m	Coverage %
Credit cards arrangements	22,206	90	1.56%	41.7	46.13%
Loans arrangements	467	2	0.51%	0.8	40.30%
Overdraft arrangement	24	-	0.02%	-	11.98%
Total Unsecured lending forbearance	22,697	92	1.42%	42.5	46.00%
2022
Credit cards arrangements	15,872	62	1.19%	24.3	39.47%
Loans arrangements	638	3	0.56%	1.4	40.33%
Overdraft arrangement	56	-	0.04%	-	30.76%
Total Unsecured lending forbearance	16,566	65	1.12%	25.7	39.51%

The volume and value of forbearance has increased, notably on the credit card portfolio, where the Group looks to agree concessions and payment arrangements which are in the best interest of the customers in order to maximise their ability to repay the lending and return to fully performing status.

Forbearance on the Loan and Overdraft portfolios remain modest and in line with the reducing size of the portfolios. The level of impairment coverage on the Unsecured portfolio has increased to 46.0% (2022: 39.5%) primarily as a result of the updated PD and other MES model inputs.

Risk management

Credit risk

IFRS 9 staging

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

2023	Stage 1		Stage 2		Stage 3(1)		Total gross loans £m	Total provisions  £m	Income statement £m
	Gross loans £m	ECL £m	Gross loans £m	ECL £m	Gross loans £m	ECL £m
Opening balance at 1 October 2022	5,324	63	1,109	181	80	40	6,513	284
Transfers from Stage 1 to Stage 2	(1,621)	(39)	1,642	320	-	-	21	281	281
Transfers from Stage 2 to Stage 1	590	13	(608)	(69)	-	-	(18)	(56)	(56)
Transfers to Stage 3	(15)	-	(179)	(100)	200	121	6	21	21
Transfers from Stage 3	-	-	1	-	(5)	(5)	(4)	(5)	(5)
Net movement	(1,046)	(26)	856	151	195	116	5	241	241
Changes to model methodology	-	-	-	-	-	-	-	-	-
New assets originated or purchased(2)	1,101	12	1	-	2	2	1,104	14	14
Repayments and other movements(3)	(97)	-	(282)	2	152	(6)	(227)	(4)	(4)
Repaid or derecognised(3)	(226)	(3)	(42)	(12)	(152)	(91)	(420)	(106)	(106)
Write-offs	-	-	-	-	(161)	(161)	(161)	(161)	-
Cash recoveries	-	-	-	-	-	37	-	37	-
Individually assessed impairment charge	-	-	-	-	-	124	-	124	124
Closing balance at 30 September 2023	5,056	46	1,642	322	116	61	6,814	429	269

2022	Stage 1		Stage 2		Stage 3(1)		Total gross loans £m	Total provisions  £m	Income statement £m
	Gross loans £m	ECL £m	Gross loans £m	ECL £m	Gross loans £m	ECL £m
Opening balance at 1 October 2021	5,148	41	553	118	69	35	5,770	194
Transfers from Stage 1 to Stage 2	(1,051)	(31)	1,059	210	-	-	8	179	179
Transfers from Stage 2 to Stage 1	504	16	(523)	(62)	-	-	(19)	(46)	(46)
Transfers to Stage 3	(19)	-	(116)	(69)	139	83	4	14	14
Transfers from Stage 3	1	-	2	1	(8)	(7)	(5)	(6)	(6)
Net movement	(565)	(15)	422	80	131	76	(12)	141	141
Changes to model methodology	-	-	-	-	-	-	-	-	-
New assets originated or purchased(2)	1,708	20	11	4	7	5	1,726	29	29
Repayments and other movements(3)	(508)	26	166	(8)	104	(4)	(238)	14	14
Repaid or derecognised(3)	(459)	(9)	(43)	(13)	(117)	(72)	(619)	(94)	(94)
Write-offs	-	-	-	-	(114)	(114)	(114)	(114)
Cash recoveries	-	-	-	-	-	26	-	26
Individually assessed impairment charge	-	-	-	-	-	88	-	88	88
Closing balance at 30 September 2022	5,324	63	1,109	181	80	40	6,513	284	178

(1)   Stage 3 includes POCI for gross loans and advances of £1m (2022: £1m) and ECL of (£2m) (2022: (£2m)).

(2)   Includes assets where the term has ended, and a new facility has been provided.

(3)   'Repayments' comprises payments made on customer lending, which are not yet fully paid at the reporting date and the customer arrangement remains live at that date. 'Repaid' refers to payments made on customer lending, which is either fully repaid or derecognised by the reporting date and the customer arrangement is therefore closed at that date.

The individually assessed impairment charge increase from last year is within expectations as the underlying portfolio has deteriorated, in line with the backdrop of a downturn in the broader UK economy. The level of post write off recoveries has increased proportionately and remains robust.

The total ECL held on balance sheet has increased from £284m to £429m with an increase in the modelled ECL being the primary driver. Modelled provision coverage alone is now 589bps (2022: 413bps).

The credit card portfolio is the primary driver of the decrease in the balance of Unsecured lending classed as Stage 1 to 74.2% (2022: 81.8%), with a corresponding increase in assets in Stage 2 from 17.0% to 24.1%. Within the Stage 2 category, 95.4% is not yet past due (2022: 94.7%) but falls into this classification due predominantly to PD deterioration rather than actual delinquency. The proportion classified as Stage 3 increased to 1.7% (2022: 1.2%). The total provision coverage has therefore increased to 665bps (2022: 466bps).

Risk management

Credit risk

Business credit performance

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

Breakdown of Business credit portfolio

2023	Gross lending £m	Government(1) £m	Total gross £m	Modelled & IA ECL £m	MA £m	Total ECL £m	Net lending £m	Coverage(2) %
Agriculture	1,315	46	1,361	4	1	5	1,356	0.35%
Business services	1,153	212	1,365	38	3	41	1,324	3.45%
Commercial Real Estate	715	4	719	5	1	6	713	0.72%
Government, health and education	1,200	38	1,238	9	2	11	1,227	0.85%
Hospitality	779	60	839	3	1	4	835	0.50%
Manufacturing	669	77	746	17	3	20	726	2.87%
Resources	160	5	165	2	-	2	163	1.65%
Retail and wholesale trade	758	145	903	19	2	21	882	2.72%
Transport and storage	290	32	322	4	-	4	318	1.47%
Other	877	149	1,026	15	2	17	1,009	1.87%
Total Business portfolio	7,916	768	8,684	116	15	131	8,553	1.60%
2022
Agriculture	1,392	66	1,458	5	1	6	1,452	0.45%
Business services	980	286	1,266	22	3	25	1,241	2.53%
Commercial Real Estate	597	10	607	3	-	3	604	0.54%
Government, health and education	1,008	54	1,062	8	2	10	1,052	0.95%
Hospitality	652	78	730	4	1	5	725	0.80%
Manufacturing	640	109	749	23	3	26	723	3.96%
Resources	133	8	141	3	1	4	137	2.37%
Retail and wholesale trade	696	198	894	15	3	18	876	2.38%
Transport and storage	291	56	347	4	1	5	342	1.44%
Other	723	192	915	12	3	15	900	2.03%
Total Business portfolio	7,112	1,057	8,169	99	18	117	8,052	1.59%

(1)   Government includes all lending provided to business customers under UK Government schemes including Bounce back loan scheme (BBLS), Coronavirus business interruption loan scheme (CBILS), Coronavirus large business interruption loan scheme (CLBILS) and Recovery loan scheme (RLS). This excludes £143m (2022: £66m) of guarantee claim funds received from British Business Bank (BBB).

(2)   Coverage ratio excludes the guaranteed element of government-backed loan schemes

Gross Business lending increased to £8.7bn (2022: £8.2bn). The government-guaranteed lending portfolio continues to reduce as borrowers repay balances. Growth remains targeted to sectors and sub sectors where we have well established expertise. The sector mix remained stable with lending to the agriculture, business services and government, health and education sectors continuing to account for almost half of the total book, at 46% (2022: 46%)

Whilst there is some weakening in the pre and early delinquency metrics being monitored, there has been no significant deterioration in asset quality metrics across the portfolio and, as yet, no significant increase in specific provision recognition. Coverage for certain sectors has reduced in the period as previously held provisions have been utilised. A range of external risks have remained prevalent throughout the period including general inflationary pressures, interest rate rises, ongoing supply chain distribution and labour market disruption, as well as wider geopolitical risks.

The proportion of loans in Stage 1 has reduced to 72.5% (2022: 76.7%) with a corresponding increase in the proportion of loans in Stage 2 at 22.8% (2022: 18.7%). Within the Stage 2 category, 98.5% is not past due (2022: 98.2%) and 90% remain rated as 'Strong' or 'Good' (2022: 95%) under the Group's internal PD rating scale. Stage 3 loans remain modest at 4.7% (2022: 4.6%).

The updated MES is the primary driver of a net £17m increase in modelled provisions to £116m. Whilst there have been no material signs of stress across the portfolio, there has been an uptick in corporate insolvencies across the UK market, therefore an economic resilience MA of £15m has been retained. A new Business LGD model was brought into use in the Business ECL calculation during the year. The impact of this had been estimated during development, resulting in a negative MA of £15m being held last year, this has now been fully released. The MA composition is covered in more detail on the page 45. The specific provisions held on balance sheet have reduced to £25m (2022: £31m) primarily due to provision utilisation. This results in an overall provision of £131m (2022: £117m) and an impairment charge of £38m (2022: credit of £96m).

Overall, portfolio coverage remains prudent at 160bps (2022: 159bps), reflecting the quality of the portfolio and little evidence of deterioration in asset quality to date.

Risk management

Credit risk

Forbearance

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

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

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

2023	Total loans and advances subject to forbearance measures			Impairment allowance on loans and advances subject to forbearance measures
	Number of loans	Gross carrying  amount  £m	% of total portfolio	Impairment allowance  £m	Coverage %
Term extension	150	112	1.22%	7.9	7.08%
Payment holiday	88	204	2.21%	30.3	14.91%
Reduction in contracted interest rate	1	-	-	-	-
Alternative forms of payment	-	-	-	-	-
Debt forgiveness	4	1	0.01%	0.4	47.66%
Refinancing	8	2	0.02%	0.0	1.85%
Covenant breach/reset/waiver	40	174	1.89%	6.4	3.65%
Total Business forbearance	291	493	5.35%	45.0	9.14%
	Total loans and advances subject to forbearance measures			Impairment allowance on loans and advances subject to forbearance measures
2022	Number of loans	Gross carrying  amount  £m	% of total portfolio	Impairment allowance  £m	Coverage %
Term extension	154	118	1.36%	4.9	4.18%
Payment holiday	81	193	2.23%	32.6	16.86%
Reduction in contracted interest rate	2	1	0.01%	-	1.33%
Alternative forms of payment	-	-	-	-	-
Debt forgiveness	2	1	0.01%	0.5	97.05%
Refinancing	9	2	0.02%	0.1	5.14%
Covenant breach/reset/waiver	41	133	1.53%	5.4	4.03%
Total Business forbearance	289	448	5.16%	43.5	9.71%

The number of Business customers reported in receipt of forbearance concessions has remained relatively stable at 291 (2022: 289) with the total customer lending increasing to £493m (2022: £448m). Whilst the forbearance concession may only be applied to one account in the customer's portfolio, in the disclosure above the customer's full lending portfolio is included. Forbearance remains a key support measure for customers in, or about to, experience financial difficulty, and the ability to agree a temporary concession on a non-commercial basis can often be the critical breathing room required to support a return to fully performing status. 13% of forborne customers met exit criteria and returned to performing status in the financial year. Therefore, most forbearance arrangements relate to term extensions allowing customers a longer term to repay obligations in full than initially contracted. As a percentage of the Business portfolio, forborne balances have increased to 5.35% (2022: 5.16%) with impairment coverage slightly reducing 9.14% (2022: 9.71%).

Customers within the forbearance portfolio have £29m of COVID-19 related support loans: £14m CBIL, £4m BBL and £11m RLS.

The table includes a portfolio of financial assets at fair value. The gross value of fair value loans subject to forbearance is £0.5m (2022: £4.7m), representing 0.01% of the total business portfolio (2022: 0.05%). The credit risk adjustment on these amounts is now immaterial. (2022: £0.1m).

Risk management

Credit risk

IFRS 9 staging

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

2023	Stage 1		Stage 2		Stage 3(3)		Total gross loans £m	Total provisions  £m	Income statement £m
	Gross loans £m	ECL £m	Gross loans £m	ECL £m	Gross loans £m	ECL £m
Opening balance at 1 October 2022	6,270	12	1,526	55	373	50	8,169	117
Transfers from Stage 1 to Stage 2	(1,703)	(4)	1,689	31	-	-	(14)	27	27
Transfers from Stage 2 to Stage 1	659	1	(666)	(11)	-	-	(7)	(10)	(10)
Transfers to Stage 3	(23)	-	(134)	(4)	158	10	1	6	6
Transfers from Stage 3	8	-	30	-	(40)	(2)	(2)	(2)	(2)
Net movement	(1,059)	(3)	919	16	118	8	(22)	21	21
Changes to model methodology	-	-	-	-	-	-	-	-	-
New assets originated or purchased(1)	11,017	43	627	44	159	32	11,803	119	119
Repayments and other movements(2)	(526)	8	(174)	(8)	(1)	(1)	(701)	(1)	(1)
Repaid or derecognised(2)	(9,409)	(30)	(918)	(56)	(213)	(33)	(10,540)	(119)	(119)
Write-offs	-	-	-	-	(25)	(25)	(25)	(25)	-
Cash recoveries	-	-	-	-	-	1	-	1	-
Individually assessed impairment charge	-	-	-	-	-	18	-	18	18
Closing balance at 30 September 2023	6,293	30	1,980	51	411	50	8,684	131	38

2022	Stage 1		Stage 2		Stage 3(3)		Total gross loans £m	Total provisions(4)  £m	Income statement £m
	Gross loans £m	ECL £m	Gross loans £m	ECL £m	Gross loans £m	ECL £m
Opening balance at 1 October 2021	5,672	66	2,433	120	235	37	8,340	223
Transfers from Stage 1 to Stage 2	(1,382)	(13)	1,347	29	-	-	(35)	16	16
Transfers from Stage 2 to Stage 1	894	8	(908)	(28)	-	-	(14)	(20)	(20)
Transfers to Stage 3	(23)	-	(255)	(10)	273	14	(5)	4	4
Transfers from Stage 3	12	-	28	2	(39)	(2)	1	-	-
Net movement	(499)	(5)	212	(7)	234	12	(53)	-	-
Changes to model methodology	443	1	(443)	(8)	-	-	-	(7)	-
New assets originated or purchased(1)	10,483	166	2,037	155	179	27	12,699	348	348
Repayments and other movements(2)	(442)	(72)	(167)	(34)	(22)	(8)	(631)	(114)	(114)
Repaid or derecognised(2)	(9,387)	(144)	(2,546)	(171)	(239)	(27)	(12,172)	(342)	(342)
Write-offs	-	-	-	-	(14)	(14)	(14)	(14)
Cash recoveries	-	-	-	-	-	4	-	4
Individually assessed impairment charge	-	-	-	-	-	19	-	19	19
Closing balance at 30 September 2022	6,270	12	1,526	55	373	50	8,169	117	(89)

(1)   Includes assets where the term has ended, and a new facility has been provided.

(2)   'Repayments' comprises payments made on customer lending which are not yet fully paid at the reporting date and the customer arrangement remains live at that date. 'Repaid' refers to payments made on customer lending which is either fully repaid or derecognised by the reporting date and the customer arrangement is therefore closed at that date.

(3)   This excludes £143m (2022: £66m) of guarantee claim funds received from British Business Bank.

The level of Business lending classed as Stage 1 has decreased to 72.5% (2022: 76.8%), with a corresponding increase in Stage 2 to 22.8% (2022: 18.7%), primarily driven by the revised MES inputs.

The majority (98.5%) of the portfolio in Stage 2 is not past due and is primarily in this category due to the updated MES inputs and PD deterioration in addition to proactive management measures such as early intervention, heightened monitoring, and forbearance concessions. Stage 3 loans have remained relatively stable at 4.7% (2022: 4.6%) and are predominantly Bounce Back Loans.

The proportion of assets classed as 'Strong' has decreased to 23% (2022: 68%) primarily due to the MES and PD changes although the proportion classed as 'Strong' or 'Good' remains robust at 90% (2022: 95%).

Risk management

Credit risk

Business collateral

The following table shows collateral held at 30 September 2023. The exposure amount shown is net of credit provisions that have some form of associated collateral and is not the total exposure for each asset class as this is disclosed elsewhere in the credit risk report.

A change was made this year where all collateral values captured have now been capped at the exposure value, which impacts the previously uncapped Other Physical Collateral & Receivables columns.

We have also included Immovable Property collateral this year, as an enhancement to last year's table content.

2023	Property £m	Cash  £m	Guarantee £m	Netting £m	Debt securities £m	Other physical collateral £m	Receivables £m	Total £m	Exposure £m
Financial assets at amortised cost
Loans and advances to customers	5,072	11	760	169	-	567	334	6,913	7,514
Of which: Default	61	-	182	-	-	-	17	260	267

2022	Property £m	Cash  £m	Guarantee £m	Netting £m	Debt securities £m	Other physical collateral £m	Receivables £m	Total £m	Exposure £m
Financial assets at amortised cost
Loans and advances to customers	4,843	7	970	237	-	432	379	6,868	7,399
Of which: Default	65	-	127	-	-	1	7	200	211

Lending backed by government guarantees in response to COVID-19 are included within the Guarantee column.

Risk management

Credit risk

Other credit risks

Offsetting of financial assets and liabilities

The table below presents information on recognised financial assets and financial liabilities that are offset on the balance sheet under IAS 32, as well as those that are subject to master netting or similar arrangements, irrespective of whether they are offset.

The Group reduces exposure to credit risk through central clearing for eligible derivatives, and daily posting of cash collateral on such transactions as detailed in note 3.1.3.2 to the financial statements. The amounts offset on the balance sheet, as shown below, mainly represent derivatives and variation margin collateral with central clearing houses, which meet the criteria for offsetting under IAS 32.

The Group enters into derivatives and repurchase agreements with various counterparties, which are governed by industry-standard master netting agreements. The Group holds and provides collateral in respect of transactions covered by these agreements. The right to offset balances under these master netting agreements only arises in the event of non-payment or default and, as a result, these arrangements do not qualify for offsetting under IAS 32.

Collateral amounts included in the table below are limited to the net balance sheet exposure in order to exclude any over collateralisation. The table excludes financial instruments not subject to offset and that are formally subject to collateral arrangements (e.g. loans and advances). The net amounts presented in the table are not intended to represent the Group's exposure to credit risk, as the Group will use a wide range of strategies to mitigate credit risk in addition to netting and collateral.

2023	Gross amounts before offset £m	Gross amounts  offset on balance sheet  £m	Net amounts  presented on  balance sheet  £m	Net amounts not offset on balance sheet		Net amount £m
				Subject to master netting agreements  £m	Cash collateral Pledged/ received(2) £m
Derivative assets	2,606	(2,471)	135	(26)	(81)	28
Derivative liabilities	(1,643)	1,353	(290)	26	62	(202)
Net position(1)	963	(1,118)	(155)	-	(19)	(174)
Repurchase agreements	(552)	-	(552)	552	-	-
2022
Derivative assets	3,340	(2,998)	342	(46)	(182)	114
Derivative liabilities	(1,797)	1,469	(328)	46	32	(250)
Net position(1)	1,543	(1,529)	14	-	(150)	(136)
Repurchase agreements	(703)	-	(703)	703	-	-

(1)   The net position is offset against variation margin cash collateral with central clearing houses included within other assets or other liabilities.

(2)   Cash collateral amounts not offset under IAS 32 in respect of derivatives with other banks are included within due from and due to other banks. Variation margin cash collateral amounts not offset under IAS 32 in respect of derivatives with central clearing houses are included within other assets and other liabilities.

Macroeconomic assumptions, scenarios, and weightings

The Group's ECL allowance at 30 September 2023 was £617m (2022: £457m).

Macroeconomic assumptions

The Group engages Oxford Economics to provide a wide range of future macroeconomic assumptions, which are used in the scenarios over the five-year forecast period, reflecting the best estimate of future conditions under each scenario outcome. The macroeconomic assumptions were provided by Oxford Economics on 1 September 2023 and changes in macroeconomic assumptions between 1 September 2023 and 30 September 2023 have been considered as part of the MAs. The Group has identified the following key macroeconomic drivers as the most significant inputs for IFRS 9 modelling purposes: UK GDP growth, inflation, house prices, base rates, and unemployment rates. The external data provided is assessed and reviewed on a quarterly basis to ensure appropriateness and relevance to the ECL calculation, with more frequent updates provided as and when the circumstances require them. Further adjustments supplement the modelled output when it is considered that not all the risks identified in a product segment have been accurately reflected within the models, or for other situations where it is not possible to provide a modelled outcome.

With UK core inflation remaining stubbornly high and wage inflation causing concern in the Monetary Policy Committee, the Bank of England base rate has been raised to its highest level since before the Global Financial Crisis. Although it is expected that the base rate has now peaked, the impact of the rapid rise in interest rates will not be fully felt until mortgage customers on fixed rate products, that predate the rate rises, remortgage. This will extend the ongoing cost of living crisis for some time to come.

Against this backdrop the Group has continued to assess the possible IFRS 9 economic scenarios to select appropriate forecasts and weightings. The selection of scenarios and the appropriate weighting to use in the IFRS 9 models are considered, debated and decided by ALCO and the Audit Committee. The three scenarios selected, together with the weightings applied, have been updated to reflect the current economic environment and are:

Scenario	2023 (%)	2022 (%)
Upside	10	10
Base	55	55
Downside	35	35

Risk management

Credit risk

The Group continue to select three scenarios, with the largest weighting applied to the base scenario. The weightings mirror those applied in 2022, while there is a shift in the downside scenario to a less severe option. This is a reflection of the view that, while there is continuing economic upheaval from the cumulative effects of Brexit, the COVID-19 pandemic and Russia's invasion of Ukraine, the peak of inflation is in the past and the Bank of England base rate is unlikely to climb much higher as inflation begins the long journey back to the Bank of England's target rate of 2%, leaving the path forward somewhat clearer.

The key macroeconomic assumptions used in the scenarios:

	Base (55%)	Upside (10%)	Downside (35%)
GDP	·      Growth limited to sub 1% in all quarters until Q2 2025, but recession is avoided ·      Overall year-on-year growth in 2024 forecast at 0.4% with a modest recovery in 2025 of 1.5% ·      GDP increases to 2.3% in 2026 before falling back to 1.5% in 2027	·      Growth of 2.9% in Q1 2024 contributes to year-on-year growth of 3.0% in 2024 ·      Overall year-on-year growth in 2025 is forecast to fall slightly to 2.6% before climbing back to 3.0% in 2026 ·      GDP falls back to 1.6% in 2027, moving towards the long run average forecast	·      Negative GDP for six consecutive quarters, from Q4 2023, (1.6%), until Q1 2025, (0.5%) resulting in total contraction of 4.1% ·      Growth remains sluggish over the remaining forecast period, only recovering to pre-contraction levels in Q3 2027, with annual growth of 1.6%
Inflation	·      Having peaked at 10.8% in Q4 2022, inflation falls back to 4.6% by Q4 2023 ·      Remains persistently above the BoE's 2% target throughout 2024 at 3.2% ·      In Q2 2025 inflation falls below the 2% target and remains so for the remainder of the forecast	·      Having peaked at 10.8% in Q4 2022, inflation falls to 4.9% in Q4 2023 ·      Reverts back to sub 2.0% levels from Q3 2025 for the remainder of the forecast period, going as low as 0.9% in Q2 2026 rising to 1.8% by Q4 2027	·      Having peaked at 10.8% in Q4 2022 before declining to 4.1% in Q4 2023 ·      Inflation continues to fall rapidly, dropping below 2% in Q2 2024 to a low of 0% in Q3 2025 ·      From Q4 2025 inflation rises steadily each quarter reaching 1.7% in Q3 2027
Base rate	·      BoE base rate hits 5.5% in Q4 2023 and remains at that level until Q3 2024 ·      From then on the rate falls steadily at around 0.25% per quarter over the forecast period to 2.1% by Q4 2027	·      BoE base rate continues to rise, peaking at 6.5% in Q2 2024 ·      The rate begins to fall in Q1 2025 and falls steadily by 0.25% per quarter thereafter to 3.6% by Q4 2027	·      BoE base rate peaks at 5.2% in Q3 2023 before falling back in Q4 2023 ·      The rate falls steadily at 0.25% per quarter from Q2 2024 to Q3 2027, tapering to 1.25% in Q4 2027
HPI	·      Shows steady decline, reaching a low point in Q3 2025 before rebounding slowly in each quarter after this until the end of the forecast period ·      Overall Q4 v Q4 year-on-year negative growth of 2.7% in 2023, 7.2% in 2024 and 2.9% in 2025 ·      Growth in the outer years recovers the value lost since Q3 2023 by the end of 2027	·      With the exception of Q4 2023, HPI falls in each quarter until Q2 2025 before reversing and rising in each subsequent quarter ·      Overall, HPI sees Q4 v Q4 negative growth of 1.3% in 2023, 4.8% in 2024 and 0.9% in 2025 ·      Returns to positive growth of 6.6% in 2026 and 7.0% in 2027	·      Falls steadily and deeply from Q1 2023 to Q2 2026 followed by modest increases in each quarter until the end of the forecast period ·      Overall, HPI sees a Q4 v Q4 negative growth of 4.7% in 2023, 12.7% in 2024 and 7.6% in 2025 ·      Modest growth in 2026 of 1.0% followed by 7.5% in 2027 leaves house prices well below the levels seen at the start of the forecast
Unemployment	·      Peaks at 4.6% in Q3 2024 and remains there through Q4 2024 ·      From then, the rate falls back to 3.9% in Q2 2026 where it remains through the remainder of the forecast period	·      Peaks in Q3 2023, at 4.3%, before falling back in the following quarter ·      From then, the rate slowly falls back to 3.7% by Q2 2026, where it remains	·      Peaks at 7.0% in Q1 2026 and remains there throughout 2026 ·      From Q1 2027 the unemployment rate begins to fall slowly, closing the year at 6.7%

Base case - 2023 v 2022⁽¹⁾

The following table shows how the Group's base case assumptions in the current year have changed from those used at 30 September 2022:

Year	Assumption	2022 %	2023 %	2024 %	2025 %	2026  %	2027 %
30 September 2023	Base rate		4.7	5.4	4.5	3.5	2.5
	Unemployment		4.2	4.5	4.3	3.9	3.9
	GDP		0.5	0.4	1.5	2.3	1.5
	Inflation		7.6	3.2	1.5	1.0	1.7
	HPI		(2.7)	(7.2)	(2.9)	4.6	7.1
30 September 2022	Base rate	1.4	2.2	1.8	1.8	1.7
	Unemployment	3.9	4.6	4.4	3.8	3.8
	GDP	3.6	0.3	2.1	2.7	2.1
	Inflation	9.4	7.5	0.6	0.7	1.5
	HPI	6.8	(4.6)	(3.0)	4.4	6.7

(1)   Macroeconomic assumptions provided by Oxford Economics on 1 September 2023 and reported on a calendar year basis unless otherwise stated. The changes in macroeconomic assumptions between 1 September 2023 and 30 September 2023 have been considered as part of the MAs.

Risk management

Credit risk

The base case macroeconomic estimates and assumptions used at 30 September 2022 reflected the forward-looking view at that time, which recognised the impact of the ongoing war in Ukraine on global fuel costs, which had triggered a spike in UK inflation of over 10% for the first time in decades. The effect was exacerbated by the autumn budget, and the wider impact of the war on global food prices in 2023. Core inflation has remained stubbornly high, compared to the previous forecast, forcing interest rates higher for longer as the Bank of England look to bring inflation back to their long-term target, prolonging the cost of living crisis.

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

2023	Unemployment %	GDP %	HPI %
Upside	3.9	2.2	1.3
Base	4.2	1.2	(0.2)
Downside	6.1	0.2	(3.3)
2022
Upside	3.9	3.1	3.3
Base	4.1	2.1	2.0
Downside	6.3	0.4	(3.4)

Graphical illustrations of the above key inputs over the five-year forecast period are:

The full range of the key macroeconomic assumptions is included in the table on page 46.

Risk management

Credit risk

The use of estimates, judgements and sensitivity analysis

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

The use of estimates

Asset lifetimes

The calculation of the ECL allowance is dependent on the expected life of the Group's portfolios. The Group assumes the remaining contract term as the maximum period to consider credit losses wherever possible. For the Group's credit card and overdraft portfolios, behavioural factors such as observed retention rates and other portfolio level assumptions are taken into consideration in determining the estimated asset life.

Economic scenarios

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

2023	Probability Weighted(1) £m	Upside £m	Base £m	Downside £m
Mortgages	20	17	18	24
Unsecured of which:	399	382	382	433
Cards	364	352(3)	350	391
Personal loans and overdrafts(2)	35	30	32	42
Business(2)	91	81	86	107
Total	510	480	486	564

2022	Probability Weighted £m	Upside £m	Base £m	Downside £m
Mortgages	15	12	13	23
Unsecured of which:	251	236	237	279
Cards	216	209(3)	208	233
Personal loans and overdrafts(2)	35	27	29	46
Business(2)	53	39	43	97
Total	319	287	293	399

(1)   In addition to the probability weighted modelled provision shown in the table, the Group holds £76m relative to MAs (2022: £85m) and £30m of individually assessed provision (2022: £38m).

(2)   Salary Finance contributes more that 50% of the combined Personal Loans and overdrafts ECL.

(3)   Due to a minor model interaction effect, the 100% ECL for Upside is marginally higher than the Base case.

Risk management

Credit risk

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

Certain asset classes are less sensitive to specific macroeconomic factors, showing lower relative levels of sensitivity. To ensure appropriate levels of ECL, the relative lack of sensitivity is compensated for through the application of MAs, further detail of which can be found on page 45.

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

·   Mortgages: Unemployment and HPI

·   Unsecured: Unemployment

·   Business: Unemployment and HPI

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

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

The following table discloses the ECL impact of a 10% increase and decrease in HPI on the Group's Mortgage and Business lending:

	2023 £m	2022 £m
Mortgages +10%	(2)	(1)
Business +10%	(1)	(1)
Mortgages -10%	2	2
Business -10%	2	2

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

	2023 £m	2022  £m
Mortgages +1%	1	1
Unsecured +1%	21	15
Business +1%	4	4
Mortgages -1%	(1)	(1)
Unsecured -1%	(21)	(15)
Business -1%	(3)	(3)

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

The use of judgement

SICR

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

Risk management

Credit risk

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

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

The table below illustrates this approach with reference to the Group's Mortgage, Unsecured (credit cards) and Business portfolios. In each case the illustration is of the PD threshold based on a five year full lifetime PD (not the annualised equivalent). The business example reflects the thresholds appropriate for term lending.

		Origination PD	SICR Trigger
Mortgages	Low origination lifetime PD	2.00%	5.69%
	High origination lifetime PD	10.00%	17.69%
Credit cards	Low origination lifetime PD	2.00%	22.34%
	High origination lifetime PD	10.00%	25.52%
Business	Low origination lifetime PD	2.00%	6.03%
	High origination lifetime PD	10.00%	16.70%

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

	2023 £m	2022  £m
A 10% movement in the mortgage portfolio from Stage 1 to Stage 2	+13	+9
A 10% movement in the credit card portfolio from Stage 1 to Stage 2	+89	+87
A 10% movement in the business portfolio from Stage 1 to Stage 2	+10	+18
A PD stress which increases PDs upwards by 20% for all portfolios	+131	+106

Definition of default

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

MAs

At 30 September 2023, £76m of MAs (30 September 2022: £85m) are included within the total ECL provision of £617m (30 September 2022: £457m).

These are management judgements which impact the ECL provision by increasing (or decreasing) the collectively assessed modelled output where not all of the known risks identified in a particular product segment have been reflected within the models. This also takes into account any time lag between the date the macroeconomic assumptions were received and the reporting date.

The impact of these judgemental adjustments and how they impact the Group's total reported ECL allowance and coverage ratio for each portfolio is:

2023(1)	Mortgages £m	Unsecured £m	Business £m	Total £m
ECL before judgemental adjustments (A)	25.2	400.2	115.5	540.9
Judgemental adjustments:
To address the cost-of-living crisis	-	-	-	-
To address economic resilience	5.0	-	15.0	20.0
Impact of new LGD model	-	-	-	-
Additional buy-to-let impact	25.1	-	-	25.1
Other credit card adjustments	-	27.5	-	27.5
Other judgemental adjustments	1.7	1.3	0.5	3.5
Total judgemental adjustments (B)	31.8	28.8	15.5	76.1
Total reported ECL (A + B)	57.0	429.0	131.0	617.0
% of total ECL (B / total reported ECL)	56%	7%	12%	12%
Coverage - total	0.10%	6.65%	1.60%	0.84%
Coverage - total ex MAs	0.04%	5.87%	1.33%	0.74%

Risk management

Credit risk

2022(1)	Mortgages £m	Unsecured £m	Business £m	Total £m
ECL before judgemental adjustments (A)	21.6	251.5	99.0	372.1
Judgemental adjustments:
To address the cost-of-living crisis	6.3	20.2	-	26.5
To address economic resilience	-	-	30.0	30.0
Impact of new LGD model	-	-	(15.4)	(15.4)
Additional buy-to-let impact	25.1	-	-	25.1
Other credit card adjustments	-	10.5	-	10.5
Other judgemental adjustments	2.8	1.8	3.3	7.9
Total judgemental adjustments (B)	34.2	32.5	17.9	84.6
Total reported ECL (A + B)	55.8	284.0	116.9	456.7
% of total ECL (B / total reported ECL)	61%	11%	15%	19%
Coverage - total	0.09%	4.66%	1.59%	0.62%
Coverage - total ex MAs	0.02%	4.13%	0.93%	0.45%

(1)   The impact of rounding means that the combination of the probability weighted total and individually assessed provision may not fully align to the portfolio sections.

The Group assesses and reviews the need for and quantification of MAs on a quarterly basis, with the CFO recommending the level of MAs to the Boards Audit Committee twice a year at each external reporting period.

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

Macroeconomic assumptions

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

2023

Scenario	VMUK weighting	Economic measure(2)	2023 %	2024 %	2025 %	2026 %	2027 %
Upside	10%	Base rate	4.8	6.5	6.0	5.0	4.0
		Unemployment	4.2	4.1	3.9	3.8	3.7
		GDP	0.8	3.0	2.6	3.0	1.6
		Inflation	7.6	4.2	2.5	1.1	1.7
		HPI	(1.3)	(4.8)	(0.9)	6.6	7.0
Base	55%	Base rate	4.7	5.4	4.5	3.5	2.5
		Unemployment	4.2	4.5	4.3	3.9	3.9
		GDP	0.5	0.4	1.5	2.3	1.5
		Inflation	7.6	3.2	1.5	1.0	1.7
		HPI	(2.7)	(7.2)	(2.9)	4.6	7.1
Downside	35%	Base rate	4.6	4.5	3.5	2.5	1.6
		Unemployment	4.3	5.7	6.7	7.0	6.8
		GDP	(0.1)	(3.3)	0.7	1.9	1.6
		Inflation	7.4	1.7	0.4	0.7	1.7
		HPI	(4.7)	(12.7)	(7.6)	1.0	7.5
Weighted average		Base rate	4.7	5.2	4.3	3.3	2.3
		Unemployment	4.2	4.9	5.1	5.0	4.9
		GDP	0.3	(0.6)	1.3	2.2	1.6
		Inflation	7.5	2.8	1.2	0.9	1.7
		HPI	(3.3)	(8.9)	(4.4)	3.6	7.3

(1)   Macroeconomic assumptions provided by Oxford Economics on 1 September 2023 and reported on a calendar year basis unless otherwise stated. The changes in macroeconomic assumptions between 1 September 2023 and 30 September 2023 have been considered as part of the MAs.

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

Risk management

Credit risk

2022

Scenario	VMUK weighting	Economic measure(2)	2022 %	2023 %	2024 %	2025 %	2026 %
Upside	10%	Base rate	1.4	3.0	2.5	2.3	2.3
		Unemployment	3.8	4.2	4.0	3.7	3.6
		GDP	3.9	2.8	3.2	3.4	2.1
		Inflation	9.5	8.5	1.8	0.7	1.3
		HPI	8.3	(2.3)	(1.8)	5.7	6.5
Base	55%	Base rate	1.4	2.2	1.8	1.8	1.7
		Unemployment	3.9	4.6	4.4	3.8	3.8
		GDP	3.6	0.3	2.1	2.7	2.1
		Inflation	9.4	7.5	0.6	0.7	1.5
		HPI	6.8	(4.6)	(3.0)	4.4	6.7
Downside	35%	Base rate	1.3	1.7	0.6	0.5	0.5
		Unemployment	4.0	6.0	7.1	7.3	7.1
		GDP	2.6	(5.6)	0.8	2.1	2.1
		Inflation	9.3	5.0	(1.0)	0.7	1.5
		HPI	3.5	(13.3)	(11.6)	(2.7)	7.4
Weighted average		Base rate	1.4	2.1	1.4	1.4	1.4
		Unemployment	3.9	5.0	5.3	5.0	4.9
		GDP	3.3	(1.5)	1.7	2.5	2.1
		Inflation	9.4	6.7	0.2	0.7	1.5
		HPI	5.8	(7.4)	(5.9)	2.0	6.9

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

Risk management

Financial risk

Strong foundations supporting resilience and growth.

The financial risk framework underpins the Group's robust balance sheet, ensuring strategy is resilient and responsive to external pressures and changing regulatory obligations.

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

Risk appetite

The primary objective for the management of financial risks is to control the risk profile within approved risk limits to maintain the confidence of the Group's customers and other stakeholders. Financial risks are also managed to protect current and future earnings from the impact of market volatility. The Group applies a prudent approach to financial risks in order to safeguard the ongoing strength and resilience of the balance sheet. These activities are undertaken in a manner consistent with the Group's obligations under ring-fencing legislation and prudential rules.

Financial risk appetite is approved by the Board, with authority delegated to ALCO for subsequent implementation and monitoring. The Board has established a range of capital risk appetite measures including CET1, leverage and MREL. Measures for funding and liquidity risks consider the structure of the balance sheet, the Group's overall funding profile and compliance with the regulatory LCR and net stable funding ratio (NSFR) requirements. Board-approved risk appetite covers both regulatory and internal liquidity requirements and the need to maintain access to liquidity resources sufficient to accommodate outflows of funds in a range of stress scenarios and time periods.

The Group participates in wholesale markets and uses financial instruments to fund its banking activities and manage the liquidity and market risks arising from these activities. The Group establishes an appetite for these risks based on an overriding principle that the Group will not engage in proprietary risk taking.

The Group's pension risk appetite is a component of the Group-wide RAS framework for the management of balance sheet risks and is considered in the context of potential capital impacts as a result of volatility in the Scheme's valuations and future contributions.

Capital risk

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

Mitigation

The Group's capital risk policy provides the framework for the management of capital within the Group. The objectives of the policy are to efficiently and sustainably manage the capital base to optimise shareholder returns while maintaining capital adequacy and ensuring that excessive leverage is not taken, so meeting regulatory requirements and managing the rating agencies' assessments of the Group.

The Group is able to accumulate additional capital through retention of profit over time, which may be increased by: income growth and cost cutting; raising new equity, for example via a rights issue; reducing or cancelling distributions on capital instruments; and raising AT1 and Tier 2 capital. The availability and cost of additional capital is dependent upon market conditions and perceptions at the time. The Group is also able to manage the demands for capital through management actions including adjusting its lending strategy.

Capital optimisation remains a key strategic priority, ensuring the Group manages the quantity and quality of resources efficiently while meeting internal targets, stress testing requirements and maintaining regulatory compliance.

Measurement

The Group manages capital in accordance with prudential rules issued by the PRA and the FCA. Pillar 1 capital requirements are calculated in respect of credit risk, operational risk, market risk, counterparty credit risk and credit valuation adjustments. The capital requirements for credit risk are calculated using the following approaches:

·   Retail mortgages: IRB.

·   Business lending: FIRB.

·   Specialised lending: IRB slotting.

·   All other portfolios: Standardised approach, via either sequential IRB implementation or Permanent Partial Use.

A rigorous approach is taken to assessing risks that are not adequately covered by Pillar 1. The Group also undertakes analysis of a range of stress scenarios to test the impact on capital arising from severe yet plausible scenarios. These approaches to capital are documented in the Group's ICAAP which is subject to review, challenge and approval by the Board. The outputs from the ICAAP and regulatory stress testing are used to inform minimum capital targets and risk appetite, ensuring survivability above peak-to-trough stress movements.

The Group IRB framework looks at the customer PD along with loss severity (EAD and LGD). The outputs are used in the calculation of RWA, expected loss and IFRS 9 ECL. The IRB parameters and rating assessments are actively embedded in the following day-to-day processes:

·   Credit approval - IRB models and parameters are used to assess the customer risk and outputs are used to inform cut-off models that drive the lending decisions.

·   Pricing - Outputs and estimates are used in the assessment of new products and portfolio pricing reviews.

·   Risk appetite - Parameters are included in the assessment of models and are analysed to inform the Group's risk capacity and appetite.

·   Asset quality - Parameters are monitored to understand the product and segment performance of the Group's portfolios.

Risk management

Financial risk

Monitoring

The Board approves the capital risk appetite annually, defining minimum levels of capital across a range of capital ratios and measurements. The internal appetite ensures the Group operates above minimum regulatory requirements with reporting conducted through ALCO, Board and Executive Risk Committee. The capital plan, which assesses capital adequacy on a forward-looking basis, is also approved by the Board annually. The annual planning process is supported by rolling forecasting which is reported to ALCO monthly. This ensures that performance trends are reviewed and that there is transparency of the impact on capital ratios, risk appetite and the outlook. As part of the monthly forecasting process, ALCO reviews scenario analysis, considering adverse impacts to economic conditions and modelling sensitivities, including changes to regulation. These processes all support the Group's management of capital and informs the CET1 target operating range of 13.0%-13.5%.

In recent years, the PRA has also taken a thematic interest in the quality of regulatory reporting across the industry, specifically focusing on the completeness, accuracy and timing of regulatory reports. This has resulted in a number of s166 Skilled Person Reviews being commissioned over the governance, controls and processes supporting the regulatory reporting framework. The Group has been subject to such a review and, although no material issues were highlighted, is working on improvements to aspects of its governance and control framework.

Regulatory capital developments

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

Designation as an O-SII

On 29 November 2022 the PRA formally designated the Group as an Other Systemically Important Institution (O-SII). This is not expected to have a material impact on the Group's capital framework and is not currently required to hold a related capital buffer. As part of the O-SII designation the Group will need to comply with BCBS 239 over a three-year period.

IRB model changes

Following the BoE's announcements in 2020 regarding supervisory and prudential policy measures to address the challenges of COVID-19, the requirements relating to compliance with updates to definition of default and mortgage IRB models were extended. The Group will apply the relevant models after PRA approval and we currently expect models to be implemented in 2024.

Ahead of the Group's implementation of mortgage IRB models (including hybrid PD), a model adjustment has been applied to increase RWAs and expected losses in advance of formal approval of models (see RWA movement commentary on page 52). There has been little movement in this adjustment since the Interim Financial Report was published.

Basel 3.1

Following the publication of final reforms to the Basel III framework in December 2017, the PRA published CP16/22 at the end of November 2022, covering its consultation on the UK implementation of these reforms. There are a number of key amendments to the standardised approaches to credit and operational risks together with the introduction of a new standardised RWA output floor, the latter of which will be introduced gradually over a transition period. There are also amendments to IRB approaches, Credit Valuation Adjustments (CVAs), Credit Risk Mitigation rules and associated reporting and disclosure requirements. Estimates of the impact of these reforms on the Group indicate they will have no material day one impact on the capital position, with no constraint from the output floor expected until late in the transition period. Since the publication of CP16/22, the PRA has stated the intention to issue 'near final' rules and policy on Operational Risk, Counterparty Credit Risk (CCR), CVA Risk and Market Risk in Quarter 4 of 2023 with the remaining elements of Credit Risk, Output Floor and Reporting and Disclosure requirements to be published in Q2 2024. Further, the PRA has advised the implementation date of the final Basel 3.1 policies will be pushed back by six months to 1 July 2025, however the transitional period will be reduced to four and a half years to ensure full implementation is achieved by 1 January 2030.

Pillar 2A

As part of its Basel 3.1 proposals, the PRA announced its intention to review its Pillar 2A methodologies more fully by 2024. This review could have an impact on the Group which will be assessed when the proposals are published.

Contingent leverage

The PRA published PS 5/23 - Risks from Contingent Leverage in May 2023. The Group is not considered to carry material contingent leverage risk however we have reviewed and updated our policies and processes where relevant. Activity is also ongoing to support new reporting requirements in 2024.

Solvency Stress Test and Annual Cyclical Scenarios

The Group completed the 2022 ACS exercise in Q2 FY23. The scenario tested the resilience of the UK Banking system to deep simultaneous recessions in the UK and global economies, real income shocks, large falls in asset prices and higher global interest rates, as well as a separate stress of conduct costs. The BoE published results in July 2023, with the Group remaining significantly in excess of its reference rates on both a transitional and non-transitional basis. In October 2023 the BoE confirmed their intention to run a desk-based stress test exercise, rather than an ACS, in 2024; the Group will participate in this exercise as required.

Resolvability Assessment Framework

The BoE has introduced a Resolvability Assessment Framework to ensure major UK banks can be safely resolved. The Group is required to submit an assessment of its resolvability to the BoE biennially; the first assessment was submitted in October 2021 with disclosures published in June 2022. The BoE concluded that, upon their first assessment as resolution authority of the eight major banks, a major UK bank could enter resolution safely, remaining open and continuing to provide vital banking services to the economy. The Group submitted its recent self assessment to the BoE on 6 October 2023 which included enhancements relating to feedback received from the BoE as part of the first cycle. A further disclosure from the BoE will occur in June 2024.

Risk management

Financial risk

Capital resources

The Group's capital resources position as at 30 September 2023 is summarised below:

Regulatory capital(1)	2023 £m	2022 £m
Statutory total equity	5,607	6,340
CET1 capital: regulatory adjustments(2)
Other equity instruments	(594)	(666)
Defined benefit pension fund assets	(333)	(650)
Prudent valuation adjustment	(5)	(5)
Intangible assets	(162)	(256)
Goodwill	(11)	(11)
Deferred tax asset relying on future profitability	(261)	(302)
Cash flow hedge reserve	(496)	(699)
AT1 coupon accrual	(12)	(13)
Foreseeable dividend on ordinary shares	(27)	(106)
Excess expected loss	(103)	(100)
Share buyback	-	(13)
IFRS 9 transitional adjustments	112	114
Unconsolidated losses arising from joint venture	(4)	-
Total regulatory adjustments to CET1	(1,896)	(2,707)
Total CET1 capital	3,711	3,633
AT1 capital
AT1 capital instruments	594	666
Total AT1 capital	594	666
Total Tier 1 capital	4,305	4,299
Tier 2 capital
Subordinated debt	1,022	1,020
Total Tier 2 capital	1,022	1,020
Total regulatory capital	5,327	5,319

(1)   Data in the table is reported under CRD IV on a fully loaded basis with IFRS 9 transitional arrangements applied.

(2)   A number of regulatory adjustments to CET1 capital are required under CRD IV regulatory capital rules.

Risk management

Financial risk

Regulatory capital flow of funds(1)	2023 £m	2022 £m
CET1 capital(2)
CET1 capital at 1 October	3,633	3,616
Share issuance	2	2
Share buyback	(99)	(76)
Retained earnings and other reserves (including special purpose entities)	(242)	502
Amendment to software asset deduction rules(3)	-	(151)
Intangible assets	94	103
Deferred tax asset relying on future profitability	41	(44)
Defined benefit pension fund assets	317	(99)
Movement in AT1 foreseeable distribution	1	6
Foreseeable dividend on ordinary shares	(27)	(106)
Excess expected losses	(3)	(100)
IFRS 9 transitional adjustments	(2)	(20)
Unconsolidated losses arising from joint venture	(4)	-
Total CET1 capital at 30 September	3,711	3,633
AT1 capital
AT1 capital at 1 October	666	697
AT1 instrument issued net of costs	-	346
AT1 instrument repurchased	(72)	(377)
Total AT1 capital at 30 September	594	666
Total Tier 1 capital at 30 September	4,305	4,299
Tier 2 capital
Tier 2 capital at 1 October	1,020	1,019
Amortisation of issue costs	2	1
Tier 2 capital at 30 September	1,022	1,020
Total capital at 30 September	5,327	5,319

(1)   Data in the table is reported under CRD IV on a fully loaded basis with IFRS 9 transitional arrangements applied.

(2)   CET1 capital is comprised of shares issued and related share premium, retained earnings and other reserves less specified regulatory adjustments.

(3)   The full deduction treatment for software assets was reinstated by the PRA in January 2022.

The Group's CET1 capital showed an increase of £78m during the year. The Group reported a profit after tax of £246m in the year, which together with reductions in intangible assets and deferred tax asset deductions of £135m, and after absorbing other movements, mostly in other reserves, of £80m, led to a net increase in CET1 of £301m. This net capital surplus was used to fund two share buyback programmes during the year totalling £100m, interim dividend payments of £45m, AT1 distributions of £54m, and a foreseeable ordinary dividend of £27m.

In December 2022, the Group redeemed £72m of AT1 securities (note 4.1.2).

Subsequent to the year end, the Group announced its intention to redeem £250m 7.875% Fixed Rate Reset Callable Notes due 2028 on 14 December 2023.

Risk management

Financial risk

Risk-weighted assets

Minimum capital requirements	2023			2022
	Exposure £m	RWA £m	Minimum  capital requirements  £m	Exposure £m	RWA £m	Minimum  capital requirements  £m
Retail mortgages	60,354	9,072	726	62,545	9,155	732
Business lending	12,635	6,990	559	11,959	6,196	497
Other retail lending	17,586	4,819	385	17,408	4,817	385
Other lending	18,328	364	29	18,165	277	22
Other(1)	592	674	54	584	637	51
Total credit risk	109,495	21,919	1,753	110,661	21,082	1,687
Credit valuation adjustment		278	22		258	21
Operational risk		2,833	227		2,623	210
Counterparty credit risk		146	12		185	15
Total	109,495	25,176	2,014	110,661	24,148	1,933

(1)   The items included in the Other exposure class that attract a capital charge include items in the course of collection, fixed assets, prepayments, other debtors and deferred tax assets that are not deducted.

RWA movements	12 months to 30 September 2023					12 months to 30 September 2022
	IRB RWA £m	STD RWA £m	Non-credit risk RWA(2) £m	Total £m	Minimum capital  requirements £m	IRB RWA £m	STD RWA £m	Non-credit risk RWA(2) £m	Total £m	Minimum capital  requirements £m
Opening RWA	14,943	6,139	3,066	24,148	1,933	15,699	5,844	2,689	24,232	1,938
Asset size	58	127	-	185	15	267	575	-	842	68
Asset quality	(1,011)	121	-	(890)	(71)	(959)	4	-	(955)	(75)
Model updates(1)	1,486	-	-	1,486	118	(64)	-	-	(64)	(5)
Methodology and policy	-	5	-	5	-	-	(160)	-	(160)	(13)
Other	-	51	191	242	19	-	(124)	377	253	20
Closing RWA	15,476	6,443	3,257	25,176	2,014	14,943	6,139	3,066	24,148	1,933

(1)   Model updates include MAs.

(2)   Other RWA includes operational risk, credit valuation adjustment and counterparty credit risk.

RWA increased c.£1bn to £25.2bn primarily due to the impact of higher lending, the new hybrid model related MAs and increased other non-credit RWAs.

There are a number of offsetting movements between asset quality and model updates. Asset quality movements predominantly reflect the impact from the introduction of new customer data on the incumbent rating system (£0.9bn reduction in RWA), however this is fully offset within model updates where this impact is temporary pending the implementation of the new hybrid models. Model updates also include the hybrid model MA of £0.4bn. In addition to model changes, asset quality includes a £0.2bn reduction in RWA from HPI movements although there is a similar increase relating to risk weights associated with new Business lending.

Other RWA movements of £242m are mainly due to an operational risk RWA uplift of £210m due to a higher three-year average income position in commercial and retail banking compared to the FY22 three-year average. The remainder is predominantly a combination of movements within credit valuation adjustment and counterparty credit risk.

Risk management

Financial risk

IFRS 9 transitional arrangements

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

Available capital (amounts)	2023
	IFRS 9 Transitional basis  £m	IFRS 9 Fully loaded basis  £m
CET1 capital	3,711	3,599
Tier 1 capital	4,305	4,193
Total capital	5,327	5,215
RWA (amounts)
Total RWA	25,176	25,087
Capital ratios
CET1 (as a percentage of RWA)	14.7%	14.3%
Tier 1 (as a percentage of RWA)	17.1%	16.7%
Total capital (as a percentage of RWA)	21.2%	20.8%
Leverage ratio
Leverage ratio total exposure measure	86,554	86,442
UK leverage ratio	5.0%	4.9%

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

At 30 September 2023, £112m of IFRS 9 transitional adjustments (2022: £114m) have been applied to the Group's capital position in accordance with CRR: £3m of static and £109m of dynamic adjustments (2022: £7m static and £107m dynamic).

Capital requirements

The Group measures the amount of capital it is required to hold by applying CRD IV as implemented in the UK by the PRA. The table below summarises the amount of capital in relation to RWA the Group is currently required to hold, excluding any PRA buffer.

Minimum requirements	2023
	CET1	Total capital
Pillar 1(1)	4.5%	8.0%
Pillar 2A	1.7%	3.0%
Total capital requirement	6.2%	11.0%
Capital conservation buffer	2.5%	2.5%
UK countercyclical capital buffer	2.0%	2.0%
Total (excluding PRA buffer)(2)	10.7%	15.5%

(1)   The minimum amount of total capital under Pillar 1 of the regulatory framework is determined as 8% of RWA, of which at least 4.5% of RWA is required to be covered by CET1 capital.

(2)   The Group may be subject to a PRA buffer as set by the PRA but is not permitted to disclose the level of any buffer.

The Group continues to maintain a significant surplus above its capital requirements. At September the Group maintained CET1 capital in excess of its requirements equal to 4.1% of RWAs (equivalent to £1,025m).

The PRA sets a Group specific Pillar 2A requirement for risks which are not captured within the Pillar 1 requirement. Together Pillar 1 and Pillar 2A represent the Group's Total Capital Requirement or TCR, which is the minimum requirement which must be met at all times.

In October 2022 the PRA communicated an update to the Group's Pillar 2A requirement setting it as 2.97% of RWAs, of which 1.67% must be met with CET1 capital (30 September 2022: £744m, of which £419m had to be met with CET1 capital). In line with previous guidance this requirement has been set as a percentage of RWAs, rather than the fixed nominal Pillar 2A requirements set during 2020 and 2021 in response to COVID-19. Applying this updated requirement in September 2023 resulted in a modest increase in total capital requirements of £4m and CET1 requirements of £2m. At 30 September 2023 this resulted in a TCR of 10.97% of RWAs (equivalent to £2,762m) of which 6.2% must be met with CET1 capital (equivalent to £1,554m).

Risk management

Financial risk

The regulatory capital buffer framework is intended to ensure firms maintain a sufficient amount of capital above their regulatory minimum in order to withstand periods of stress and mitigate against firm specific and systemic risks. The UK has implemented the provisions on capital buffers outlined in CRD IV which introduced a combined capital buffer. This includes a Capital Conservation Buffer, a Countercyclical Capital Buffer (CCyB) and where applicable a Global Systemically Important Institution (G-SII) Buffer or an Other Systemically Important Institutions (O-SII) Buffer.

The Group's CCyB reflects an exposure weighted average of the CCyB rates applicable in the geographies the Group operates in. Currently this reflects only the UK. As had been previously announced, the CCyB rate increased in the year to 1% in December 2022, rising to 2% in July 2023 to align with its guidance for the CCyB rate under standard risk conditions. The FPC has noted the considerable uncertainties in relation to the economic outlook and will continue to monitor the situation and stands ready to vary the UK CCyB rate - in either direction - in line with the evolution of economic conditions, underlying vulnerabilities and the overall risk environment.

The Group has been designated as an O-SII, but is not required to hold a related capital buffer.

MREL

MREL position	2023 £m	2022 £m
Total capital resources(1) (2)	5,327	5,319
Eligible senior unsecured securities issued by Virgin Money UK PLC(2)	2,707	2,423
Total MREL resources	8,034	7,742
Risk-weighted assets	25,176	24,148
Total MREL resources available as a percentage of risk-weighted assets	31.9%	32.1%
UK leverage exposure measure(3)	86,554	85,934
Total MREL resources available as a percentage of UK leverage exposure measure(3)	9.3%	9.0%

(1)   The capital position reflects the application of the transitional arrangements for IFRS 9.

(2)   Includes MREL instrument maturity adjustments, the add-back of regulatory amortisation and the deduction of instruments with less than one year to maturity.

(3)   The comparative figures include a restatement to qualifying central bank claims which have been adjusted to exclude encumbered note cover and payments system collateral balances.

The BoE as the UK Resolution Authority has published its framework for setting a minimum requirement for own funds and eligible liabilities (MREL). This requires the Group to hold capital resources and eligible debt instruments equal to the greater of two times the Total Capital Requirement (TCR) or two times the UK leverage ratio requirement. In addition to MREL the Group must also hold any applicable capital buffers, which together with MREL represent the Group's loss-absorbing capacity (LAC) requirement.

As at 30 September 2023, the Group's leverage based LAC requirement of 7.8% of leverage exposures (or 26.6% when expressed as a percentage of RWAs) was greater than the RWA based LAC requirement of 26.4% of RWAs, meaning the leverage measure is the binding requirement.

MREL resources were £8.0bn (2022: £7.7bn), equivalent to 9.3% of leverage exposures (2022: 9.0%) or 31.9% when expressed as a percentage of RWAs (2022: 32.1%). This provides prudent headroom of £1.3bn or 1.5% above the binding LAC requirement of 7.8% of leverage exposures, or 5.3% above the binding LAC requirement of 26.6% when expressed as a percentage of RWAs.

Dividend

Distributable reserves are determined as required by the Companies Act 2006 by reference to a company's individual financial statements. At 30 September 2023, the Company had accumulated distributable reserves of £1,044m (2022: £1,056m).

The Board has recommended a final dividend for the financial year ended 30 September 2023 of 2.0p per share.

Share buyback

On 30 June 2022 the Company announced an inaugural share buyback programme, with an initial repurchase of up to £75m in aggregate between its ordinary shares of £0.10 each listed on the LSE and CDIs, each representing one share, listed on the ASX. The Company repurchased shares and CDIs in approximately equal proportions; the buyback commenced on 30 June 2022 and ended on 9 December 2022.

On 21 November 2022 the Company announced an extension to the share buyback programme with an intent to repurchase a further £50m in aggregate of ordinary shares and CDIs. The Company again repurchased shares and CDIs in approximately equal proportions; the buyback extension commenced on 21 November 2022 and ended on 7 March 2023.

On 2 August 2023 the Company announced a new share buyback to repurchase £50m in aggregate of ordinary shares and CDIs and subsequently repurchased shares and CDIs in approximately equal proportions; the buyback commenced on 2 August 2023 and ended on 22 November 2023.

On 23 November 2023 the Company announced a further share buyback with an intent to repurchase another £150m in aggregate of shares and CDIs, ending no later than 16 May 2024.

Risk management

Financial risk

Leverage

Leverage ratio	2023 £m	2022 £m
Total Tier 1 capital for the leverage ratio
Total CET1 capital	3,711	3,633
AT1 capital	594	666
Total Tier 1 capital	4,305	4,299
Exposures for the leverage ratio
Total assets	91,786	91,907
Adjustment for off-balance sheet items	2,999	3,204
Adjustment for derivative financial instruments(1)	706	522
Adjustment for securities financing transactions	2,261	2,974
Adjustment for qualifying central bank claims(2)	(9,052)	(9,792)
Regulatory deductions and other adjustments(1)	(2,146)	(2,881)
UK leverage ratio exposure(3)	86,554	85,934
UK leverage ratio(3)	5.0%	5.0%
Average UK leverage ratio exposure(4)	85,910	86,144
Average UK leverage ratio(4)	4.9%	4.9%

(1)   The comparative figures include a reclassification between adjustment for derivative financial instruments and regulatory deductions and other adjustments in relation to the cash variation margin.

(2)   The comparative figures include a restatement to qualifying central bank claims which have been adjusted to exclude encumbered note cover and payments system collateral balances.

(3)   The UK leverage ratio and exposure measure are calculated after applying the IFRS 9 transitional arrangements of the CRR.

(4)   The average leverage exposure measure is based on the daily average of on-balance sheet items and month-end average of off-balance sheet and capital items over the quarter (1 July 2023 to 30 September 2023).

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

The PRA simplified the leverage framework from 1 January 2022 with UK banks now subject to a single UK leverage ratio exposure measure. The CRD IV leverage ratio is no longer applicable to UK banks.

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

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

·   Capital: Tier 1 capital defined on an IFRS 9 transitional basis.

·   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 PRA regulations to be deducted from Tier 1 capital. The removal of these from the exposure measure ensures consistency is maintained between the capital and exposure components of the ratio.

The Group's UK leverage ratio of 5.0% (2022: 5.0%) exceeds the UK minimum ratio of 3.25%.

Funding and liquidity risk

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

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

Risk management

Financial risk

Exposures

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. The Group has also drawn against the BoE TFSME, which was introduced to support the UK through COVID-19.

Funding risk exposures arises 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, negatively impact market or customer perception, increase the acquisition cost of new funds or reduce lending capacity, thereby adversely impacting financial performance and stability.

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.

Measurement

Funding and liquidity risks are subject to a range of measures contained within the Group's RAS which reflect both regulatory requirements, as a minimum, and the Group's own view on risk sensitivities. The Group RAS is supported by a series of limits agreed by ALCO. These measures provide a short- and long-term view of risks under both normal and stressed conditions. The measures focus on: cash outflows and inflows under stress; concentration risks; refinancing risks; asset encumbrance; and the quantum, diversity and operational capability of mitigating actions.

The Group's funding plan establishes an acceptable level of funding risk which is approved by the Board and is consistent with risk appetite and the Group's strategic objectives. The development of the Group's funding plan is informed by the requirements of the Group's financial risk policies. A series of metrics are used across the Group to measure risk exposures, including funding ratios, limits to concentration risk and maximum levels of encumbrance.

Liquidity is managed in accordance with the ILAAP, which is approved by the Board. Liquidity risk exposures are subject to assessment under both regulatory and internal requirements. 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 High-Quality Liquid Asset (HQLA) requirement is quantified as the outflow of funds under a series of stress scenarios less the impact of inflows from assets. Stress cash outflow assumptions have been established for individual liquidity risk drivers across idiosyncratic and market-wide stresses.

The Treasury function is responsible for the development and execution of strategy subject to oversight from the Risk function and review at ALCO. The Group continues to maintain its strong funding and liquidity position and seeks to achieve an appropriate balance between profitability, liquidity risk and balance sheet optimisation.

Monitoring

Liquidity is monitored and measured daily by the Group, with reporting conducted through ALCO and the Executive Risk Committee. In a stress situation or in adverse conditions, the level of monitoring and reporting is increased commensurate with the nature of the stress event.

Monitoring and control processes are in place against internal and regulatory liquidity requirements. The Group monitors a range of market and internal early warning indicators on a routine basis for early signs of liquidity risk in the market or specific to the Group. These indicators cover a mixture of quantitative and qualitative measures including daily variation of customer balances, measurement against stress requirements and monitoring of the macroeconomic environment.

Mitigation

The Group holds a portfolio of HQLA that can be utilised to raise funding in times of stress. The size of the HQLA portfolio is calibrated based on a view of potential outflows under both systemic and idiosyncratic stress events. The Group has several sources of funding which are well-diversified in terms of the type of instrument and product, counterparty, term structure and market. Wholesale funding is used to support balance sheet growth, lengthen the contractual tenor of funding and diversify funding sources. These funding programmes are a source of strength for the Group and leverage the Group's high-quality mortgage book as collateral for secured funding. In addition, the Group can use the repo market for managing cash flows and bilateral relationships to generate funds and can also participate in BoE operations through the Sterling Monetary Framework (SMF).

As a participant in the BoE SMF, the Group had access to funding via TFSME. TFSME was launched in April 2020 to provide cost-effective funds to banks to support additional lending to the real economy and incentivise lending to SMEs during a period of economic disruption caused by COVID-19.

The funding plan includes an assessment of the Group's capacity for raising funds across a wide range of primary funding sources, thereby mitigating funding risk. Refinancing risks are carefully managed and are subject to controls overseen by ALCO. The Group's funding plan includes TFSME repayment profiles designed to manage refinancing risk within a suitably prudent time frame.

The Group recovery plan has been established for management of an escalated liquidity requirement, if the Group experiences either restricted access to wholesale funding or a significant increase in the withdrawal of funds. The plan identifies triggers for escalation, assesses capacity, details the actions required, allocates the key tasks to individuals, provides a time frame and defines the governance framework to manage the action plan and return the balance sheet structure within appetite.

The Group operates a Funds Transfer Pricing system, a key purpose of which is to ensure that liquidity risk and funding costs are factors in the pricing of loans and deposits.

Risk management

Financial risk

Sources of funding

The table below provides an overview of the Group's sources of funding as at 30 September 2023:

	2023 £m	2022  £m
Total assets	91,786	91,907
Less: other liabilities(1)	(2,694)	(3,122)
Funding requirement	89,092	88,785
Funded by:
Customer deposits	66,827	65,434
Debt securities in issue	9,719	8,509
Due to other banks	6,939	8,502
of which:
Secured loans	6,291	7,230
Securities sold under agreements to repurchase	552	1,205
Transaction balances with other banks	19	17
Deposits with other banks	77	50
Equity	5,607	6,340
Total funding	89,092	88,785

(1)   Other liabilities include derivatives, 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. At 30 September 2023, the Group had a funding requirement of £89,092m (2022: £88,785m) 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 £66,827m (2022: £65,434m). Customer deposits comprise interest-bearing deposits, term deposits and non‑interest-bearing demand deposits from a range of sources including Personal and Business customers.

Debt securities in issue

Growth in customer deposits has been supported by an increase in debt securities to £9,719m (2022: £8,509m). The wholesale funding has been primarily driven by issuance from our covered bond and medium-term note programmes.

Equity

Equity of £5,607m (2022: £6,340m) was also used to meet the Group's funding requirement. Equity comprises ordinary share capital, retained earnings, other equity investments and a number of other reserves. For full details on equity refer to note 4.1 within the consolidated financial statements.

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 LCR (based on a monthly rolling average over the previous 12 months) increased from 140% to 146% during the year and remains comfortably above regulatory and internal risk appetite.

LCR	2023 £m	2022 £m
Eligible liquidity buffer	13,798	11,503
Net stress outflows	9,424	8,222
Surplus	4,374	3,281
LCR	146%	140%

The liquid asset portfolio provides a buffer against sudden and potentially sharp outflows of funds. Liquid assets must therefore be high-quality so they can be realised for cash and cannot be encumbered for any other purpose (e.g. to provide collateral for payments systems). The liquid asset portfolio is primarily comprised of cash at the BoE, UK Government securities (Gilts) and listed securities (e.g. bonds issued by supra-nationals and AAA-rated covered bonds).

Risk management

Financial risk

The volume and quality of the Group's liquid asset portfolio is defined through a series of internal stress tests across a range of time horizons and stress conditions. The key risk driver assumptions applied to the scenarios are:

Liquidity Risk Driver	Internal Stress Assumption
Retail funding	Severe unexpected withdrawal of retail deposits by customers arising from redemption or refinancing risk. No additional deposit inflows are assumed.
Wholesale funding	Limited opportunity to refinance wholesale contractual maturities. Full outflow of secured and unsecured funding during the refinancing period, with no reinvestment of funding.
Off-balance sheet	Cash outflows during the period of stress as a result of off-balance sheet commitments such as mortgage pipeline, undrawn credit card facilities and collateral commitments. Lending outflows, over and above contractual obligations, are honoured as the Group preserves ongoing viability.
Intra-day	Other participants in the payment system withhold or delay payments or customers increase transactions resulting in reduced liquidity.
Liquid assets	The liquidity portfolio value is reduced, reflecting stressed market conditions.

The Group monitors the movements in its credit ratings and the related requirement to post collateral for payment systems and clearing houses. These figures are not considered material compared to the volume of unencumbered liquid assets.

As at 30 September 2023, the Group held eligible liquid assets well in excess of 100% of net stress outflows and Pillar 2 liquidity requirements, as defined through internal risk appetite.

Liquid asset portfolio(1)	2023 £m	2022 £m	Change %	Average 2023 £m	Average 2022 £m
Level 1
Cash and balances with central banks	8,940	9,795	(8.7)	9,604	7,632
UK Government treasury bills and gilts	1,655	512	223.2	1,182	905
Other debt securities	3,153	2,827	11.5	2,782	2,993
Total level 1	13,748	13,134	4.7	13,568	11,530
Level 2(2)	471	117	302.8	327	32
Total LCR eligible assets	14,219	13,251	7.3	13,895	11,562

(1)   Excludes encumbered assets.

(2)   Includes Level 2A and Level 2B.

The liquid asset portfolio is marked to market and fully hedged from an interest, inflation and foreign exchange risk perspective. All fair value movements are therefore recognised in CET1 via the income statement (market risk) or FVOCI reserve (credit risk). The IRRBB stress testing framework includes limits to manage the stressed credit spread risk arising from hedging the fixed rate securities in the Group's liquid asset portfolio. This ensures the composition of the total portfolio is controlled and the exposure will not exceed internal appetite or the amount of capital allocated.

The NSFR was implemented by the PRA on 1 January 2022 based on Basel standards. During the year, the Group has been comfortably in excess of regulatory and internal requirements. The 12-month average NSFR as at 30 September 2023 is 136% (2022: 134%).

Risk management

Financial risk

Encumbered assets

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. The Group RAS includes an internal limit for levels of encumbrance. 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 TFSME 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.

Encumbered assets by asset category

2023	Assets encumbered with non-central bank counterparties				Positioned  at the  central bank  (including encumbered) £m	Other assets				Total £m
						Assets not positioned at the central bank			Total £m
	Covered Bonds £m	Securitisations £m	Other £m	Total £m		Readily available for encumbrance £m	Other assets capable of being encumbered £m	Cannot be encumbered £m
Loans and advances to customers	5,944	3,807	-	9,751	17,770	24,995	17,458	2,276	62,499	72,250
Cash and balances with central banks	-	-	-	-	2,797	8,485	-	-	11,282	11,282
Due from other banks	97	262	296	655	-	-	12	-	12	667
Derivative	-	-	-	-	-	-	-	135	135	135
Financial instruments at FVOCI	-	-	1,404	1,404	-	4,780	-	-	4,780	6,184
Other assets	-	-	14	14	-	-	186	1,068	1,254	1,268
Total assets	6,041	4,069	1,714	11,824	20,567	38,260	17,656	3,479	79,962	91,786

2022	Assets encumbered with non-central bank counterparties				Positioned  at the  central bank  (including encumbered) £m	Other assets				Total £m
						Assets not positioned at the central bank			Total £m
	Covered Bonds £m	Securitisations £m	Other £m	Total £m		Readily available for encumbrance £m	Other assets capable of being encumbered £m	Cannot be encumbered £m
Loans and advances to customers	4,268	4,620	-	8,888	14,879	28,647	17,054	2,353	62,933	71,821
Cash and balances with central banks	-	-	-	-	2,879	9,342	-	-	12,221	12,221
Due from other banks	67	305	269	641	-	-	15	-	15	656
Derivatives	-	-	-	-	-	-	-	342	342	342
Financial instruments at FVOCI	-	-	1,535	1,535	-	3,529	-	-	3,529	5,064
Other assets	-	-	40	40	-	-	218	1,545	1,763	1,803
Total assets	4,335	4,925	1,844	11,104	17,758	41,518	17,287	4,240	80,803	91,907

The Group's total non-central bank asset encumbrance increased by £720m to £11,284m as at 30 September 2023. This was primarily due to an increase in encumbered mortgages, supporting Covered Bond funding.

Cash and balances with central banks of £11,282m, as per note 3.1.1.2, include: £1,971m of assets that are encumbered to support the issuance of Scottish bank notes (excluding notes not in circulation) and to support payments systems; £275m of mandatory central bank deposits; and £84m excluded from LCR to cover operating expenses.

Financial assets at FVOCI of £6,184m, as per note 3.1.2, include: £1,404m of encumbered UK Government treasury bills and gilts, £197m of which is encumbered to support Operational Continuity in Resolution.

Risk management

Financial risk

Assets and liabilities by maturity

The following tables represent a breakdown of the Group's balance sheet, according to the contractual maturity of the assets and liabilities. Many of the longer-term monetary assets are variable rate products, with behavioural maturities shorter than the contractual terms. The majority of customer deposits are repayable on demand or at short notice on a contractual basis, with behavioural maturities typically longer than their contractual maturity. Accordingly, this information is not relied upon by the Group in its management of interest rate risk. The Group has disclosed certain term facilities within loans and advances to customers with a revolving element at the maturity of the facility as this best reflects their contractual maturity.

2023	Call £m	3 months or less £m	3 to 12 months £m	1 to 5 years £m	Over 5 years £m	No specified maturity(1) £m	Total £m
Assets
Financial instruments
At amortised cost
Loans and advances to customers	748	2,766	945	6,448	55,608	5,676	72,191
Cash and balances with central banks	10,193	-	-	-	-	1,089	11,282
Due from other banks	510	157	-	-	-	-	667
At FVOCI	-	506	712	2,196	2,770	-	6,184
At FVTPL
Loans and advances to customers	-	1	-	16	42	-	59
Derivatives	3	92	10	25	5	-	135
Other	-	-	-	-	-	2	2
Other assets	-	4	149	1	1	1,111	1,266
Total assets	11,454	3,526	1,816	8,686	58,426	7,878	91,786
Liabilities
Financial instruments
At amortised cost
Customer deposits	40,567	4,368	15,195	6,697	-	-	66,827
Debt securities in issue	-	441	1,441	7,837	-	-	9,719
Due to other banks	96	393	550	5,900	-	-	6,939
At FVTPL
Derivatives	2	22	45	196	25	-	290
Other liabilities	1,675	66	119	49	114	381	2,404
Total liabilities	42,340	5,290	17,350	20,679	139	381	86,179
Off-balance sheet items
Financial guarantees	-	12	18	9	40	-	79
Other credit commitments	17,921	-	-	-	-	-	17,921
Total off-balance sheet items	17,921	12	18	9	40	-	18,000

(1)   The no specified maturity balance within loans and advances to customers relates to credit cards.

Risk management

Financial risk

2022	Call £m	3 months or less £m	3 to 12 months £m	1 to 5 years £m	Over 5 years £m	No specified  maturity(1) £m	Total £m
Assets
Financial instruments
At amortised cost
Loans and advances to customers	764	2,378	1,019	7,241	55,053	5,296	71,751
Cash and balances with central banks	11,015	-	-	-	-	1,206	12,221
Due from other banks	575	81	-	-	-	-	656
At FVOCI	-	620	602	1,917	1,925	-	5,064
At FVTPL
Loans and advances to customers	-	2	1	21	46	-	70
Derivatives	2	46	71	190	33	-	342
Other	-	-	-	-	-	8	8
Other assets	-	7	152	1	1	1,634	1,795
Total assets	12,356	3,134	1,845	9,370	57,058	8,144	91,907
Liabilities
Financial instruments
At amortised cost
Customer deposits	48,750	3,786	10,209	2,689	-	-	65,434
Debt securities in issue	-	485	1,047	6,669	308	-	8,509
Due to other banks	67	285	250	7,900	-	-	8,502
At FVTPL
Derivatives	3	9	29	253	33	-	327
Other liabilities	1,822	135	134	54	59	591	2,795
Total liabilities	50,642	4,700	11,669	17,565	400	591	85,567
Off-balance sheet items
Financial guarantees	-	33	23	12	44	-	112
Other credit commitments	19,247	-	-	-	-	-	19,247
Total off-balance sheet items	19,247	33	23	12	44	-	19,359

(1)   The no specified maturity balance within loans and advances to customers relates to credit cards.

Risk management

Financial risk

Cash flows payable under financial liabilities by contractual maturity

2023	Call £m	3 months or less £m	3 to 12 months £m	1 to 5 years £m	Over 5 years £m	No specified  maturity £m	Total £m
Liabilities
Financial instruments
At amortised cost
Customer deposits	40,567	4,384	15,647	6,874	-	-	67,472
Debt securities in issue	-	510	1,744	9,036	-	-	11,290
Due to other banks	96	399	837	6,304	-	-	7,636
At FVTPL
Trading derivatives	-	16	29	37	8	-	90
Hedging derivatives
Contractual amounts payable	-	65	556	1,668	-	-	2,289
Contractual amounts receivable	-	(21)	(463)	(1,500)	-	-	(1,984)
Other liabilities	1,675	66	119	49	114	381	2,404
Total liabilities	42,338	5,419	18,469	22,468	122	381	89,197

2022	Call £m	3 months or less £m	3 to 12 months £m	1 to 5 years £m	Over 5 years £m	No specified  maturity £m	Total £m
Liabilities
Financial instruments
At amortised cost
Customer deposits	48,750	3,801	10,291	2,732	-	-	65,574
Debt securities in issue	-	521	1,294	7,863	315	-	9,993
Due to other banks	67	289	492	8,793	-	-	9,641
At FVTPL
Trading derivatives	-	12	40	63	14	-	129
Hedging derivatives
Contractual amounts payable	-	21	557	1,720	-	-	2,298
Contractual amounts receivable	-	(6)	(459)	(1,477)	-	-	(1,942)
Other liabilities	1,822	135	134	54	59	591	2,795
Total liabilities	50,639	4,773	12,349	19,748	388	591	88,488

The balances in the cash flow table above do not agree directly to the balances in the balance sheet or the assets and liabilities by maturity table presented above, as the table incorporates all cash flows, on an undiscounted basis, related to both principal and future coupon payments.

Analysis of debt securities in issue by residual maturity

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

	3 months or less £m	3 to 12 months £m	1 to 5 years £m	Over 5 years £m	Total 2023 £m	Total 2022 £m
Covered bonds	8	614	3,793	-	4,415	3,467
Securitisation	165	89	1,486	-	1,740	1,880
Medium-term notes	6	737	1,869	-	2,612	2,249
Subordinated debt	262	1	689	-	952	913
Total debt securities in issue	441	1,441	7,837	-	9,719	8,509
Of which issued by Virgin Money UK PLC	268	738	2,558	-	3,564	3,162

Risk management

Financial risk

External credit ratings

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

	Outlook as at	As at
	30 Sept 2023(1)	30 Sept 2023	30 Sept 2022
Virgin Money UK PLC
Moody's	Stable	Baa1	Baa1
Fitch	Positive	BBB+	BBB+
Standard & Poor's	Stable	BBB-	BBB-
Clydesdale Bank PLC
Moody's(2)	Stable	A3	A3
Fitch	Positive	A-	A-
Standard & Poor's	Stable	A-	A-

(1)   For detailed background on the latest credit opinion by Standard & Poor's, Fitch and Moody's, please refer to the respective rating agency website.

(2)   Long-term deposit rating.

In June 2023, Fitch revised the outlook on the Group's Long-Term Issuer Default Rating to Positive from Stable reflecting Fitch's expectation of a structural improvement in profitability due to higher interest rates, contained credit impairment charges and further cost efficiency improvements. It also reflects the Group's improving risk profile, notwithstanding the tougher operating environment.

As at 22 November 2023, there have been no other changes to the Group's long-term credit ratings or outlooks since the report date.

Market risk

Market risk is the risk of loss associated with adverse changes in the value of assets and liabilities held by the Group as a result of movements in market factors such as foreign exchange risk, interest rates (duration risk), customer behaviour (optionality risk), and the movement in rate spreads across types of assets or liabilities (basis risk and credit spread risk). The Group's balance sheet is predominantly UK-based and is denominated in GBP, therefore foreign exchange is not a material risk for the Group. Any non-GBP denominated funding issuances and any foreign currency securities purchased are cross-currency swapped to sterling for the term of the instrument.

Exposures

The Group does not have a trading book and therefore is only exposed to non-traded market risk. Market risk principally arises through Interest Rate Risk in the Banking Book (IRRBB), small foreign exchange exposure and the management of assets to support our liquidity requirements, including Credit Spread Risk in the Banking Book (CSRBB). It comprises the sensitivity of the Group's current and future NII and economic value to movements in market interest rates. The major contributors to interest rate risk are:

·   the mismatch, or duration, between repricing dates of interest-bearing assets and liabilities;

·   basis risk or assets and liabilities repricing to different reference rates, for example, customer asset and liability products repricing against BoE base rate and Sterling Overnight Index Average (SONIA); and

·   customer optionality, for example, the right to repay borrowing in advance of contractual maturity dates.

The focus of the Group's activity is to provide high-quality banking services to its customers. These services include the provision of foreign exchange, interest rate and commodity derivative products to enable customers to manage risks within their businesses. As a result of these activities, the Group may be exposed to forms of market risk that would arise from movements in the price on these products. These risks are monitored daily and are not a material component of the Group's risk profile. Controls and mitigation include the hedging of these products and the use of natural offsets, in line with Group policies.

Risk management

Financial risk

Measurement

IRRBB is measured, monitored, and managed from both an internal risk appetite and an external regulatory perspective. The RMF incorporates both market valuation and earnings-based approaches. In accordance with the Group IRRBB policy, risk measurement techniques include: basis point sensitivity, NII sensitivity, value at risk (VaR), changes in the economic value of equity (EVE), interest rate risk stress testing, and scenario analysis.

The key features of the market risk management measurement approach are:

·   Basis point sensitivity analysis is performed daily and compares the potential impact of a one basis point (0.01%) change on the present value of all future cash flows.

·   NII sensitivity assesses changes to earnings over a 12-month time horizon as a result of interest rate movements and changes to customer behaviour.

·   VaR is measured on a statistical basis using a 99% confidence level based on daily rate movements over a ten-year history set with a one-year holding period.

·   EVE is measured in line with PRA Rulebook with all six interest rate shock scenarios assessed on a quarterly basis, including customer optionality stresses. Reporting is performed including and excluding equity.

·   Static balance sheet (i.e. any new business is assumed to be matched, hedged or subject to immediate repricing).

·   Dynamic balance sheet (i.e. a balance sheet incorporating future business expectations, adjusted for the relevant scenario in a consistent manner).

·   Run-off balance sheet (i.e. existing assets and liabilities not replaced as they mature, except to the extent necessary to fund the remaining balance sheet).

·   Investment term for capital is modelled with a benchmark term agreed by ALCO.

·   Investment term for core non-interest-bearing assets and liabilities is modelled on a behavioural basis with a benchmark term agreed by ALCO.

·   Assumptions covering the behavioural life of products and customer behaviour for optionality are reviewed and approved by ALCO.

·   Structural hedging, used to reduce earnings volatility, is based on analysis approved by ALCO and Board.

·   CSRBB is assessed through VaR applied to the Group's liquid asset buffer portfolio. CSRBB is measured at a 99% confidence level based on daily spread movements over a ten-year history set with a three-month holding period.

·   Foreign exchange risk is assessed based on the absolute exposure to each currency.

·   IRRBB is fully integrated in the Group's ICAAP.

Mitigation

Market risks are overseen by ALCO with delegation for day-to-day management given to Treasury. Treasury uses a number of techniques and products to manage market risks including interest rate swaps, cash flow netting and foreign exchange derivatives.

The Group uses derivative financial instruments to manage its exposures within approved limits and not for speculative purposes. The Group elects to apply hedge accounting for the majority of its risk management activity that uses derivatives. Certain derivatives are designated as either fair value hedge or cash flow hedge:

Fair value hedges - the Group hedges part of its existing interest rate risk, resulting from potential movements in the fair value of fixed rate assets and liabilities. The fair value of these swaps is disclosed within note 3.1.3.2 to the Group's consolidated financial statements. There were no transactions for which fair value hedge accounting had to be discontinued in the year.

Cash flow hedges - the Group hedges a portion of the variability in future cash flows attributable to interest rate risk. The interest risk arises from variable interest rate assets and liabilities which are hedged using interest rate swaps. There were no transactions for which cash flow hedge accounting had to be discontinued in the year as a result of the highly probable cash flows no longer being expected to occur. The fair value of derivatives is disclosed within note 3.1.3.2 to the Group's consolidated financial statements.

Monitoring

Parameters and assumptions of models that are used in market risk monitoring are reviewed and updated on at least an annual basis. Material changes require the approval of ALCO. Oversight of market risk is conducted by the Group's Financial Risk team which is independent of the Treasury function. The Board and Executive Risk Committee, through ALCO's oversight, monitor risk to ensure it remains within approved policy limits and Board requirements.

Value at Risk	Duration risk		Credit spread
	2023 £m	2022 £m	2023 £m	2022 £m
As at 30 September	27	17	62	41
Average value during the year	16	19	55	48
Minimum value during the year	4	14	44	41
Maximum value during the year	28	27	62	52

Risk management

Financial risk

Net interest income

Earnings sensitivity measures calculate the change in NII over a 12-month period resulting from an instantaneous and parallel change in interest rates. +/-25 basis point shocks and +/-100 basis point shocks represent the primary NII sensitivities assessed internally, though a range of scenarios are assessed on a monthly basis.

12 months NII sensitivity	2023 £m	2022  £m
+ 25 basis point parallel shift	11	18
+100 basis point parallel shift	42	66
- 25 basis point parallel shift	(11)	5
-100 basis point parallel shift	(45)	(35)

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

The key assumptions and limitations are outlined below:

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

·   There are no changes to basis spreads with the rate change passed on in full to all interest rate bases.

·   Administered rate products receive a rate pass on in line with internal scenario specific pass on assumptions. Any rate reduction in a rate fall scenario is subject to product floors with the assumption customer rates would not go negative.

·   Additional commercial pricing responses and management actions are not included.

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

Market risk linkage to the balance sheet

The following table shows the Group's principal market risks, linked to the balance sheet assets and liabilities.

	2023 £m	2022 £m	Interest rate  duration	Optionality	Basis	Credit spread	Foreign exchange
Assets
Financial instruments
At amortised cost
Loans and advances to customers	72,191	71,751	•	•	•		•
Cash and balances with central banks	11,282	12,221	•		•
Due from other banks	667	656	•		•		•
At FVOCI	6,184	5,064	•		•	•	•
At FVTPL
Loans and advances to customers	59	70	•	•	•		•
Derivatives	135	342	•		•		•
Other	2	8	•				•
Other assets	1,266	1,795	•				•
Total assets	91,786	91,907
Liabilities
Financial instruments
At amortised cost
Customer deposits	66,827	65,434	•	•	•		•
Debt securities in issue	9,719	8,509	•		•		•
Due to other banks	6,939	8,502	•		•		•
At FVTPL
Derivatives	290	327	•		•		•
Other liabilities	2,404	2,795	•				•
Total liabilities	86,179	85,567

Risk management

Financial risk

Repricing periods of assets and liabilities by asset/liability category

The following table shows the repricing periods of the Group's assets and liabilities as assessed by the Group. This repricing takes account of behavioural assumptions where material and the Group's policy to hedge capital in accordance with a benchmark term agreed by ALCO.

2023	Overnight £m	3 months or less £m	3 to 12 months  £m	1 to 5 years £m	Over 5 years £m	Non-interest bearing £m	Total £m
Assets
Financial instruments
At amortised cost
Loans and advances to customers	7,745	8,132	12,381	43,151	1,321	(539)	72,191
Cash and balances with central banks	9,903	35	105	140	-	1,099	11,282
Due from other banks	626	-	-	-	-	41	667
At FVOCI	1,635	475	568	881	2,440	185	6,184
At FVTPL
Loans and advances to customers	-	2	5	23	29	-	59
Derivatives	-	-	-	-	-	135	135
Other assets	14	20	59	314	157	704	1,268
Total assets	19,923	8,664	13,118	44,509	3,947	1,625	91,786
Liabilities
Financial instruments
At amortised cost
Customer deposits	7,935	16,096	18,254	23,085	1,229	228	66,827
Debt securities in issue	4,184	250	748	4,861	-	(324)	9,719
Due to other banks	6,783	10	33	-	-	113	6,939
At FVTPL
Derivatives	-	-	-	-	-	290	290
Other liabilities	1,249	85	255	340	-	475	2,404
Equity	-	166	748	3,007	1,329	357	5,607
Total liabilities and equity	20,151	16,607	20,038	31,293	2,558	1,139	91,786
Notional value of derivatives managing interest rate sensitivity	5,417	1,655	8,595	(14,136)	(1,531)	-	-
Total interest rate gap	5,189	(6,288)	1,675	(920)	(142)	486	-
Cumulative interest rate gap	5,189	(1,099)	575	(344)	(486)	-	-

Risk management

Financial risk

2022	Overnight £m	3 months or less £m	3 to 12 months  £m	1 to 5 years £m	Over 5 years £m	Non-interest bearing £m	Total £m
Assets
Financial instruments
At amortised cost
Loans and advances to customers	7,293	8,796	13,234	41,514	1,699	(785)	71,751
Cash and balances with central banks	10,765	12	37	196	-	1,211	12,221
Due from other banks	656	-	-	-	-	-	656
At FVOCI	1,265	525	320	1,159	1,733	62	5,064
At FVTPL
Loans and advances to customers	-	30	4	16	20	-	70
Derivatives	-	-	-	-	-	342	342
Other assets	40	38	113	604	-	1,008	1,803
Total assets	20,019	9,401	13,708	43,489	3,452	1,838	91,907
Liabilities
Financial instruments
At amortised cost
Customer deposits	7,026	18,725	13,449	26,077	-	157	65,434
Debt securities in issue	3,606	191	432	4,686	-	(406)	8,509
Due to other banks	8,438	12	-	-	-	52	8,502
At FVTPL
Derivatives	-	-	-	-	-	327	327
Other liabilities	1,717	-	-	-	-	1,078	2,795
Equity	-	264	573	3,306	350	1,847	6,340
Total liabilities and equity	20,787	19,192	14,454	34,069	350	3,055	91,907
Notional value of derivatives managing interest rate sensitivity	16,448	(359)	(239)	(12,146)	(3,704)	-	-
Total interest rate gap	15,680	(10,150)	(985)	(2,726)	(602)	(1,217)	-
Cumulative interest rate gap	15,680	5,530	4,545	1,819	1,217	-	-

LIBOR replacement

All regulatory milestones in relation to LIBOR cessation have been met and there are no conduct issues to note.

Loans with an aggregate value of c.£0.9m with a small number of customers remain on three-month GBP synthetic LIBOR. This temporary reference rate is due to cease at the end of March 2024.

There are no remaining USD LIBOR exposures. Post 31 March 2024, there will be no LIBOR exposure (in any currency) on the Group's balance sheet.

Risk management

Financial risk

Financial instruments linked to IBOR benchmark rates are summarised below:

Amounts referencing IBOR rates

2023	Non derivative  financial assets -  carrying value(1) £m	Non derivative  financial liabilities - carrying value £m	Derivatives -  nominal amount(2) £m
GBP LIBOR	1	-	-
Other(3)	179	-	-
Total	180	-	-

2022	Non derivative  financial assets -  carrying value(1) £m	Non derivative  financial liabilities - carrying value £m	Derivatives -  nominal amount(2) £m
GBP LIBOR	94	-	67
Other(3)	164	-	-
Total	258	-	67

(1)   Gross carrying amount excluding allowances for ECLs.

(2)   The IBOR exposures for derivative nominal amounts include undrawn loan commitments shown as GBP LIBOR. This is materially the case although some facilities allow drawdowns in a number of different currencies.

(3)   Comprises financial instruments referencing EURIBOR, which is not subject to benchmark reform (2022: £127m).

Pension risk

The Group operates a defined benefit pension scheme, the Yorkshire and Clydesdale Bank Pension Scheme (the Scheme). The Bank is the Scheme's principal employer and there are no other participating employers. The Scheme was closed to future accrual on 1 August 2017 for most members. A small number of members remain on a defined benefit accruals basis subject to certain conditions.

Under a defined benefit pension scheme, the economic benefit an employee receives in retirement is determined by factors such as salary and length of service but is not tied to the employee's or the employer's contributions, or the performance of the scheme's assets. A defined benefit pension scheme is exposed to market risk drivers such as interest rate risk, inflation risk, equity risk, as well as risks pertaining to the life expectancy of scheme members (longevity risk) and to changes in the legislation and regulatory requirements.

Pension risk is the risk that, at any point in time, the value of the Scheme's assets is not enough to meet the Scheme's estimated liabilities. This risk will continue to exist until the Scheme is formally wound up, either if all the liabilities are transferred to a third party (for example an insurer) or once all individual member benefits have been honoured. Pension risk can negatively impact the Group's capital position.

The Group also supports a defined contribution scheme. Defined contribution schemes do not give rise to pension risk, as the employer has no legal or constructive obligation to make further contributions if the defined contribution scheme's assets are insufficient to pay all member benefits. Risks, including market, investment performance and longevity risks are borne by the employee rather than the Group.

Risk appetite

The Group's pension risk appetite is a component of the Group-wide framework for the management of balance sheet risks.

Pension risk may adversely impact the Group's capital position. The Group is required to hold capital against it and may be required to make further contributions. Consequently, pension risk is considered in the context of potential capital impacts to the Group, due to changes in the valuations of the Scheme's liabilities and assets.

Risk management

Financial risk

Liabilities

The defined benefit obligation is a series of future cash flows, with relatively long duration. It is estimated by independent actuaries using the projected unit credit method. The actual cost of the Scheme can only be known after the Scheme is formally wound up.

On an IAS 19 basis, the defined benefit obligation present value is calculated by discounting the series of future cash flow estimates using a discount rate linked to yields of high-quality corporate bonds, of a duration aligned to that of the Scheme's liabilities. The cash flows and valuation are primarily sensitive to changes in corporate bond credit spreads, long-term inflation rates and the life expectancy of members. There is a risk that the value of the Scheme's liabilities is higher than that of its assets. In particular:

·   an increase in the discount rate corresponds to a decrease in liabilities;

·   an increase in long-term expected inflation corresponds to an increase in liabilities; and

·   an increase in life expectancy corresponds to an increase in liabilities.

The impact of these actuarial assumptions on valuations will also depend on investment and de-risking decisions (including interest rate, inflation rate and longevity hedging) made by the Trustee, as well as by the inflationary caps within the terms of the Scheme. Nevertheless, material changes to the key actuarial assumptions or changes to the methodology by which they are derived may lead to volatility in the Group's IAS 19 position. In line with pensions legislation, a formal actuarial valuation (Triennial Valuation) of the Scheme's assets and liabilities takes place at least every three years by independent actuaries.

More information on the Scheme's defined benefit obligations is shown within note 3.3 of the Group's consolidated financial statements. The present value of the liabilities was £2,284m as at 30 September 2023 (2022: £2,216m).

Assets

The Scheme's assets are held separately from the Group's assets and are administered by a board of trustees (the Trustee). The Trustee has fiduciary responsibilities to the Scheme's members and governs investments according to a Statement of Investment Principles (SIP). The SIP is reviewed and agreed by the Trustee on a regular basis, with the Group consulted on any proposed changes. The SIP sets out the Scheme objectives and the path to meet these objectives and is drafted in accordance with the requirements of Section 35 of the Pensions Act 1995 (as amended by the Pensions Act 2004 and regulations made under it). This results in the Scheme holding an appropriate mix of assets to better match future pension obligations.

There is a risk that the value of the Scheme's assets is lower than the present value of its liabilities. In particular, asset total returns lower than the discount rate used in the calculation of the present value of the defined benefit obligations may have an adverse impact on the Group's IAS 19 position.

The split of Scheme assets is shown within note 3.3 of the Group's consolidated financial statements. The fair value of the assets was £2,796m as at 30 September 2023 (2022: £3,216m).

Within the Scheme's matching assets there is a Liability Driven Investment (LDI) portfolio, which consists of both physical assets and derivatives. The Scheme uses a bespoke, segregated strategy which reflects, as far as possible, the specifics of the Scheme's liabilities in terms of exposure to movements in interest rates and inflation. As at 30 September 2023, the LDI portfolio was valued at £1,038m (2022: £968m).

LDI portfolios are commonly used by defined benefit pension schemes to better match their assets to their liabilities, while retaining their allocations to return-seeking assets. For example, falling interest rates or rising inflation would typically increase the value of a scheme's liabilities but the value of the LDI portfolio would also increase commensurably, hence reducing the scheme's funding level volatility. LDI utilises financial instruments, including derivatives, which require the scheme to provide collateral to counterparties. This generates additional liquidity risks and requirements as these collateral demands can change over periods when rates change. The general trend since LDI strategies were first introduced has been long-term interest rates falling. However, when interest rates rise instead of fall, more collateral is required to be posted for the same level of interest rate and inflation protection to be maintained. Therefore, the scheme needs to ensure that it has sufficient liquidity to meet any such obligation.

As at 30 September 2023, the Scheme is still estimated to have substantial collateral headroom to meet further rises in interest rates of more than 10% (2022: 3%).

During the period, the Group and Trustee to the Scheme agreed to cease their previous contingent security arrangement. Subsequently, the Group has granted a £75m uncommitted facility to the Scheme as an additional contingency against future short-term liquidity challenges resulting from unexpected market turbulence. As at 30 September 2023 the amount drawn under the facility was £Nil.

Exposure

The Group's defined benefit pension scheme affects its regulatory capital in two ways:

·   CET1 capital - an IAS 19 surplus increases the Group's balance sheet assets and reserves. However, any such amount is not recognised for the purposes of determining CET1 capital. An IAS 19 deficit on the other hand, which increases balance sheet liabilities and reduces reserves, is recognised for regulatory capital purposes, and so will decrease CET1 capital.

·   Pillar 2A capital - the Group is also required to determine the level of capital required to be held under Pillar 2A for pension obligation risk as part of the annual ICAAP process. This requirement forms part of the Group's regulatory Total Capital Requirement.

Mitigation

The Trustee and Group have a common view of the Scheme's long-term strategic aims, encapsulated by an agreed de-risking journey plan. Within the journey plan, several core principles have been established, including a long-term self-sufficiency funding target (i.e. the point in time when the Scheme would no longer need to call on the Bank for additional funding) with assumptions as to how this target is expected to be managed, monitored and met. Potential actions to address deviations in the actual funding level relative to the journey plan have also been considered.

In addition to the Scheme being closed to new members and essentially closed to future accrual, additional measures have been implemented by the Group and Trustee with the specific aim of reducing risks. This includes hedging against interest rate and inflation risk. Moreover, on 6 April 2023, the Scheme executed a longevity swap transaction to manage longevity risk in relation to c.£1,600m of pensioner liabilities. Cost-effective options to further reduce risk within the Scheme will continue to be assessed.

Risk management

Financial risk

Monitoring

Information on the Scheme's current valuations, asset holdings and discount and inflation rate assumptions are presented to ALCO. This also includes monitoring of the performance of the LDI portfolio as well as of the collateral headroom. The impact of the Scheme on the Group is also subject to risk oversight from the Risk function. In addition, semi-annual pension risk updates are provided to the Board Risk Committee.

Performance of the Scheme's asset portfolio against the various risk metrics is monitored by the Scheme investment adviser, and reported to the Investment Sub Committee, which includes Group representation, and Trustee Board on a quarterly basis.

The Scheme's de-risking plan has delivered resilience to stress-testing and continued improvements in Group and Trustee valuations. The IAS 19 position continues to be assessed in the Group's ICAAP and regulatory stress testing processes.

The Triennial Valuation with effective date 30 September 2022 has concluded and showed a funding surplus. Consequently, no further contributions from the Group will be required and there is no capital impact. The effective date of the Scheme's next Triennial Valuation is 30 September 2025.

Directors' responsibility statement in respect of the Annual Report and Accounts

The responsibility statement below has been prepared in connection with the Company's full Annual Report and Accounts for the year ended 30 September 2023. Certain parts thereof are not included within this announcement.

The Directors confirm that to the best of their knowledge:

−   the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the Group and the undertakings included in the consolidation taken as a whole; and

−   the Strategic report includes a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that they face.

The Directors consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's and Group's position and performance, business model and strategy.

David Duffy

Chief Executive Officer
22 November 2023

Group financial statements

Consolidated income statement

For the year ended 30 September	Note	2023 £m	2022 £m
Interest income		3,830	2,215
Other similar interest		3	2
Interest expense and similar charges		(2,146)	(641)
Net interest income	2.1	1,687	1,576
Gains less losses on financial instruments at fair value		(12)	(17)
Other operating income		152	157
Non-interest income	2.2	140	140
Total operating income		1,827	1,716
Operating and administrative expenses before impairment losses	2.3	(1,173)	(1,069)
Operating profit before impairment losses		654	647
Impairment losses on credit exposures	3.1.1.1	(309)	(52)
Profit on ordinary activities before tax		345	595
Tax expense	2.4	(99)	(58)
Profit for the year		246	537
Attributable to:
Ordinary shareholders		192	467
Other equity holders		54	70
Profit for the year		246	537
Basic earnings per share (pence)	2.5	14.0	32.4
Diluted earnings per share (pence)	2.5	13.9	32.3

All items dealt with in arriving at the profit before tax for each year relate to continuing activities.

The notes on pages 78 to 121 form an integral part of these financial statements.

Group financial statements

Consolidated statement of comprehensive income

For the year ended 30 September	Note	2023 £m	2022 £m
Profit for the year		246	537
Items that may be reclassified to the income statement
Change in cash flow hedge reserve
(Losses)/gains during the year		(268)	962
Transfers to the income statement		(12)	(13)
Taxation thereon - deferred tax credit/(charge)		77	(260)
	4.1.5	(203)	689
Change in FVOCI reserve
(Losses)/gains during the year		(49)	15
Transfers to the income statement		(1)	(4)
Taxation thereon - deferred tax credit/(charge)		14	(1)
		(36)	10
Total items that may be reclassified to the income statement		(239)	699
Items that will not be reclassified to the income statement
Change in defined benefit pension plan	3.3	(544)	122
Taxation thereon - deferred tax credit/(charge)		188	(50)
Taxation thereon - current tax credit		1	6
Total items that will not be reclassified to the income statement		(355)	78
Other comprehensive (losses)/income, net of tax		(594)	777
Total comprehensive (losses)/income for the year, net of tax		(348)	1,314
Attributable to:
Ordinary shareholders		(402)	1,244
Other equity holders		54	70
Total comprehensive (losses)/income for the year, net of tax		(348)	1,314

The notes on pages 78 to 121 form an integral part of these financial statements.

Group financial statements

Consolidated balance sheet

As at 30 September	Note	2023 £m	2022 £m
Assets
Financial instruments	3.1
At amortised cost	3.1.1
Loans and advances to customers	3.1.1.1	72,191	71,751
Cash and balances with central banks	3.1.1.2	11,282	12,221
Due from other banks		667	656
At FVOCI	3.1.2	6,184	5,064
At FVTPL	3.1.3
Loans and advances to customers	3.1.3.1	59	70
Derivatives	3.1.3.2	135	342
Other	3.1.3.3	2	8
Intangible assets and goodwill	3.2	173	267
Deferred tax	2.4	193	146
Defined benefit pension assets	3.3	512	1,000
Other assets	1.7, 3.4	388	382
Total assets		91,786	91,907
Liabilities
Financial instruments	3.1
At amortised cost	3.1.1
Customer deposits	3.1.1.3	66,827	65,434
Debt securities in issue	3.1.1.4	9,719	8,509
Due to other banks	3.1.1.5	6,939	8,502
At FVTPL	3.1.3
Derivatives	3.1.3.2	290	327
Deferred tax	2.4	179	350
Provisions for liabilities and charges	3.7	69	50
Other liabilities	1.7, 3.5	2,156	2,395
Total liabilities		86,179	85,567
Equity
Share capital and share premium	4.1.1	143	148
Other equity instruments	4.1.2	594	666
Capital reorganisation reserve	4.1.3	(839)	(839)
Merger reserve	4.1.4	2,128	2,128
Other reserves	4.1.5	528	766
Retained earnings		3,053	3,471
Total equity		5,607	6,340
Total liabilities and equity		91,786	91,907

The notes on pages 78 to 121 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 22 November 2023 and were signed on its behalf by:

                                           

David Duffy                                           Clifford Abrahams

Chief Executive Officer         Chief Financial Officer

Virgin Money UK PLC, Registered number: 09595911

Group financial statements

Consolidated statement of changes in equity

Note	Share capital and share premium £m 4.1.1	Other equity instruments £m 4.1.2	Capital reorg' reserve £m 4.1.3	Merger reserve £m 4.1.4	Other reserves						Retained earnings £m	Total equity £m
					Own shares held £m 4.1.5	Capital redemption reserve £m 4.1.5	Deferred shares reserve £m 4.1.5	Equity based comp' reserve £m 4.1.5	FVOCI reserve £m 4.1.5	Cash flow hedge reserve £m 4.1.5
As at 1 October 2021	149	915	(839)	2,128	-	-	14	14	33	10	3,049	5,473
Profit for the year	-	-	-	-	-	-	-	-	-	-	537	537
Other comprehensive income, net of tax	-	-	-	-	-	-	-	-	10	689	78	777
Total comprehensive income for the year	-	-	-	-	-	-	-	-	10	689	615	1,314
AT1 distributions paid	-	-	-	-	-	-	-	-	-	-	(70)	(70)
Dividends paid to ordinary shareholders	-	-	-	-	-	-	-	-	-	-	(50)	(50)
Ordinary shares issued	2	-	-	-	-	-	-	-	-	-	-	2
Share buyback	(3)	-	-	-	-	3	-	-	-	-	(63)	(63)
Transfer from equity based compensation reserve	-	-	-	-	-	-	-	(9)	-	-	9	-
Equity based compensation expensed	-	-	-	-	-	-	-	5	-	-	-	5
Settlement of Virgin Money Holdings (UK) Limited share awards	-	-	-	-	-	-	(3)	-	-	-	1	(2)
AT1 issuance	-	346	-	-	-	-	-	-	-	-	-	346
AT1 redemption	-	(595)	-	-	-	-	-	-	-	-	(20)	(615)
As at 30 September 2022	148	666	(839)	2,128	-	3	11	10	43	699	3,471	6,340
Profit for the year	-	-	-	-	-	-	-	-	-	-	246	246
Other comprehensive losses, net of tax	-	-	-	-	-	-	-	-	(36)	(203)	(355)	(594)
Total comprehensive losses for the year	-	-	-	-	-	-	-	-	(36)	(203)	(109)	(348)
AT1 distributions paid	-	-	-	-	-	-	-	-	-	-	(54)	(54)
Dividends paid to ordinary shareholders	-	-	-	-	-	-	-	-	-	-	(148)	(148)
Ordinary shares issued	2	-	-	-	-	-	-	-	-	-	-	2
Share buyback	(7)	-	-	-	-	7	-	-	-	-	(112)	(112)
Purchase of own shares	-	-	-	-	(2)	-	-	-	-	-	-	(2)
Transfer from equity based compensation reserve	-	-	-	-	-	-	-	(4)	-	-	4	-
Equity based compensation expensed	-	-	-	-	-	-	-	5	-	-	-	5
Settlement of Virgin Money Holdings (UK) Limited share awards	-	-	-	-	-	-	(5)	-	-	-	1	(4)
AT1 redemption	-	(72)	-	-	-	-	-	-	-	-	-	(72)
As at 30 September 2023	143	594	(839)	2,128	(2)	10	6	11	7	496	3,053	5,607

The notes on pages 78 to 121 form an integral part of these financial statements.

Group financial statements

Consolidated statement of cash flows

For the year ended 30 September	Note	2023 £m	2022 £m
Operating activities
Profit on ordinary activities before tax		345	595
Adjustments for:
Non-cash or non-operating items included in profit before tax	5.4	(1,207)	(1,326)
Changes in operating assets	5.4	(544)	1,212
Changes in operating liabilities	5.4	284	(238)
Payments for short-term and low value leases	3.6	(3)	(2)
Interest received		3,300	2,112
Interest paid		(1,173)	(378)
Tax paid		(48)	(59)
Net cash provided by operating activities		954	1,916
Cash flows from investing activities
Interest received		232	47
Proceeds from sale and maturity of financial assets at FVOCI		1,868	673
Purchase of financial assets at FVOCI		(2,950)	(2,019)
Purchase of shares issued by UTM		-	(4)
Proceeds from sale of property, plant and equipment		1	1
Purchase of property, plant and equipment		(9)	(13)
Purchase and development of intangible assets	3.2	(11)	(53)
Net cash used in investing activities		(869)	(1,368)
Cash flows from financing activities
Interest paid		(742)	(246)
Repayment of principal portions of lease liabilities	3.6	(24)	(26)
Redemption and principal repayment on RMBS and covered bonds	3.1.1.4	(1,012)	(1,264)
Redemption and principal repayment on medium-term notes/subordinated debt	3.1.1.4	(432)	-
Redemption of AT1 securities		(72)	(614)
Proceeds from issuance of AT1 securities		-	347
Issuance of RMBS and covered bonds	3.1.1.4	1,826	2,480
Issuance of medium-term notes/subordinated debt	3.1.1.4	747	-
Amounts drawn down under the TFSME		-	2,550
Amounts repaid under the TFSME		(1,000)	-
Amounts repaid under the TFS		-	(1,244)
Share buybacks and purchase of own shares		(112)	(53)
AT1 distributions	4.1.2	(54)	(70)
Ordinary dividends paid		(148)	(50)
Net cash (used in)/provided by financing activities		(1,023)	1,810
Net (decrease)/increase in cash and cash equivalents		(938)	2,358
Cash and cash equivalents at the beginning of the year		12,611	10,253
Cash and cash equivalents at the end of the year	5.4	11,673	12,611

Group financial statements

Consolidated statement of cash flows

Movements in liabilities arising from financing activities

Note	Term funding schemes(1) £m 3.1.1.5	Debt securities in issue £m 3.1.1.4	Lease liabilities £m 3.6	Total £m
At 1 October 2021	5,896	7,678	154	13,728
Cash flows:
Issuances	-	2,480	-	2,480
Drawdowns	2,550	-	-	2,550
Redemptions	-	(1,264)	-	(1,264)
Repayment	(1,244)	-	(26)	(1,270)
Non-cash flows:
Fair value and other associated adjustments	-	(400)	-	(400)
Additions to right-of-use asset in exchange for increased
lease liabilities	-	-	4	4
Remeasurement	-	-	(4)	(4)
Movement in accrued interest	28	8	4	40
Unrealised foreign exchange movements	-	5	-	5
Unamortised costs	-	2	-	2
At 30 September 2022	7,230	8,509	132	15,871
Cash flows:
Issuances	-	2,573	-	2,573
Redemptions	-	(1,444)	-	(1,444)
Repayment	(1,000)	-	(24)	(1,024)
Tax paid	-	-	(1)	(1)
Non-cash flows:
Fair value and other associated adjustments	-	59	-	59
Additions to right-of-use asset in exchange for increased
lease liabilities	-	-	76	76
Remeasurement	-	-	(6)	(6)
Movement in accrued interest	61	27	3	91
Unamortised costs	-	(5)	-	(5)
At 30 September 2023	6,291	9,719	180	16,190

(1)   This includes amounts drawn under the TFS and TFSME.

The notes on pages 78 to 121 form an integral part of these financial statements.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation

Overview This section sets out the Group's accounting policies that relate to the consolidated financial statements as a whole. Where an accounting policy is specific to one note, the policy is described in the note to which it relates. This section also highlights newly adopted accounting standards, amendments and interpretations which are relevant to the Group. Where relevant, we explain how these changes are expected to impact the financial position and performance of the Group. The Group has adopted the UK Finance Code for Financial Reporting Disclosure and has prepared the 2023 Annual Report and Accounts in compliance with the Code.

1.1 General information

The Company is a public company limited by shares, incorporated in the United Kingdom under the Companies Act and registered in England and Wales.

The consolidated financial statements comprise those of the Company and its controlled entities, together the 'Group'

1.2 Basis of accounting

The consolidated financial statements, have been prepared in accordance with UK adopted IASs.

The financial information has been prepared under the historical cost convention, as modified by the revaluation of certain financial assets and liabilities at fair value through profit or loss and other comprehensive income. Fair value is defined in note 3.1.4.

1.3 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 Strategic report contained in the Group's Annual Report and Accounts. In addition, the full Risk report contained in the Group's Annual Report and Accounts includes the Group's risk management objectives and the objectives, policies and processes for managing its capital.

In assessing the Group's going concern position as at 30 September 2023, the Directors have considered a number of factors, including the current balance sheet position (which reflected the Group's consideration of the potential impact of climate-related risks), the Group's strategic and financial plan, taking account of possible changes in trading performance and funding retention, and stress testing and scenario analysis. The assessment concluded that the Group has sufficient capital and liquidity for at least the next 12 months. The Group's capital ratios and its total capital resources are comfortably in excess of PRA requirements and internal stress testing indicates the Group can withstand severe economic and competitive stresses.

As a result of the assessment, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and that the Group is well placed to manage its business risks successfully. Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements.

The Directors' report contained in the Group's Annual Report and Accounts provides further detail on the Group's going concern and viability assessment.

1.4 Basis of consolidation

Controlled entities are all entities (including structured entities) to which the Company is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. An assessment of control is performed if there are indicators that control may have changed.

Controlled entities are consolidated from the date on which control is established by the Group until the date that control ceases. The acquisition method of accounting is used to account for business combinations other than those under common control. A non‑controlling interest is recognised by the Group in respect of any portion of the total assets less total liabilities of an acquired entity or entities that is not owned by the Group. Balances and transactions between entities within the Group and any unrealised gains and losses arising from those transactions are eliminated in full upon consolidation.

The consolidated financial statements have been prepared using uniform accounting policies.

1.5 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 amount of contingent liabilities. Actual results may differ from those on which management's estimates are based. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation

The Group considers the most significant use of accounting estimates and judgements relate to the following areas:

Area	Estimates	Judgements	Further detail
Impairment provisions on credit exposures	Asset lifetimes Economic scenarios	SICR Definition of default PMAs	Credit risk section of  Risk management and note  3.1.1.1
EIR	Product life Post promotion attrition and yield	Standard variable rate Macroeconomic factors Model risk reserve (MRR)	Note 2.1
Deferred tax		Period for the recoverability of deferred tax assets	Note 2.4
Retirement benefit obligations	Discount rate Inflation assumptions Mortality assumptions		Note 3.3

Critical accounting estimates and judgements related to climate-related risks

In addition, management has also considered and reflected on the potential impact of climate-related risks on the Group's financial position and performance.

This involved undertaking an assessment over the Group's assets (both financial and non-financial) and evaluating whether the observable effects of physical and transition risk of climate change would have a material impact on the Group's financial position and performance in the current year. It is widely accepted that the effects of climate change in the UK will not be significant in the short term and that the inherent risks and uncertainties in quantifying the effect of climate change in the financial statements are considerable and more likely to impact in the medium to longer term.

The Group's customer lending is the most significant financial asset class exposed to the potential impact of climate-related risks, primarily through ECL implications, the ability of the customer to meet their contractual payments and the potential for a fall in collateral values. Given the challenges associated with modelling specific climate projections, the Group's IFRS 9 scenarios do not make explicit and objective assumptions about climate change impacts for which the associated probability can be derived within the existing methodology. Instead, the Group's base forecast, and therefore the scenarios, incorporate the short to medium-term (five-year horizon) impact of the domestic and global economy on demand for fossil fuel and thus emissions. Consequently we consider that as a UK-based bank with no significant lending outside of the UK, the potential for material ECLs to emerge as a result of climate change in the short term is negligible.

Other non-financial assets that may be impacted include the Group's deferred tax asset and the pension assets held by the Group's defined benefit pension scheme. The Group assesses the recoverability of deferred tax assets over a six-year corporate planning time horizon which incorporates all aspects of the Group's future performance and expectations. The Trustee of the defined benefit pension scheme is responsible for all investment decisions, and these are made in accordance with a SIP which incorporates climate change considerations. In addition, by necessity, the investment decisions made by the Trustees are normally medium to long term in nature to match the related pension obligations. The majority of the scheme assets held at 30 September 2023 are in lower risk government and corporate bonds, with the remaining investments in secure income alternatives, property and renewables. As its funding position has improved it has disinvested from some of the asset classes that were more exposed to climate risks (such as public equity), but the Scheme is increasingly holding a larger proportion of longer dated assets to better match its liabilities. The Trustee is therefore very focused on the sustainability of these assets.

Overall, while the effects of climate change represent a source of significant uncertainty, the Group does not consider there to be a material impact on its estimates and judgements from physical and transition risks of climate change in these financial statements.

1.6 New accounting standards and interpretations

The Group adopted the following International Accounting Standards Board (IASB) pronouncements in the current financial year, which have been endorsed for use in the UK by the UK Endorsement Board (UKEB), and are not considered to have a material impact for the Group:

·   Amendments to IAS 16 'Property, plant and equipment': proceeds before intended use. This was issued in May 2020 (applicable for accounting periods beginning on or after 1 January 2022) and received endorsement for use in the UK in April 2022. The amendments prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, a company will recognise such sales proceeds and related cost in profit or loss.

·   Amendments to IAS 37 'Provisions, contingent liabilities and contingent assets': onerous contracts - cost of fulfilling a contract. This was issued in May 2020 (applicable for accounting periods beginning on or after 1 January 2022) and received endorsement for use in the UK in April 2022. The amendments clarify that for the purpose of assessing whether a contract is onerous, the cost of fulfilling the contract includes both the incremental costs of fulfilling that contract and an allocation of other costs that relate directly to fulfilling contracts.

·   Amendments to IFRS 3 'Business combinations'. This was issued in May 2020 and received endorsement for use in the UK in April 2022. The amendments update IFRS 3 to refer to the 2018 Conceptual Framework for Financial Reporting, in order to determine what constitutes an asset or a liability in a business combination and applies to those business combinations for which the acquisition date is on or after the start of the first annual reporting period beginning on or after 1 January 2022.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation

·   Annual improvements 2018-2020. This was issued in May 2020 (applicable for accounting periods beginning on or after 1 January 2022) and received endorsement for use in the UK in April 2022. The annual improvements package includes the following minor amendments to: (i) IFRS 1 'First-time adoption of IFRS' - Subsidiary as a first-time adopter; (ii) IFRS 9 'Financial instruments' - Fees in the '10%' test for derecognition of financial liabilities; (iii) IFRS 16 'Leases' - Lease incentives; and (iv) IAS 41 'Agriculture' - Taxation in fair value measurements.

·   International tax reform - Pillar Two model rules: Amendments to IAS 12. This was issued in May 2023 (additional disclosure requirements are applicable for accounting periods beginning on or after 1 January 2023, although some paragraphs were for immediate application) and received endorsement for use in the UK in July 2023. The amendments introduce a mandatory temporary exception to the accounting for deferred taxes arising from the implementation of the OECD Pillar Two model rules, together with targeted disclosure requirements for affected entities. As mandated, the Group applied the temporary exemption on adoption and has neither recognised nor disclosed information about deferred tax assets and liabilities related to Pillar Two income taxes.

During the year, the Group also early adopted Amendments to IAS 1 'Presentation of financial statements' and IFRS Practice Statement 2 'Making materiality judgements' which was issued by the IASB in February 2021 (applicable for accounting periods beginning on or after 1 January 2023 with early adoption permitted) and endorsed for use in the UK by the UKEB in November 2022.

The amendments require entities to disclose their material accounting policy information rather than their significant accounting policies. As part of this, the IASB has amended IFRS Practice Statement 2 'Making materiality judgements' by adding guidance and examples of circumstances to help entities determine when accounting policy information is material and, therefore, needs to be disclosed.

The Group has assessed the requirements of the amendments and concluded that the disclosure of certain accounting policies included within the 2022 Annual Report and Accounts would no longer be necessary. Consequently, while the Group continues to apply these policies, the following accounting policy wording has been omitted by early adopting the amendments:

·   Basis of consolidation: joint ventures (JVs).

·   Foreign exchange: functional and presentation currency/transactions and balances.

·   Property, plant and equipment.

·   Operating and administrative expenses before impairment losses.

·   Taxation: income tax/current tax.

·   Intangibles and goodwill: capitalised software/goodwill/impairment.

·   Retirement benefits: defined contribution scheme.

·   Provisions.

·   Other liabilities: deferred grants.

·   Leases: as lessee/as sub-lessor.

·   Equity: equity/dividends.

·   Equity based compensation.

·   Contingent liabilities.

·   Investment in controlled entities (this policy relates to the Company financial statements).

New accounting standards and interpretations not yet adopted

The IASB has issued a number of other minor amendments to IFRSs that are not mandatory for the current reporting year and have not been early adopted by the Group. These amendments are not expected to have a material impact for the Group.

1.7 Other accounting policy and presentational changes

The following changes took place during the year:

Investment property

IAS 40 'Investment property' allows an entity to select either the fair value model or the cost model for subsequent measurement of investment property. The Group has a historic policy of fair value measurement for investment property but has not held any on its balance sheet for several years prior to the current year.

During the year, the Group has classified £43m of lease right-of-use assets as investment property on initial recognition where there is surplus space which will be sub-let under an operating lease. The Group has also transferred freehold land and buildings with a value of £9m to investment property where there was a change in use. Investment property balances are included within other assets on the balance sheet (note 3.4).

From 1 October 2022 investment property has been recognised at cost, less accumulated depreciation and impairment. The holding of investment property is not a central element of the Group's overarching business model or strategy; it is an incidental consequence of surplus estate arising from changes in operational requirements. Considering the relative materiality and nature of investment property balances, the Group has determined that changing the accounting policy for investment property to align to the measurement basis, which is applied to the Group's other property related assets under IFRS 16 'Leases' and IAS 16 'Property, plant and equipment', will provide greater relevance and consistency to users of the financial statements. This policy change has no impact on prior years.

Expected credit losses

During the year, a new Business LGD model was brought into use in the Group's ECL calculation. The development of this model was at an advanced stage in the prior year, to the extent that a negative management adjustment of £15m was incorporated into the ECL figure. The introduction of the new model allowed this negative management adjustment to be removed in the current year. Further detail can be found in the credit risk section within Risk management, pages 36 and 45.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation

Presentational change

Other assets and other liabilities have been restated in the prior year in line with the current year presentation. The balance sheet line items for property, plant and equipment and current tax have been removed and the balances assumed into the other assets and other liabilities line items respectively. This is a presentational change to align with peers and is not considered to be a material change in disclosure. The table below reflects the impact of these changes on the balances at 30 September 2022:

	Other assets £m	Other liabilities £m
Original balance	171	2,394
Property, plant and equipment	211	-
Current tax	-	1
Restated balance	382	2,395

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.1 Net interest income

Accounting policy Interest income is recognised using the effective interest method which discounts the estimated future cash payments or receipts, at the effective interest rate, over the expected life of the financial instrument to the gross carrying amount of the non-credit impaired financial asset. Interest expense is recognised using the same effective interest method on the amortised cost of the financial liability. When calculating the EIR, cash flows are estimated considering all contractual terms of the financial instrument (e.g. prepayment, call and similar options) excluding future credit losses. The calculation includes all amounts paid or received that are an integral part of the EIR such as transaction costs and all other premiums or discounts. Where it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of financial instruments), the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments) are used. Loan origination and commitment fees are recognised within the EIR calculation. Fees in relation to the non-utilisation of a commitment are recognised as revenue upon expiry of the agreed commitment period. Interest income on financial assets in Stages 1 and 2 is recognised on the gross carrying value of the financial asset using the original EIR. Once a financial asset or group of similar financial assets has been categorised as credit-impaired (Stage 3), interest income is recognised on the net carrying value (which is after deducting the ECL allowance from the gross lending) using the asset's original EIR. Interest income for POCI financial assets is calculated using the credit-adjusted EIR applied to the amortised cost of the financial asset from initial recognition. The Group recognises and presents the reversal of ECLs following the curing of a credit impaired financial asset as a reversal of impairment losses. The Group's policy on ECLs can be found in note 3.1.1. Interest income includes finance lease income, which is recognised at a constant periodic rate of return on the net investment. Interest income and interest expense on hedged assets and liabilities and financial assets and liabilities designated as FVTPL are also recognised as part of NII. Interest income and interest expense on derivatives economically hedging interest bearing financial assets or liabilities (but not designated as hedging instruments) and other financial assets and liabilities held at FVTPL (either mandatory or by election) are presented as other similar interest within NII. Critical accounting estimates and judgements EIR The EIR is determined at initial recognition based upon the Group's best estimate of the future cash flows of the financial instrument over its expected life. Where these estimates are subsequently revised, a present value adjustment to the carrying value of the asset is recognised in profit or loss. Such adjustments can introduce income statement volatility and consequently the EIR method is a source of estimation uncertainty. The Group considers that significant judgement is exercised over the mortgage and credit card portfolios. Due to the inherent judgement and estimation uncertainty that exists in determining the EIR adjustment, an MRR is held to mitigate this uncertainty. The Group assesses the quantification of the EIR adjustment, including the MRR, on a quarterly basis with the CFO making recommendations to the Board Audit Committee twice a year at each external reporting period. Mortgages For mortgage products the main accounting estimates and judgements when assessing the cash flows are the product life (including assumptions based on observed historic customer behaviour when in a standard variable rate (SVR) period) and the applicable SVR. As at 30 September 2023, a total EIR adjustment of £209m (2022: £201m) has been recognised for mortgages. This represented 0.4% (2022: 0.3%) of the balance sheet carrying value of gross loans and advances to customers for mortgage lending. The net impact of the mortgage EIR adjustments on the income statement in the year represented 0.5% of gross customer interest income for mortgages (2022: (0.7)%). Product life This primarily involves assumptions of customer behaviour when a fixed rate product comes to an end and reverts to the Group's SVR. The current assumptions indicate that 89% (2022: 85%) of customers will have fully repaid or switched to a new product within two months of reverting to SVR. SVR Changes to the BoE base rate have an impact on the SVR charged to customers and consequently on the Group's interest income. The Group historically passes base rate changes through to the SVR in full but, on occasion, may choose not to do so. The significant accounting estimates above are monitored on an ongoing basis to ensure they remain appropriate based on recent, observable customer behaviour, market data (such as market derived base rate forecasts) and take account of the competitive environment in which the Group operates. The Group also considers potential changes to future customer behaviour as a result of macroeconomic factors. There continues to be increased uncertainty in purchase and switching activity as a result of actual and anticipated base rate rises. The Group has taken this into account when determining the EIR modelling assumptions.

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.1 Net interest income continued

Sensitivity analysis As noted above, the calculation of the Group's EIR adjustment is sensitive to changes in product life and SVR assumptions. There are inter-dependencies between the assumptions which add to the complexity of the judgements the Group has to make. This means that no single factor is likely to move independently of others, however, the sensitivities disclosed below assume all other assumptions remain unchanged. Sensitivity impact on the mortgage EIR adjustment 2023 £m 2022 £m +/- 1 month change to the timing of customer repayments, redemptions and product transfers 21/(18) 16/(13) 50bps increase to the BoE base rate not passed through to the Group's SVR (42) (46) Credit cards An EIR adjustment arises on credit card products that have a low introductory rate, followed by a higher reversionary rate in future years when the promotional period expires. However, receipt of such interest income depends on the customer staying with the Group beyond promotional expiry and therefore significant judgement is involved in forecasting customer behaviour and estimating the future cash flows. Key behavioural assumptions include an estimation of the utilisation of available credit, transaction and repayment activity and the retention of the customer balance after the end of a promotional period. As at 30 September 2023, a total EIR adjustment of £259m (2022: £285m) has been recognised for credit cards. This represented 4.5% (2022: 5.5%) of the balance sheet carrying value of gross loans and advances to customers for credit cards. The impact of the net credit card EIR adjustments on the income statement was a charge in the year representing (6.2)% of gross customer interest income for credit cards (2022: a credit representing 3.3% of gross customer interest income for credit cards). Expected cash flows are estimated based on historical experience of similar products and are consistent with those used in product pricing models. The Group reviews and adjusts assumptions where necessary on an ongoing basis, using the most recent observable customer behaviour and market data. The Group also considers potential future changes to customer behaviour as a result of macroeconomic factors. Post-promotional yield The yield on a credit card following the post-promotional period is a significant estimate within the EIR assumptions. Yield is a function of the Interest Bearing Balance (IBB) and the APR charged to customers. IBB is impacted by customer behaviour and while there is evidence to support the expected IBB following the post-promotional period, there is inherent risk that this data may differ in the future. If the IBB differs to the Group's estimate it can have a material impact on the revised future cash flows. Based on recent experience, the Group has applied an average IBB of 55% (2022: 55%) following the end of the promotional period. Post-promotional attrition The level of repayment in the post-promotional period is a key sensitivity within the EIR assumptions. There is evidence to support the expected behaviour of customers after the end of promotional periods, however there is inherent risk that this data may not be indicative of actual future behaviour. If the proportion of customers who repay their balance post-promotion differs to the Group's estimate it can have a material impact on the revised future cash flows. Based on recent experience, the Group has applied a long run average attrition rate of 1.5% per month (2022: 1.5% per month) following the end of the promotional period. Macroeconomic factors When determining assumptions, the Group has considered the impact to customers of inflationary pressures including high energy and utility costs and the recent base rate rises. As a result, temporary adjustments have been made to assumptions. Post-promotional IBB has been decreased to 50% for 18 months and balance attrition has been increased to reflect customer reaction to the high-rate environment for 18 months. If, however, the stress period was to increase to 30 months, the Group estimates it would result in a negative present value adjustment of approximately £19m, which would be recognised in the income statement. Sensitivity analysis As noted above, the calculation of the Group's EIR adjustment for credit cards is sensitive to changes in post-promotional yield and post-promotional attrition. There are inter-dependencies between the key assumptions which add to the complexity of the judgements the Group has to make. This means that no single factor is likely to move independently of others, however, the sensitivities disclosed below assume all other assumptions remain unchanged. Sensitivity impact on the credit card EIR adjustment 2023 £m 2022 £m +/- 5 ppts change to post-promotional IBB assumption(1) (9.1% relative increase/decrease) 25/(26) 34/(28) +/- 0.5 ppts change to post-promotional monthly balance attrition rate (33% relative increase/decrease) (7)/7 (20)/23 (1)   Where the IBB assumption is already equal to or less than 50% IBB, no further adjustment has been made on the basis this already represents a downside economic stress.

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.1 Net interest income continued

	2023 £m	2022 £m
Interest income
Loans and advances to customers	3,150	2,095
Loans and advances to other banks	435	70
Financial assets at FVOCI	245	50
Total interest income	3,830	2,215
Other similar interest
Financial assets at FVTPL	3	5
Derivatives economically hedging interest bearing assets	-	(3)
Total other similar interest	3	2
Less: interest expense and similar charges
Customer deposits	(1,233)	(342)
Debt securities in issue	(537)	(227)
Due to other banks	(372)	(70)
Other interest expense	(4)	(2)
Total interest expense and similar charges	(2,146)	(641)
Net interest income	1,687	1,576

Net interest income includes a charge of £29m (2022: £16m) in relation to acquisition accounting unwinds as shown in the reconciliation of statutory to underlying results table on page 17.

2.2 Non-interest income

Accounting policy Gains less losses on financial instruments at fair value This includes fair value gains and losses from three distinct activities: ·   Derivatives classified as held for trading - the full change in fair value of trading derivatives is recognised inclusive of interest income and interest expense arising on those derivatives except when economically hedging other assets and liabilities at fair value as outlined in note 2.1. ·   Other financial assets designated at FVTPL - these relate principally to the Group's fixed interest rate loan portfolio (note 3.1.3.1), which were designated at inception as FVTPL. The fair value of these loans is derived from the future loan cash flows using appropriate discount rates and includes adjustments for credit risk and credit losses. ·   Hedged assets, liabilities and derivatives designated in hedge relationships - fair value movements are recognised on both the hedged item and hedging derivative in a fair value hedge relationship, the net of which represents hedge ineffectiveness, and hedge ineffectiveness on cash flow hedge relationships (note 3.1.3.2). Fees and commissions Fees and commissions receivable which are not an integral part of the EIR are recognised as income as the Group fulfils its performance obligations. The Group's principal performance obligations arising from contracts with customers are in respect of current accounts, debit cards and credit cards. The Group provides the service and consequently generates the fee and commission income monthly, with amounts recognised in income on this basis. Costs incurred to generate this income are charged to fees and commissions expense as they are incurred.

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.2 Non-interest income continued

	2023 £m	2022 £m
Gains less losses on financial instruments at fair value
Held for trading derivatives	1	6
Financial assets at fair value(1)	2	(19)
Ineffectiveness arising from fair value hedges (note 3.1.3.2)	33	46
Amounts recycled to profit and loss from cash flow hedges(2) (note 3.1.3.2)	2	(4)
Ineffectiveness arising from cash flow hedges (note 3.1.3.2)	(50)	(46)
	(12)	(17)
Other operating income
Net fee and commission income	128	134
Margin on foreign exchange derivative brokerage	19	19
Gains on sale of financial assets at FVOCI	1	4
Share of JV loss after tax	-	(4)
Other income	4	4
	152	157
Total non-interest income	140	140

(1)   Included within financial assets at fair value is a credit risk gain on loans and advances at fair value of £Nil (2022: £1m gain), and a fair value gain on equity investments of £2m (2022: £2m gain).

(2)   In respect of terminated hedges.

The Group's unrecognised share of losses of JVs for the year was £6m (2022: £8m). For loss‑making entities, subsequent profits earned are not recognised until previously unrecognised losses are extinguished. On a cumulative basis, the Group's unrecognised share of losses net of unrecognised profits of JVs is £15m (2022: £9m).

Non-interest income includes the following fee and commission income disaggregated by income type:

	2023 £m	2022  £m
Current account and debit card fees	100	102
Credit cards	63	52
Insurance, protection and investments	7	8
Other fees(1)	16	26
Total fee and commission income	186	188
Total fee and commission expense	(58)	(54)
Net fee and commission income	128	134

(1)   Other fees include mortgages, invoice and asset finance and ATM fees.

2.3 Operating expenses

	2023 £m	2022 £m
Staff costs	432	435
Property and infrastructure	74	38
Technology and communications	130	119
Corporate and professional services	240	135
Depreciation, amortisation and impairment	116	179
Other expenses	181	163
Total operating and administrative expenses	1,173	1,069

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.3 Operating expenses continued

Staff costs comprise the following items:

	2023 £m	2022 £m
Salaries and wages	275	254
Social security costs	32	30
Defined contribution pension expense	56	50
Defined benefit pension credit (note 3.3)	(50)	(24)
Compensation costs	313	310
Equity based compensation(1)	6	4
Bonus awards	22	27
Performance costs	28	31
Redundancy and restructuring	7	3
Temporary staff costs	24	13
Other(2)	60	78
Other staff costs	91	94
Total staff costs	432	435

(1)   Includes National Insurance on equity based compensation.

(2)   Includes a one-off cost of living allowance of £Nil (2022: £7m).

Phase 2 of the ongoing Pension Increase Exchange (PIE) exercise completed in FY22, and the third and final phase is due to complete in the final quarter of calendar year 2023. The defined benefit pension credit in the current year therefore includes no impact (2022: £10m credit) arising from the PIE exercise. A PIE gives members the option to exchange future increases on their pensions for a one-off uplift to their current pension.

The average number of FTE employees of the Group during the year was made up as follows:

	2023 Number	2022 Number
Managers(1)	3,436	2,574
Clerical staff	3,730	4,292
	7,166	6,866

(1)   Includes a combination of managers with and without staff responsibilities.

The average monthly number of employees was 8,110 (2022: 7,829). All staff are contracted employees of the Group and its subsidiary undertakings. The average figures above do not include contractors.

Auditor's remuneration included within other operating and administrative expenses:

	2023 £'000	2022 £'000
Fees payable to the Company's auditor for the audit of the Company's financial statements	25	24
Fees payable to the Company's auditor for the audit of the Company's subsidiaries(1)	4,787	4,564
Total audit fees	4,812	4,588
Audit related assurance services	562	262
Other assurance services	276	1,877
Total non-audit fees	838	2,139
Fees payable to the Company's auditor in respect of associated pension schemes	126	107
Total fees payable to the Company's auditor	5,776	6,834

(1)   Includes the audit of the Group's structured entities.

Non-audit fees of £1m (2022: £2m) were paid to the auditor during the year for services including UN PRB and the second Payment Services Directive assurance, the review of the Interim Financial Report, PRA Written Auditor Reporting, comfort letters for the global medium-term note and covered bond programmes, client money reviews and profit attestations.

Out of pocket expenses of £26k (2022: £13k) were borne by the Group during the year.

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.4 Taxation

Accounting policy Deferred tax assets and liabilities are recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised, or the deferred tax liability is settled. A deferred tax asset is recognised for unused tax losses and unused tax credits only if it is probable that future taxable amounts will arise against which those temporary differences and losses may be utilised. Critical accounting estimates and judgements In arriving at the Group's deferred tax asset balance of £193m (2022: £146m), significant judgement is exercised on the component of deferred tax assets that relate to tax losses carried forward of £267m (2022: £302m). Consistent with prior years, deferred tax assets are recognised to the extent that they are expected to be utilised over six years from the balance sheet date. Gross losses of £83m are not forecast to reverse within this period and have been derecognised (2022: £Nil). If instead of six years the period were five years or seven years, the recognised deferred tax asset would decrease to £148m or increase to £213m respectively, with the latter being full recognition of all losses. If Group profit forecasts were 10% lower than anticipated, the deferred tax asset would be £168m. If Group profit forecasts were 10% higher than anticipated, the deferred tax asset would be £213m. All tax assets arising will be used within the UK.

	2023 £m	2022 £m
Current tax
Current year	36	81
Adjustment in respect of prior years	2	4
	38	85
Deferred tax
Current year	65	(21)
Adjustment in respect of prior years	(4)	(6)
	61	(27)
Tax expense for the year	99	58

The tax assessed for the year differs from that arising from applying the standard rate of corporation tax in the UK of 22% (2022: 19%). 22% is the average standard rate for the full financial year, comprising 19% to 1 April 2023 then 25% to 30 September 2023. A reconciliation from the expense implied by the standard rate to the actual tax expense is as follows:

	2023 £m	2022 £m
Profit on ordinary activities before tax	345	595
Tax expense based on the standard rate of corporation tax in the UK of 22% (2022: 19%)	76	113
Effects of:
Disallowable expenses	5	4
Conduct indemnity adjustment	(1)	(12)
Deferred tax assets derecognised/(recognised)	19	(83)
Impact of rate changes	9	23
AT1 distribution	(12)	(13)
Banking surcharge	5	28
Adjustments in respect of prior years	(2)	(2)
Tax expense for the year	99	58

In February 2022 legislation was enacted to reduce the banking surcharge from 8% to 3%, and to increase the threshold below which it is not chargeable to £100m (previously £25m). The impact on deferred tax was reflected in the large rate change charge for the year ended 30 September 2022. The changes are effective for current tax from 1 April 2023 resulting in an average tax rate for the year of 22% (comprising 19% for the six months to 1 April 2023 then 25% to 30 September 2023).

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year

2.4 Taxation continued

The Group's effective tax rate is 28.7% (2022: 9.7%). The primary driver of this is the derecognition of losses following a reduction in forecast profits over the corporate planning horizon, and a fall in the cash flow hedge reserve due to market conditions. The current period rate change charge of £9m arises mainly in relation to the defined benefit pension scheme, where current period amounts that are recognised in the income statement are reflected at 22%, while the deferred tax liability on the ultimate accounting surplus is measured at 35%. The Group has recognised deferred tax in relation to the following items in the balance sheet, income statement, and statement of other comprehensive income:

Movement in deferred tax asset/(liability)

	Acquisition accounting adjustments £m	Cash flow hedge reserve £m	Gains on financial instruments at FVOCI £m	Tax losses carried forward £m	Capital allowances £m	Pension spreading £m	Other temporary differences £m	Total deferred tax assets £m	Defined benefit pension scheme surplus £m	Total deferred tax liabilities £m
At 1 October 2021	(10)	(9)	(15)	255	124	5	27	377	(296)	(296)
Income statement credit/(charge)	2	2	-	47	(13)	-	(2)	36	(9)	(9)
Other comprehensive income charge	-	(260)	(1)	-	-	(5)	(1)	(267)	(45)	(45)
At 30 September 2022	(8)	(267)	(16)	302	111	-	24	146	(350)	(350)
Income statement credit/(charge)	2	1	-	(35)	(8)	-	(4)	(44)	(17)	(17)
Other comprehensive income credit	-	77	14	-	-	-	-	91	188	(188)
At 30 September 2023	(6)	(189)	(2)	267	103	-	20	193	(179)	(179)

Other temporary differences include the IFRS 9 transitional adjustment of £9m and equity based compensation of £5m (2022: £11m and £6m respectively). The deferred tax assets and liabilities detailed above arise primarily in Clydesdale Bank PLC which has a right to offset current tax assets against current tax liabilities and is party to a Group Payment Arrangement for payments of tax to HMRC. Therefore, in accordance with IAS 12, deferred tax assets and deferred tax liabilities have also been offset in this year where they relate to payments of income tax to this tax authority.

The Group has unrecognised deferred tax assets of £21m (2022: £Nil) (£83m gross loss valued at the mainstream rate of 25%) representing tax losses whose use is not forecast within the foreseeable future.

On 22 November 2023 the Chancellor announced that the authorised surplus payments charge will be reduced from 35% to 25% from 6 April 2024. If this measure had been enacted on the balance sheet date the deferred tax liability in respect of the defined benefit pension surplus would have reduced from £179m to £128m.

2.5 Earnings per share

Accounting policy Basic EPS Basic EPS is calculated by taking the profit attributable to ordinary shareholders of the parent company and then dividing this by the weighted average number of ordinary shares outstanding during the year after deducting the weighted average of the Group's holdings of its own shares. Diluted EPS This requires the weighted-average number of ordinary shares in issue to be adjusted to assume conversion of all dilutive potential ordinary shares. These arise from awards made under equity based compensation schemes. Share awards with performance conditions attaching to them are not considered to be dilutive unless these conditions have been met at the reporting date.

	2023 £m	2022 £m
Profit attributable to ordinary equity holders for the purposes of basic and diluted EPS	192	467

	2023	2022
Weighted-average number of ordinary shares in issue (millions)
- Basic	1,375	1,441
Adjustment for share awards made under equity based compensation schemes	4	3
- Diluted	1,379	1,444
Basic earnings per share (pence)	14.0	32.4
Diluted earnings per share (pence)	13.9	32.3

Basic earnings per share has been calculated after deducting 0.2m (2022: 0.3m) ordinary shares representing the weighted-average of the Group's holdings of its own shares.

Note 4.1 provides details of the share buyback programme including buybacks intended for beyond 30 September 2023.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1 Financial instruments

Accounting policy Recognition and derecognition Financial instruments are recognised when the Group becomes party to the contractual provisions of the instrument. Purchases and sales of financial assets classified within FVTPL or FVOCI are recognised on trade date. The Group derecognises a financial asset when the contractual cash flows from the asset expire or it transfers the right to receive contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership are transferred. Financial liabilities are derecognised when the Group has discharged its obligation to the contract, or the contract is cancelled or expires. Note 3.1.4 contains information on the valuation techniques and methodologies applied to financial instruments and their classification within the fair value hierarchy. Classification and measurement The Group measures a financial asset or liability on initial recognition at its fair value, plus or minus transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability (with the exception of financial assets or liabilities at FVTPL, where transaction costs are recognised directly in the income statement as they are incurred). Subsequent accounting for a financial asset is determined by the classification of the asset depending on the underlying business model and contractual cash flow characteristics. This results in classification within one of the following categories: (i) amortised cost (note 3.1.1); (ii) FVOCI (note 3.1.2); or (iii) FVTPL (note 3.1.3). Repurchase agreements Securities sold subject to sale and repurchase agreements ('repo') are retained in their respective balance sheet categories. The associated liabilities are included in amounts due to other banks based upon the counterparties to the transactions. The difference between the sale and repurchase price of repos is treated as interest and accrued over the life of the agreements using the effective interest method. Offsetting This can only occur, and the net amount be presented on the balance sheet, when the Group currently has a legally enforceable right to offset the recognised amounts and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Presentation of risk, offsetting and maturity disclosures Certain disclosures required under IFRS 7 'Financial instruments: disclosures' and IAS 1 'Presentation of financial statements' have been included within the Risk management section of this results announcement.

3.1.1 Financial instruments at amortised cost

Accounting policy A financial asset is measured at amortised cost when: (1) the asset is held within a business model whose objective is achieved by collecting contractual cash flows; and (2) the contractual terms give rise to cash flows on specified dates which are solely payments of principal and interest on the principal amount outstanding. All financial liabilities are measured at amortised cost, except for financial liabilities at FVTPL. Such liabilities include derivative contracts, other than those which are financial guarantee contracts or designated and effective hedging instruments. Financial assets classified at amortised cost are subject to expected credit loss (ECL) impairment requirements. At each reporting date, the Group assesses financial assets measured at amortised cost, as well as loan commitments and financial guarantees not measured at FVTPL, for impairment. The impairment loss allowance is calculated using an ECL methodology and reflects: (i) an unbiased and probability weighted amount; (ii) the time value of money which discounts the impairment loss; and (iii) reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. ECL methodology is based upon the combination of PD, LGD and EAD estimates that consider a range of factors that impact on credit risk and consequently the level of impairment loss provisioning. The Group uses reasonable and supportable forecasts of future economic conditions in estimating the ECL allowance. The methodology and assumptions used in the ECL calculation are reviewed regularly and updated as necessary. ECLs are assessed either collectively or individually. The Group's impairment policy for debt instruments at FVOCI is included in note 3.1.2. The impact of the ECL methodology on amounts due from other banks balances held at amortised cost is immaterial. ECLs relating to loan commitments and financial guarantees can be found in note 3.7. SICR assessment and staging The ECL is calculated as either 12-month (Stage 1) or lifetime depending on whether the financial asset has suffered a SICR since origination (Stage 2) or has otherwise become credit impaired (Stage 3) as at the reporting date. The Group uses a PD threshold curve (distinct for each portfolio) to assess for a SICR in addition to the 30 DPD and 90 DPD backstops for recognising Stage 2 and Stage 3 ECLs respectively.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.1 Financial instruments at amortised cost continued

Financial assets can move between stages when the relevant staging criteria are no longer satisfied subject to certain restrictions for forborne assets. If the level of impairment loss reduces in a subsequent year, the previously recognised impairment loss allowance is reversed and recognised in the income statement. POCI financial assets are those which are credit impaired upon initial recognition (being the point at which the asset was either purchased or originated). Once a financial asset is classified as POCI, it remains as such until derecognition irrespective of its credit quality at each reporting date. POCI financial assets are disclosed separately from those financial assets in Stage 3. The Group regards the date of acquisition as the origination date for purchased portfolios. The Group has not made use of the low credit risk option under IFRS 9 for loans and advances at amortised cost. Regardless of the calculation basis, the Group generates a modelled ECL allowance at the individual financial instrument level. The modelled ECL output can be supplemented by management adjustments (MAs) where appropriate. Write-offs and recoveries When there is no reasonable expectation of recovery for a loan, it is written off against the related provision. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the impairment charge in the income statement. Critical accounting estimates and judgements ECL methodology requires the Group to apply estimates and exercise judgement when calculating an impairment allowance for credit exposures. Further information on the chosen scenarios, macroeconomic assumptions, and scenario weightings used in the ECL calculation, including the use of MAs together with sensitivity analysis, is contained in the credit risk section of Risk management on pages 40 to 47.

3.1.1.1 Loans and advances to customers

Accounting policy Loans and advances to customers arise when the Group provides money directly to a customer and includes mortgages, term lending, overdrafts, credit card lending, lease finance and invoice financing. They are recognised initially at fair value and are subsequently measured at amortised cost, using the effective interest method and adjusted for ECLs. They are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership. Leases entered into by the Group as lessor, where the Group transfers substantially all the risks and rewards of ownership to the lessee, are classified as finance leases. The leased asset is not held on the Group balance sheet; instead, a finance lease is recognised representing the minimum lease payments receivable under the terms of the lease, discounted at the rate of interest implicit in the lease. Interest income is recognised in interest receivable, allocated to accounting years to reflect a constant periodic rate of return.

	2023 £m	2022 £m
Gross loans and advances to customers	73,295	73,146
Impairment provisions on credit exposures(1)	(612)	(454)
Fair value hedge adjustment	(492)	(941)
	72,191	71,751

(1)   ECLs on off-balance sheet exposures of £5m (2022: £3m) are presented as part of the provisions for liabilities and charges balance (note 3.7).

The Group has a portfolio of fair valued business loans of £59m (2022: £70m) which are classified separately as financial assets at FVTPL (note 3.1.3.1). Combined with the above, this is equivalent to total loans and advances to customers of £72,250m (2022: £71,821m).

The fair value hedge adjustment represents an offset to the fair value movement on hedging derivatives transacted to manage the interest rate risk inherent in the Group's fixed rate mortgage portfolio.

The Group has transferred a proportion of mortgages to the securitisation and covered bond programmes (note 3.1.5).

Lease finance

The Group leases a variety of assets to third parties under finance lease arrangements, including vehicles and general plant and machinery. The cost of assets acquired by the Group during the year for the purpose of letting under finance leases and hire purchase contracts amounted to £71m (2022: £46m) and £557m (2022: £405m) respectively.

Finance lease receivables are presented in the statement of financial position within loans and advances to customers. The maturity analysis of lease receivables, including the undiscounted lease payments to be received, is as follows:

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.1.1 Loans and advances to customers continued

Gross investment in finance lease and hire purchase receivables

	2023 £m	2022 £m
Less than 1 year	373	269
1-2 years	223	170
2-3 years	158	117
3-4 years	95	66
4-5 years	59	46
More than 5 years	31	24
	939	692
Unearned finance income	(83)	(45)
Net investment in finance lease and hire purchase receivables	856	647

Finance income recognised on the net investment in the lease was £38m (2022: £21m) and is included in interest income (note 2.1).

Impairment provisions on credit exposures

	2023 £m	2022 £m
Opening balance	454	496
ECL charge for the year(1)	307	57
Amounts written off	(187)	(129)
Recoveries of amounts written off in previous years	38	30
Closing balance	612	454

(1)   The £309m charge (2022: £52m) for impairment losses on credit exposures shown in the income statement also includes a £2m charge (2022: £5m credit) in respect of off-balance sheet ECLs which are presented as part of the provisions for liabilities and charges balance (note 3.7).

3.1.1.2 Cash and balances with central banks

Accounting policy Cash and balances with central banks are measured at amortised cost, using the effective interest method, and are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership. These balances form part of the Group's treasury-related activities and are mostly short term in nature and repayable on demand or within a short timescale, generally three months. The impact of the ECL impairment requirements (note 3.1.1) on the Group's cash and balances with central banks is immaterial.

	2022 £m	2021 £m
Cash assets	1,089	1,206
Balances with central banks (including EU payment systems)	10,193	11,015
	11,282	12,221
Less mandatory deposits with central banks(1)	(275)	(266)
Included in cash and cash equivalents (note 5.4)	11,007	11,955

(1)   Mandatory deposits are not available for use in the Group's day-to-day business and are non-interest bearing.

3.1.1.3 Customer deposits

	2023 £m	2022 £m
Interest bearing demand deposits	39,292	46,457
Term deposits	22,775	13,951
Non-interest bearing demand deposits	4,542	4,952
	66,609	65,360
Accrued interest	218	74
	66,827	65,434

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.1.4 Debt securities in issue

Accounting policy Debt securities comprise short and long-term debt issued by the Group including, medium-term notes, subordinated debt, covered bonds and RMBS notes. Debt securities are initially recognised at fair value, being the issue proceeds, net of transaction costs incurred. These instruments are subsequently measured at amortised cost using the effective interest method resulting in premiums, discounts and associated issuance costs being recognised in the income statement over the life of the instrument. Where relevant, fair value hedge adjustments have been applied.

	Medium-term notes  £m	Subordinated debt £m	Securitisation £m	Covered bonds £m	Total £m
2023
Debt securities	2,584	938	1,729	4,392	9,643
Accrued interest	28	14	11	23	76
	2,612	952	1,740	4,415	9,719
2022
Debt securities	2,236	899	1,875	3,450	8,460
Accrued interest	13	14	5	17	49
	2,249	913	1,880	3,467	8,509

Key movements in the year are shown in the table below⁽¹⁾. Full details of all notes in issue can be found at https://www.virginmoneyukplc.com/investor‑relations/debt-investors/

	2023				2022
	Issuances		Redemptions		Issuances		Redemptions
	Denomination	£m	Denomination	£m	Denomination	£m	Denomination	£m
Medium-term notes	EUR, GBP	747	EUR	432	-	-	-	-
Securitisation	GBP	900	USD, GBP	1,012	GBP	700	USD, GBP	1,264
Covered bonds	EUR, GBP	926	-	-	EUR, GBP	1,780	-	-
		2,573		1,444		2,480		1,264

(1)   Other movements relate to foreign exchange, hedging adjustments and the capitalisation and amortisation of issuance costs.

The following tables provide a breakdown of the medium-term notes and subordinated debt by instrument as at 30 September (excluding accrued interest):

Medium-term notes

	2023 £m	2022 £m
VM UK 3.125% fixed-to-floating rate callable senior notes due 2025	300	299
VM UK 4% fixed rate reset callable senior notes due 2026	463	444
VM UK 3.375% fixed rate reset callable senior notes due 2026	330	317
VM UK 4% fixed rate reset callable senior notes due 2027	350	331
VM UK 2.875% fixed rate reset callable senior notes due 2025	418	413
VM UK 0.375% fixed rate reset callable senior notes due 2024	-	432
VM UK 4.625% fixed rate reset callable senior notes due 2028	421	-
VM UK 7.625% fixed rate reset callable senior notes due 2029	302	-
	2,584	2,236

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.1.4 Debt securities in issue continued

Subordinated debt

	2023 £m	2022 £m
VM UK 7.875% fixed rate reset callable subordinated notes due 2028	250	249
VM UK 5.125% fixed rate reset callable subordinated notes due 2030	424	400
VM UK 2.625% fixed rate reset callable subordinated notes due 2031	264	250
	938	899

Details of securitisation and covered bond issuances are included in note 3.1.5.

3.1.1.5 Due to other banks

	2023 £m	2022 £m
Secured loans	6,291	7,230
Securities sold under agreements to repurchase(1)	552	1,205
Transaction balances with other banks	19	17
Deposits from other banks	77	50
	6,939	8,502

(1)   The underlying securities sold under agreements to repurchase have a carrying value of £1,047m (2022: £1,873m) and relate to internally held debt securities, backed by mortgage assets, issued from the Group's securitisation programmes (note 3.1.5).

Secured loans comprise amounts drawn under the TFSME scheme (including accrued interest).

3.1.2 Financial assets at fair value through other comprehensive income

Accounting policy A financial asset is measured at FVOCI when: (i) the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and (ii) the contractual terms give rise to cash flows on specified dates which are solely payments of principal and interest on the principal amount outstanding unless the financial asset is designated at FVTPL on initial recognition. An option for equity investments that are not held for trading can be taken to classify them at FVOCI where an irrevocable election is made at initial recognition. This is available for each separate investment, and the Group has not exercised this option for any equity investments. Interest income and impairment gains and losses on FVOCI assets are measured in the same manner as for assets measured at amortised cost and recognised in the income statement, with all other gains or losses recognised in other comprehensive income as a separate component of equity in the year in which they arise. Gains and losses arising from changes in fair value are included as a separate component of equity until sale, when the cumulative gain or loss is transferred to the income statement. For all FVOCI assets, the gain or loss is calculated with reference to the gross carrying amount. Debt instruments at FVOCI are subject to the same impairment criteria as amortised cost financial assets (note 3.1.1), with the ECL element recognised directly in the income statement. As the financial asset is fair valued through other comprehensive income, the change in its value includes the ECL element, with the remaining fair value change recognised in other comprehensive income. Any reversal of the ECL is recorded in the income statement up to the value recognised previously. A low credit risk option is available which allows entities not to assess whether there has been a significant increase in credit risk since initial recognition where the financial asset is deemed as being of low credit risk at the reporting date. The result of exercising the low credit risk exemption is that the financial assets are classed under Stage 1 with a 12-month ECL calculation applied. The Group exercises the low credit risk option for debt instruments classified as FVOCI, recognising the high credit quality of the instruments. Consequently, no material ECL provision is held for these financial assets.

Financial assets at FVOCI consists of £6,184m of listed securities (2022: £5,064m).

Note 3.1.4 contains further information on the valuation methodology applied to financial instruments at FVOCI at 30 September 2023 and their classification within the fair value hierarchy. Details of the credit quality of financial assets is provided in the Risk management section.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.3 Financial assets at fair value through profit or loss

Accounting policy A financial asset is measured at FVTPL if it: (i) does not fall into one of the business models for amortised cost (note 3.1.1) or FVOCI (note 3.1.2); (ii) is specifically designated as FVTPL on initial recognition in order to eliminate or significantly reduce a measurement mismatch; or (iii) is classified as held for trading. A financial instrument is classified as held for trading if it is acquired principally for the purpose of selling in the near term, forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative not in a qualifying hedge relationship. Associated gains and losses are recognised in the income statement as they arise (note 2.2). Derivatives The Group uses derivative financial instruments to manage exposure to interest rate, contractually specified inflation and foreign currency risk. Interest rate risk arises primarily due to the mismatch, or duration, between repricing dates of interest-bearing assets and liabilities, or basis risk from assets and liabilities repricing to different reference rates. Contractually specified inflation risk arises from financial instruments whose cash flows are linked to an inflation index. Currency risk arises when assets and liabilities are not denominated in the functional currency of the entity. Derivatives are recognised on the balance sheet at fair value on trade date and are measured at fair value throughout the life of the contract. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. The notional amount of a derivative contract is not recorded on the balance sheet but is disclosed as part of this note. Netting Derivative assets and liabilities are offset against collateral received and paid respectively, and the net amount reported in the balance sheet only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis. Amounts offset on the balance sheet represent the Group's centrally cleared derivative financial instruments and collateral paid to/from central clearing houses, which meet the criteria for offsetting under IAS 32. Hedge accounting The Group elects to apply hedge accounting for the majority of its risk management activity that uses derivatives. This results in greater alignment in the timing of recognition of gains and losses on hedged items and hedging instruments and therefore reduces income statement volatility. The Group does not have a trading book, however derivatives that do not meet the hedging criteria, or for which hedge accounting is not applied, are classified as held for trading. The Group has elected, as a policy choice permitted under IFRS 9, to continue to apply hedge accounting in accordance with IAS 39. The method of recognising the fair value gain or loss on a derivative depends on whether it is designated as a hedging instrument and the nature of the item being hedged. Certain derivatives are designated as either hedges of highly probable future cash flows attributable to a recognised asset or liability, or a highly probable forecast transaction (a cash flow hedge); or hedges of the fair value of recognised assets or liabilities or firm commitments (a fair value hedge). Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity. Specifically, the separate component of equity (note 4.1) is adjusted to the lesser of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the expected future cash flows on the hedged item from the inception of the hedge. Any remaining gain or loss on the hedging instrument is recognised in the income statement. The carrying value of the hedged item is not adjusted. Amounts accumulated in equity are transferred to the income statement in the period in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge is discontinued or no longer meets the criteria for hedge accounting, any cumulative gain or loss remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. This movement in the fair value of the hedged item is made as an adjustment to the carrying value of the hedged asset or liability. Where the hedged item is derecognised from the balance sheet, the adjustment to the carrying amount of the asset or liability is immediately transferred to the income statement. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item is amortised to the income statement over the remaining life of the asset or liability. Derivatives held for trading Changes in value of held for trading derivatives are immediately recognised in the income statement (note 2.2).

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.3.1 Loans and advances to customers

Included in financial assets at FVTPL is a historical portfolio of loans. 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 £59m (2022: £70m). The cumulative loss in the fair value of the loans attributable to changes in credit risk amounts to £1m (2022: £1m); the change for the current year is £Nil (2022: decrease of £1m), of which £Nil (2022: £1m) has been recognised in the income statement.

3.1.3.2 Derivatives

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

	2023 £m	2022 £m
Fair value of derivative financial assets
Designated as hedging instruments	96	277
Designated as held for trading	39	65
	135	342
Fair value of derivative financial liabilities
Designated as hedging instruments	204	201
Designated as held for trading	86	126
	290	327

Cash collateral totalling £267m (2022: £241m) has been pledged and £33m has been received (2022: £38m) in respect of derivatives with other banks. These amounts are included within due from and due to other banks respectively. Net collateral received from clearing houses, which did not meet offsetting criteria, totalled £116m (2022: £149m) and is included within other assets and other liabilities.

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.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.3.2 Derivatives continued

Total derivative contracts

	2023			2022
	Notional contract amount £m	Fair value of assets £m	Fair value of liabilities £m	Notional contract amount £m	Fair value of assets £m	Fair value of liabilities £m
Derivatives designated as hedging instruments
Cash flow hedges
Interest rate swaps (gross)	51,185	1,295	545	35,753	1,988	930
Less: net settled interest rate swaps(1)	(49,888)	(1,222)	(531)	(33,188)	(1,803)	(900)
Interest rate swaps (net)(2)	1,297	73	14	2,565	185	30
Fair value hedges
Interest rate swaps (gross)(3)	19,203	1,219	862	16,600	1,201	636
Less: net settled interest rate swaps(1)	(18,113)	(1,206)	(820)	(14,611)	(1,144)	(570)
Interest rate swaps (net)(2)	1,090	13	42	1,989	57	66
Cross currency swaps(2)	2,350	10	148	2,113	35	105
	3,440	23	190	4,102	92	171
Total derivatives designated as hedging instruments	4,737	96	204	6,667	277	201
Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward foreign exchange(2)	654	7	9	599	26	20
Options(2)	-	-	-	1	-	-
	654	7	9	600	26	20
Interest rate related contracts
Interest rate swaps (gross)	1,910	47	50	1,411	52	66
Less: net settled interest rate swaps(1)	(753)	(43)	(1)	(665)	(50)	-
Interest rate swaps (net)(2)	1,157	4	49	746	2	66
Swaptions(2)	10	-	1	10	-	2
Options(2)	1,067	16	16	501	16	17
	2,234	20	66	1,257	18	85
Commodity related contracts	167	12	11	199	21	21
Total derivatives designated as held for trading	3,055	39	86	2,056	65	126

(1)   Presented within other assets and other liabilities.

(2)   Presented within derivative financial instruments.

(3)   Includes inflation and interest rate risk related swaps detailed in the summary of hedging instruments in designated hedge relationships table on page 98.

Hedge accounting

The hedging strategy of the Group is divided into micro hedges, where the hedged item is a distinctly identifiable asset or liability, and portfolio hedges, where the hedged item is a homogeneous portfolio of assets or liabilities.

In some hedge accounting relationships, the Group designates risk components of hedged items as follows:

·   Benchmark interest rate risk as a component of interest rate risk, such as the SONIA component.

·   Exchange rate risk for foreign currency financial assets and financial liabilities.

·   Inflation risk where it is a contractually specified component of a debt instrument.

·   Components of cash flows of hedged items, for example cash flows linked to benchmark rates such as SONIA.

Other risks such as credit risk and liquidity risk are managed by the Group but are not included in the hedge accounting relationship. Changes in the designated risk component usually account for the largest portion of the overall change in fair value or cash flows of the hedged item.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.3.2 Derivatives continued

Portfolio cash flow hedges

The Group applies macro cash flow hedge accounting to a portion of its floating rate financial assets and liabilities. The hedged cash flows are a group of forecast transactions that result in cash flow variability from resetting of interest rates, reinvestment of financial assets, or refinancing and rollovers of financial liabilities. This cash flow variability can arise on recognised assets or liabilities or highly probable forecast transactions. The hedged items are designated as the gross asset or liability positions allocated to time buckets based on projected repricing and interest profiles. The Group aims to maintain a position where the principal amount of the hedged items is greater than or equal to the notional amount of the corresponding interest rate swaps used as the hedging instruments. The hedge accounting relationship is reassessed on a monthly basis with the composition of hedging instruments and hedged items changing frequently in line with the underlying risk exposures. If necessary, the hedge relationships are de-designated and redesignated based on the effectiveness test results.

Portfolio fair value hedges

The Group applies macro fair value hedging to a portion of its fixed rate mortgages. The Group determines hedged items by identifying portfolios of homogeneous loans based on their contractual maturity and other risk characteristics. Loans within the identified portfolios are allocated to repricing time buckets based on expected, rather than contractual, repricing dates. The hedging instruments are designated to those repricing time buckets. Hedge effectiveness is measured on a monthly basis, by comparing fair value movements of the designated proportion of the bucketed loans due to the hedged risk against the fair value movements of the derivatives.

The aggregated fair value changes in the hedged loans are recognised on the Group's balance sheet as an asset. At the end of every month, in order to minimise the ineffectiveness from early repayments and accommodate new exposures, the Group voluntarily de-designates the hedge relationships and redesignates them as new hedges. Fair value hedging of fixed rate deposits was discontinued in 2020, and the hedge adjustment recognised on the Group's balance sheet is amortised to profit and loss over the life of the hedged item.

Micro fair value hedges

The Group uses this hedging strategy on GBP, inflation or foreign currency denominated fixed rate assets held at FVOCI and GBP and foreign currency denominated fixed rate debt issuances by the Group. Where assets and liabilities are exposed to multiple risk components, for example interest rate and foreign currency risk, these components are simultaneously designated as hedged risks within the same hedge relationship.

Hedge ineffectiveness

Hedge ineffectiveness can arise from:

·   mismatches between the contractual terms of the hedged item and hedging instrument, including basis differences;

·   differences in timing of cash flows of hedged items and hedging instruments;

·   changes in expected timings and amounts of forecast future cash flows; and

·   derivatives used as hedging instruments having a non-zero fair value at the time of designation.

Additionally, for portfolio fair value hedges of the Group's fixed rate mortgage portfolio, ineffectiveness also arises from the difference between forecast and actual repayments (i.e. prepayment risk).

The Group has no remaining hedge relationships exposed to LIBOR and as no uncertainty remains regarding interest rate benchmark reform, the Group no longer applies the reliefs provided by 'Interest Rate Benchmark Reform - Phase 1 and Phase 2 amendments' to hedge accounting. Further detail on the Group's approach to managing the risk of LIBOR replacement, including derivatives designated as held for trading that have not yet transitioned, is provided on page 67.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.3.2 Derivatives continued

Summary of hedging instruments in designated hedge relationships

In the table below, the Group sets out the accumulated adjustments arising from the corresponding continuing hedge relationships, irrespective of whether or not there has been a change in hedge designation during the year:

	2023				2022
	Notional contract amount £m	Carrying amount		Change in fair value of hedging instrument in the  year used for ineffectiveness measurement(2) £m	Notional contract amount £m	Carrying amount		Change in fair value of hedging instrument in the  year used for ineffectiveness measurement(2) £m
		Assets £m	Liabilities £m			Assets £m	Liabilities £m
Cash flow hedges
Interest rate risk
Interest rate swaps(1)	51,185	1,295	545	(318)	35,753	1,988	930	916
Total derivatives designated as cash flow hedges	51,185	1,295	545	(318)	35,753	1,988	930	916
Fair value hedges
Interest rate risk
Interest rate swaps(1)	17,683	983	257	(368)	16,150	1,059	361	1,052
Inflation and interest rate risk
Inflation linked interest rate swaps(1)	1,520	236	606	43	450	142	275	96
Foreign exchange and interest rate risk
Cross currency swaps	2,350	10	148	(58)	2,113	35	105	6
Total derivatives designated as fair value hedges	21,553	1,229	1,011	(383)	18,713	1,236	741	1,154

(1)   As shown in the total derivatives contracts table on page 96, for centrally cleared derivatives, where the IAS 32 'Financial instruments: presentation' netting criteria is met, the derivative balances are offset within other assets. For all other derivatives, the derivative balances are presented within derivative financial instruments.

(2)   Changes in fair value of cash flow hedging instruments are recognised in other comprehensive income. Changes in fair value of fair value hedging instruments are recognised in the income statement in non-interest income.

Summary of hedged items in designated hedge relationships

In the table below, the Group sets out the accumulated adjustments arising from the corresponding continuing hedge relationships, irrespective of whether or not there has been a change in hedge designation during the year.

	2023			2022
	Change in fair value of hedged item in the year used for ineffectiveness measurement £m	Cash flow hedge reserve		Change in fair value of hedged item in the year used for ineffectiveness measurement £m	Cash flow hedge reserve
		Continuing hedges £m	Discontinued hedges £m		Continuing hedges £m	Discontinued hedges £m
Cash flow hedges
Interest rate risk
Gross floating rate assets and gross floating rate liabilities(1)	268	625	59	(962)	979	(14)
Total	268	625	59	(962)	979	(14)

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.3.2 Derivatives continued

	2023				2022
	Carrying amount of hedged items		Accumulated hedge adjustment on the hedged  item £m	Change in fair  value of hedged items in the year used for ineffectiveness measurement £m	Carrying amount of hedged items		Accumulated hedge adjustment  on the hedged  item £m	Change in fair  value of hedged  items in the year used for ineffectiveness measurement £m
	Assets £m	Liabilities £m			Assets £m	Liabilities £m
Fair value hedges
Interest rate risk
Fixed rate mortgages(3)	10,864	-	(492)	426	9,520	-	(941)	(779)
Fixed rate customer deposits(4)	-	-	-	-	-	-	(2)	-
Fixed rate FVOCI debt instruments(5)	2,692	-	(568)	92	2,443	-	(613)	(629)
Fixed rate issuances(2)	-	(2,810)	234	(116)	-	(2,392)	350	388
Inflation and interest rate risk
Fixed rate FVOCI debt instruments(5)	1,116	-	(92)	(43)	589	-	(105)	(96)
Foreign exchange and interest rate risk
Fixed rate currency FVOCI debt instruments(5)	64	-	(2)	1	76	-	(3)	(3)
Fixed rate currency issuances(2)	-	(2,156)	140	56	-	(1,954)	83	11
Total	14,736	(4,966)	(780)	416	12,628	(4,346)	(1,231)	(1,108)

(1)   Highly probable future cash flows arising from loans and advances to customers, due to customers and debt securities in issue.

(2)   Hedged item is recorded in debt securities in issue.

(3)   Hedged item and the cumulative fair value changes are recorded in loans and advances to customers.

(4)   Hedge relationship was discontinued in 2020. The fair value adjustment taken will be amortised over the remaining life of the hedged items, and is recorded in customer deposits.

(5)   Hedged item is recorded in financial assets at FVOCI.

	2023				2022
	Hedge ineffectiveness recognised in income statement(1) £m	Effective portion recognised in other comprehensive income £m	Reclassified into income  statement as		Hedge ineffectiveness recognised in income statement(1) £m	Effective portion recognised in other comprehensive income £m	Reclassified into income statement as
			Net interest income £m	Non-interest income £m			Net interest income £m	Non-interest income £m
Cash flow hedges
Interest rate risk
Gross floating rate assets and gross floating rate liabilities	(50)	(268)	10	2	(46)	962	17	(4)
Total (losses)/gains on cash flow hedges	(50)	(268)	10	2	(46)	962	17	(4)

	Hedge ineffectiveness recognised in income
	2023 £m	2022 £m
Fair value hedges
Interest rate risk
Fixed rate mortgages	31	33
Fixed rate FVOCI debt instruments	3	(2)
Fixed rate issuances	-	1
Inflation and interest rate risk
Fixed rate FVOCI debt instruments	-	-
Foreign exchange and interest rate risk
Fixed rate currency FVOCI debt instruments	-	(1)
Fixed rate currency issuances	(1)	15
Total losses on fair value hedges(1)	33	46

(1)   Recognised in gains less losses on financial assets at fair value.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.3.3 Other

Included in other financial assets is £1m (2022: £7m) of unlisted securities and £1m (2022: £1m) of debt instruments.

3.1.4 Fair value of financial instruments

Accounting policy Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the valuation date. When available, the Group measures the fair value of a financial instrument using quoted prices in an active market for that instrument. Where no such active market exists for the particular asset or liability, the Group uses a valuation technique to arrive at the fair value, including the use of transaction prices obtained in recent arm's length transactions where possible, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. In doing so, fair value is estimated using a valuation technique that makes maximum possible use of market inputs and that places minimal possible reliance upon entity-specific inputs. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, which represents the fair value of the consideration paid or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Group recognises profits or losses on the transaction date. In certain limited circumstances, the Group applies the fair value measurement option to financial assets including loans and advances where the inherent market risks (principally interest rate and option risk) are individually hedged using appropriate interest rate derivatives. The loan is designated as being carried at FVTPL to offset the movements in the fair value of the derivative within the income statement and therefore avoid an accounting mismatch. When a loan is held at fair value, a statistical-based calculation is used to estimate credit losses attributable to adverse movements in credit risk on the assets held. This adjustment to the credit quality of the asset is then applied to the carrying amount of the loan to arrive at fair value and recognised in the income statement. Analysis of the fair value disclosures uses a hierarchy that reflects the significance of inputs used in measuring fair value. The level in the fair value hierarchy within which a fair value measurement is categorised is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. The fair value measurement hierarchy is as follows: ·   Level 1 - quoted prices (unadjusted) in active markets for an identical financial asset or liability. ·   Level 2 - inputs other than quoted prices within Level 1 that are observable for the financial asset or liability, either directly (as prices) or indirectly (derived from prices). ·   Level 3 - inputs for the financial asset or liability that are not based on observable market data (unobservable inputs). For the purpose of reporting movements between levels of the fair value hierarchy, transfers are recognised at the beginning of the reporting year in which they occur.

(a) Fair value of financial instruments recognised at amortised cost

The tables 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.

	2023		2022
	Carrying value £m	Fair value £m	Carrying value £m	Fair value £m
Financial assets
Loans and advances to customers(1)	72,191	71,611	71,751	69,277
Financial liabilities
Customer deposits(2)	66,827	66,625	65,434	65,069
Debt securities in issue(3)	9,719	9,788	8,509	8,515
Due to other banks(2)	6,939	6,959	8,502	8,485

(1)   Loans and advances to customers are categorised as Level 3 in the fair value hierarchy with the exception of £1,085m (2022: £1,098m) 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 £3,597m of listed debt (2022: £3,156m) which is categorised as Level 1.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.4 Fair value of financial instruments continued

The Group's fair values disclosed for financial instruments at amortised cost are based on the following methodologies and assumptions:

(a)   Loans and advances to customers - determined by firstly segregating them into portfolios which have similar characteristics. Contractual cash flows are then adjusted for ECLs and expectations of customer behaviour based on observed historic data. The cash flows are then discounted at a weighted average cost of capital (appropriate to the portfolio) to arrive at an estimate of their fair value.

(b)   Customer deposits - determined using a replacement cost method which assumes alternative funding is raised in the most advantageous market. The contractual cash flows have been discounted using a funding curve with credit spreads reflecting the tenor of each deposit.

(c)   Debt securities in issue - taken directly from quoted market prices where available or determined from a discounted cash flow model using current market rates for instruments of similar terms and maturity.

(d)   Due to other banks - determined from a discounted cash flow model using current market rates for instruments of similar terms and maturity.

(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 subsequent to initial recognition at fair value, using the fair value hierarchy described above:

	2023				2022
	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Financial assets
Held at FVOCI	6,184	-	-	6,184	5,064	-	-	5,064
Loans and advances to customers	-	59	-	59	-	70	-	70
Other	-	-	2	2	-	4	4	8
Derivatives	-	135	-	135	-	342	-	342
Total financial assets at fair value	6,184	194	2	6,380	5,064	416	4	5,484
Financial liabilities
Derivatives	-	290	-	290	-	327	-	327
Total financial liabilities at fair value	-	290	-	290	-	327	-	327

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

The Group's valuations for financial instruments that are measured subsequent to initial recognition at fair value are based on the following methodologies and assumptions:

(a)   Held at FVOCI - based on quoted closing market prices.

(b)   Loans and advances to customers - derived from data or valuation techniques based upon observable market data and non-observable inputs as appropriate to the nature and type of the underlying instrument.

(c)   Other (Level 2) - represents £Nil (2022: £4m) of Visa Inc. Series A preferred stock received following a conversion event in July 2022. This is calculated by taking the year end New York Stock Exchange share price for Visa inc. The preferred stock was sold in full during the year.

(d)   Other (Level 3) - represents unlisted equity investments for which the transaction price is considered the best representation of the exit price and is the Group's best estimate of fair value. The Visa Inc. Series B preferred stock received as partial consideration for the sale of the Group's share in Visa Europe, was sold in full during the year.

(e)   Derivative financial assets and liabilities - includes foreign exchange contracts, interest rate swaps, interest rate and currency option contracts, and currency swaps, and are obtained from discounted cash flow models or option pricing models as appropriate.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.4 Fair value of financial instruments continued

Level 3 movement analysis:

	2023		2022
	Financial assets at FVTPL £m	Derivative financial assets £m	Financial assets at FVTPL £m	Derivative financial assets £m
Balance at the beginning of the year	4	-	6	1
Fair value gains recognised(1)
In profit or loss - unrealised	-	-	-	(1)
Sales	(2)	-	-	-
Settlements	-	-	(2)	-
Balance at the end of the year	2	-	4	-

(1) Net gains or losses were recorded in non-interest income.

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

The Group has limited exposure to Level 3 fair value measurements. If all risks inherent in the valuations were to crystallise in their entirety, total assets would reduce by £2m which would be recognised directly in the income statement.

3.1.5 Securitisation and covered bond programmes

Accounting policy The Group sponsors the formation of structured entities, primarily for the purpose of facilitation of asset securitisation and covered bond transactions, the full details of which can be found in note 6.2 to the Company financial statements. The Group has no shareholding in these entities, but is exposed, or has rights, to variable returns and has the ability to affect those returns. The entities are consolidated in the Group's financial statements in accordance with note 1.4. Securitisation The Group has securitised a portion of its retail mortgage loan portfolio under master trust securitisation programmes. The securitised mortgage loans have been assigned at principal value to bankruptcy remote structured entities. The securitised debt holders have no recourse to the Group other than the principal and interest (including fees) generated from the securitised mortgage loan portfolio. The externally held securitised notes in issue are included within debt securities in issue (note 3.1.1.4). There are a number of notes held internally by the Group which are used as collateral for repurchases and similar transactions or for credit enhancement purposes. Covered bond A subset of the Group's retail mortgage loan portfolio has been ring-fenced and assigned to a bankruptcy remote limited liability partnership, Eagle Place Covered Bonds LLP, to provide a guarantee for the obligations payable on the covered bonds issued by the Group. The covered bond partnership is consolidated with the mortgage loans retained on the Group balance sheet and the covered bonds issued included within debt securities in issue (note 3.1.1.4). The covered bond holders have dual recourse: firstly, to the bond issuer on an unsecured basis; and secondly, to the LLP under the Covered Bond Guarantee secured against the mortgage loans. Under both the securitisation and covered bond programmes, the mortgage loans do not qualify for derecognition because the Group remains exposed to the majority of the risks and rewards of the mortgage loan portfolio, principally the associated credit risk. The Group continues to service the mortgage loans in return for an administration fee and is also entitled to any residual income after all payment obligations due under the terms of the programmes and senior programme expenses have been met. A deemed loan liability is recognised in the programme sponsor for the proceeds of the funding transaction. Significant restrictions Where the Group uses its financial assets to raise finance through securitisation and the sale of securities subject to repurchase agreements, the assets become encumbered and are not available for transfer around the Group.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1.5 Securitisation and covered bond programmes continued

The assets and liabilities in relation to securitisation and covered bonds in issue at 30 September are as follows (excluding accrued interest):

	2023		2022
	Loans and advances securitised £m	Notes in issue £m	Loans and advances securitised £m	Notes in issue £m
Securitisation programmes
Lanark	3,743	2,967	3,776	2,768
Lannraig	1,620	1,090	768	622
Gosforth 2018-1	-	-	872	745
	5,363	4,057	5,416	4,135
Less held by the Group		(2,328)		(2,260)
		1,729		1,875
Covered bond programmes
Clydesdale Bank PLC (formerly Virgin Money PLC)	7,575	4,392	6,739	3,450

The fair values of financial assets and associated liabilities relating to the securitisation programmes were £5,311m and £1,749m respectively (2022: £5,235m and £1,878m) where the counterparty to the liabilities has recourse only to the financial assets.

There were no events during the year that resulted in any Group transferred financial assets being derecognised.

The Group has contractual and non-contractual arrangements which may require it to provide financial support as follows:

Securitisation programmes

The Group provides credit support to the structured entities via reserve funds, which are partly funded through subordinated debt arrangements and by holding junior notes. Exposures are shown in the table below:

	2023 £m	2022 £m
Beneficial interest held	1,137	1,239
Subordinated loans	75	42
Junior notes held	853	978
	2,065	2,259

Looking forward through future reporting years there are a number of date-based options on the notes issued by the structured entities which could be actioned by them as issuer. These could require the Group, as sponsor, to provide additional liquidity support.

Covered bond programmes

The nominal level of over-collateralisation was £2,670m (2022: £3,127m) in the Clydesdale Bank PLC (formerly Virgin Money PLC) programme. From time to time the obligations of the Group to provide over‑collateralisation may increase due to the formal requirements of the programme.

Under all programmes, the Group has an obligation to repurchase mortgage exposures if certain mortgage loans no longer meet the programme criteria.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.2 Intangible assets and goodwill

	Capitalised software £m	Goodwill  £m	Core deposit intangible £m	Total £m
Cost
At 1 October 2021	1,043	11	6	1,060
Additions	53	-	-	53
Write-off	(28)	-	-	(28)
Disposal	(8)	-	-	(8)
At 30 September 2022	1,060	11	6	1,077
Additions	11	-	-	11
Write-off	(45)	-	-	(45)
Disposal	(714)	-	-	(714)
At 30 September 2023	312	11	6	329
Accumulated amortisation and impairment
At 1 October 2021	684	-	3	687
Charge for the year	81	-	3	84
Impairment	47	-	-	47
Disposal	(8)	-	-	(8)
At 30 September 2022	804	-	6	810
Charge for the year	60	-	-	60
Disposal	(714)	-	-	(714)
At 30 September 2023	150	-	6	156
Net book value
At 30 September 2023	162	11	-	173
At 30 September 2022	256	11	-	267

In both FY22 and FY23 all software additions form part of internally generated software projects.

A write-off charge of £45m (2022: £28m) was recognised in relation to the Group's mortgage digitisation programme. Following an assessment of the progress of the project to upgrade the mortgage platform and challenges identified during testing, we now anticipate a significant deferral and redesign as we implement the upgraded capability.

£714m of fully amortised assets were disposed of during the year following a data cleanse exercise conducted on the Group's intangible asset registers ahead of a migration to a single asset register in FY24.

3.3 Retirement benefit obligations

Accounting policy Defined benefit pension scheme A liability or asset is recognised on the balance sheet in respect of the defined benefit scheme and is measured as the difference between the present value of the defined benefit obligation less the fair value of the defined benefit scheme assets at the reporting date. The present value of the defined benefit obligation for the scheme is discounted by high-quality corporate bond rates that have maturity dates approximating to the terms of the defined benefit obligation. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through refunds from the scheme. In assessing whether a surplus is recoverable, the Group considers its current right to obtain a refund or a reduction in future contributions and does not anticipate any future acts by other parties that could change the amount of the surplus that may ultimately be recovered. Pension expense attributable to the Group's defined benefit scheme comprises current service cost, past service cost resulting from a scheme amendment or curtailment, net interest on the net defined benefit obligation/asset, gains or losses on settlement and administrative costs incurred. Where actuarial remeasurements arise, the Group recognises such amounts directly in equity through the statement of comprehensive income in the year in which they occur. Actuarial remeasurements arise from experience adjustments (the effects of differences between previous actuarial assumptions and what has actually occurred) and changes in actuarial assumptions.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.3 Retirement benefit obligations continued

The Group's principal trading subsidiary, Clydesdale Bank PLC, is the sponsoring employer of the Yorkshire and Clydesdale Bank Pension Scheme, a defined benefit pension scheme, which was closed to future benefit accrual for the majority of current employees on 1 August 2017.

The following table summarises the present value of the defined benefit obligation and fair value of plan assets for the Scheme as at 30 September:

	2023 £m	2022 £m
Active members' defined benefit obligation	(4)	(9)
Deferred members' defined benefit obligation	(988)	(987)
Pensioner and dependant members' defined benefit obligations	(1,292)	(1,220)
Total defined benefit obligation	(2,284)	(2,216)
Fair value of Scheme assets	2,796	3,216
Net defined benefit pension asset	512	1,000
Post-retirement medical benefits obligations(1)	(2)	(2)

(1)   Post-retirement medical benefits obligations are included within other liabilities (note 3.5).

The Group's pension arrangements

The current version of the Scheme was established under trust on 30 September 2009 with the assets held in a Trustee administered fund. The Trustee is responsible for the operation and governance of the Scheme, including making decisions regarding the Scheme's funding and investment strategy.

The Scheme is subject to the funding legislation outlined in the Pensions Act 2004 which came into force on 30 December 2005. This, together with documents issued by the Pensions Regulator, sets out the framework for funding defined benefit occupational pension plans in the UK.

The Group has implemented several reforms to the Scheme to manage the obligation. It closed the Scheme to new members in 2004 and since April 2006 has provided benefits accruing on a career average revalued earnings basis. On 1 August 2017, the Scheme was closed to future benefit accrual for the majority of current employees, with both affected and new employees' future pension benefits being provided through the Group's existing defined contribution scheme, 'My Retirement'. The income statement charge for this is separately disclosed in note 2.3.

The Group also provides post-retirement healthcare under a defined benefit scheme for some pensioners and their dependant relatives for which provision 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. The obligation in respect of this scheme was £2m at 30 September 2023 (2022: £2m) and is included within other liabilities in note 3.5.

Scheme valuations

There are a number of means of measuring liabilities in the defined benefit schemes, with the ultimate aim of the Trustee being that the Scheme is 100% funded on an agreed self-sufficiency basis (which is where the Scheme is essentially self-funded and does not need to call on the Group for any additional funding). The two bases used by the Group to value its obligations are: (i) an IAS 19 accounting basis; and (ii) a Trustee's Technical Provision basis.

(i) IAS 19 accounting basis

The valuations of the Scheme assets and obligations are calculated on an accounting basis in accordance with the applicable accounting standard IAS 19 which provides the basis for the accounting framework and methodology for entries in the income statement, balance sheet and capital reporting. The principal purpose of this valuation is to allow comparison of pension obligations between companies. The obligation under an accounting valuation can be higher or lower than those under a Trustee's Technical Provision valuation.

The rate used to discount the obligation on an IAS 19 basis is a key driver of any potential volatility and is based on yields on AA rated high-quality corporate bonds, regardless of how the Trustee of the Scheme invests the assets. The accounting valuation under IAS 19 can therefore move adversely because of low rates and narrowing credit spreads which are not fully matched by the Scheme assets. Inflation is another key source of volatility and arises as a result of member benefits having an element of index linking, which causes the obligation to increase in line with rises in long-term inflation assumptions. In practice however, over the long term, the relationship between interest and inflation rates tends to be negatively correlated resulting in a degree of risk offset.

(ii) Trustee's Technical Provision basis

This valuation basis reflects how much money the Trustee considers is required now in order to provide for the promised benefits as they come up for payment in the future. The Trustee is responsible for ensuring that the calculation is conducted prudently on an actuarial basis, considering factors including the Scheme's investment strategy and the relative financial strength of the sponsoring employer.

A key aspect of this valuation is the investment strategy the Trustee proposes to follow as part of the policy for meeting the Scheme's obligations. Because there are no guarantees about investment returns over long periods, legislation requires the Trustee to consider carefully how much of their expected future investment returns it would be prudent for them to account for in advance.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.3 Retirement benefit obligations continued

On 6 April 2023, the Scheme entered into a longevity swap transaction with Pacific Life Re International Limited and Zurich Assurance Ltd to manage longevity risk in relation to c.£1.6bn of pensioner liabilities. The arrangement provides long term protection to the Scheme against costs resulting from pensioners or their dependants living longer than currently expected, enhancing security for Scheme members and reducing risk for the Group. The fair value of the hedge instrument at 30 September 2023 was £Nil.

During 2023 the Trustee concluded the latest triennial valuation for the Scheme, which was conducted in accordance with Scheme data and market conditions as at 30 September 2022. The valuation resulted in an improvement in the Scheme's funding position, with a reported surplus of £256m (previously a surplus of £144m based on Scheme data and market conditions as at 30 September 2019) and a technical provisions funding level of 109% (previously 103%). As the 2022 valuation outcome was a funding surplus, a deficit recovery plan is not required and the Group is not required to make any additional contributions to the Scheme other than the ongoing funding of the Scheme's administrative expenses.

The next triennial valuation will be conducted in the year ending 30 September 2026 based on Scheme data and market conditions as at 30 September 2025.

Scheme assets are not subject to the same valuation differences as Scheme obligations and are consistently valued at current market value.

IAS 19 position

The Scheme movements in the year are as follows:

	2023				2022
	Present value of obligation £m	Fair value of plan assets £m	Total  £m	Cumulative impact in other comprehensive income £m	Present value of obligation £m	Fair value of plan assets £m	Total  £m	Cumulative impact in other comprehensive income £m
Balance sheet surplus at 1 October	(2,216)	3,216	1,000		(3,789)	4,636	847
				(126)				(248)
(Charges)/credits
Past service credit	-	-	-		9	-	9
Interest (expense)/income	(117)	172	55		(84)	104	20
Administrative costs	-	(5)	(5)		-	(5)	(5)
Total (charge)/credit recognised in the consolidated income statement (note 2.3)	(117)	167	50		(75)	99	24
Remeasurements
Return on Scheme assets greater than discount rate	-	(470)	(470)	(470)	-	(1,393)	(1,393)	(1,393)
Actuarial:
Loss - experience adjustments	(151)	-	(151)	(151)	(16)	-	(16)	(16)
(Loss)/gain - demographic assumptions	(27)	-	(27)	(27)	36	-	36	36
Gain - financial assumptions	104	-	104	104	1,495	-	1,495	1,495
Remeasurement (losses)/gains recognised in other comprehensive income	(74)	(470)	(544)	(544)	1,515	(1,393)	122	122
Contributions and payments
Employer contributions	-	6	6		-	7	7
Disbursements	123	(123)	-		133	(133)	-
	123	(117)	6		133	(126)	7
Balance sheet surplus at 30 September	(2,284)	2,796	512		(2,216)	3,216	1,000
				(670)				(126)

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.3 Retirement benefit obligations continued
In July 2021, the Trustees communicated a Pension Increase Exchange (PIE) exercise to members. A PIE gives members the option to exchange future increases on their pensions for a one-off uplift to their current pension. The exercise is being undertaken in three phases and is due to complete later in calendar year 2023. The defined benefit pension credit in the current year therefore includes no impact (2022: £10m credit) arising from the PIE exercise; any past service credit arising is not expected to be material and will be recognised when the exercise concludes in FY24.

The expected contributions and benefit payments for the year ending 30 September 2024 are £6m (2023: £10m) and £115m (2023: £118m) respectively.

During the year, the Group and Trustee to the Scheme ceased their previous contingent security arrangement, subsequently the Group has granted a £75m uncommitted liquidity facility to the Scheme as an additional contingency against future short-term liquidity challenges resulting from unexpected market turbulence. As at 30 September 2023 the amount drawn under the facility was £Nil.

Maturity of Scheme liabilities

The estimated maturity period of Scheme obligations on an IAS 19 accounting basis is as follows:

Annual Pension Scheme liability cash flows (£m)

The discounted mean term of the defined benefit obligation at 30 September 2023 is 13 years (2022: 14 years).

Scheme assets

In order to meet the obligations of the Scheme, the Trustee invests in a diverse portfolio of assets, with the level and volatility of asset returns being a key factor in the overall investment strategy. The investment portfolio is subject also to a range of risks typical of the types of assets held, such as: equity risk; credit risk on bonds; currency risk; interest rate and inflation risk; and exposure to the property market. The Trustee's investment strategy (including physical assets and derivatives) seeks to reduce the Scheme's exposure to these risks. In managing interest rate and inflation risks, the investment strategy seeks to hold portfolios of matching assets (including derivatives) that enable the Scheme's assets to better match movements in the value of liabilities due to changes in interest rates and inflation.

As at 30 September 2023, the interest rate and inflation rate hedge ratios were 90% and 90% respectively (2022: 97% and 95%) of the obligation when measured on a self-sufficiency basis. This strategy reflects the Scheme's obligation profile and the Trustee's and the Group's attitude to risk. The Trustee monitors the investment objectives and asset allocation policy on a regular basis.

The Trustee's investment strategy involves two main categories of investments:

·   Matching assets - a range of investments that provide a match to changes in obligation values.

·   Return seeking assets - a range of investments designed to provide specific, planned and consistent returns.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.3 Retirement benefit obligations continued
The major categories of plan assets for the Scheme, stated at fair value, are as follows:

	2023				2022
	Quoted £m	Unquoted £m	Total £m	%	Quoted £m	Unquoted £m	Total £m	%
Bonds
Fixed government	558	-	558		350	-	350
Index-linked government	824	-	824		1,314	-	1,314
Global sovereign	84	-	84		90	2	92
Corporate and other	924	-	924		781	37	818
	2,390	-	2,390	85%	2,535	39	2,574	80%
Equities(1)
Global equities	-	-	-		-	137	137
Emerging market equities	-	-	-		-	14	14
UK equities	-	-	-		-	7	7
	-	-	-	-%	-	158	158	5%
Other
Alternative credit investments(2)	-	352	352		-	874	874
Derivatives(3)	-	30	30		-	(83)	(83)
Repurchase agreements	-	(383)	(383)		-	(803)	(803)
Property	-	47	47		-	59	59
Renewables	-	238	238		-	194	194
Cash	-	122	122		-	243	243
	-	406	406	15%	-	484	484	15%
Total Scheme assets	2,390	406	2,796	100%	2,535	681	3,216	100%

(1)   Equity investments are classified as unquoted, reflecting the nature of the funds in which the Scheme invests directly. The underlying investments within those funds are, however, mostly quoted.

(2)   Alternative credit investments includes both secured income alternatives and alternative credit which were presented separately in the prior year.

(3)   Derivative financial instruments are used to modify the profile of the assets of the Scheme to better match the Scheme liabilities. Derivative holdings may lead to increased or decreased exposures to the physical asset categories disclosed above.

The nature of the Scheme assets held has remained broadly consistent year on year, with the exception of equities and certain alternative credit assets (principally hedge equity and hedge multi strategy assets) which the Trustee made a conscious decision to sell out of as part of its de-risking strategy and to raise further liquidity for collateral purposes.

At 30 September 2023, the Scheme had employer-related investments within the meaning of Section 40 (2) of the Pensions Act 1995 totalling £1m (2022: £2m).

Actuarial assumptions

The following assumptions were used in arriving at the IAS 19 defined benefit obligation:

	2023 % p.a.	2022 % p.a.
Financial assumptions
Discount rate	5.65	5.45
Inflation (RPI)	3.30	3.58
Inflation (CPI)	2.70	2.94
Career average revalued earnings revaluations:
Pre 31 March 2012 benefits (RPI)	3.30	3.58
Post 31 March 2012 benefits (CPI capped at 5% per annum)	2.66	2.90
Pension increases (capped at 2.5% per annum)	2.14	2.21
Pension increases (capped at 5% per annum)	3.15	3.37
Rate of increase for pensions in deferment	2.66	2.91

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.3 Retirement benefit obligations continued

Demographic assumptions

	2023 Years	2022 Years
Post-retirement mortality:
Current pensioners at 60 - male	27.2	27.0
Current pensioners at 60 - female	29.4	29.3
Future pensioners at 60 - male	28.3	28.0
Future pensioners at 60 - female	30.4	30.4

Critical accounting estimates and judgements The value of the Group's defined benefit pension scheme requires management to make several assumptions. The key areas of estimation uncertainty in these assumptions are: discount rate: this is set with reference to market yields at the end of the reporting year on high-quality corporate bonds in the currency and with a term consistent with the Scheme's obligations. The average duration of the Scheme's obligations is approximately 13 years. The market for bonds with a similar duration is illiquid and, as a result, significant management judgement is required to determine an appropriate yield curve on which to base the discount rate; inflation: this is set with reference to market expectations of the RPI measure of inflation for a term consistent with the Scheme's obligations, based on data published by the BoE. Other measures of inflation (such as CPI, or inflation measures subject to an annual cap) are derived from this assumption; and mortality: the cost of the benefits payable by the Scheme will also depend upon the life expectancy of the members. The assumptions for mortality rates are based on standard mortality tables (as adjusted to reflect the characteristics of Scheme members) which allow for future improvements in life expectancies. The table below sets out the sensitivity and impact on the balance sheet surplus position of the Scheme, the defined benefit obligation and pension cost to changes in the key actuarial assumptions: Assumption Change Balance sheet  surplus £m Obligation £m Pension cost £m Discount rate  +0.25% (18) (70) -  −0.25% 17 74 - Inflation  +0.25% 9 42 -  −0.25% (6) (43) - Life expectancy +1 year (22) 50 (1) −1 year 22 (50) 1 The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, changes in some of the assumptions may be correlated.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.4 Other assets

	2023 £m	2022 £m
Property, plant and equipment	184	211
Investment properties	40	-
Finance sub-leases	2	3
Investment in associates	10	10
Prepayments	59	66
Other receivables	66	87
Current tax	21	-
Other	6	5
	388	382

The prior year balance of £382m has been restated from the original £171m by the addition of the property, plant and equipment balance of £211m (note 1.7). This includes right-of-use assets of £115m (2022: £113m) (note 3.6).

The Group classified £43m of lease right-of-use assets as investment property on initial recognition this year as there is surplus space which will be sub-let under an operating lease. Also in the year, freehold land and buildings with a carrying value of £9m were transferred from property, plant and equipment to investment properties following a change in use (note 1.7). Subsequently, an impairment of £6m was recognised in respect of these freehold land and buildings based on the fair value confirmed by an independent professional valuation by Royal Institution of Chartered Surveyors registered valuers. The Group estimated the fair value of the leased right-of-use investment property assets at 30 September 2023 using income based fair value techniques and available market data, an independent valuation was not obtained. The estimated fair value approximates the carrying value.

No material rental income from investment property was received in the year, with the majority of assets currently being marketed for rental.

3.5 Other liabilities

	2023 £m	2022 £m
Notes in circulation	1,675	1,822
Accruals and deferred income	67	74
Current tax	-	1
Other	414	498
	2,156	2,395

The prior year balance of £2,395m has been restated from the original £2,394m by the addition of the current tax balance of £1m (note 1.7).

3.6 Lessee accounting

a) Amounts recognised in the income statement

The income statement includes the following amounts related to leases:

	2023 £m	2022 £m
Interest expense and similar charges
Interest expense	(4)	(2)
Other operating income
Income from operating sub-leases where the Group is a lessor	1	1
Operating and administrative expenses
Depreciation and impairment of right-of-use assets	(26)	(26)
Expense relating to short-term leases	(2)	(1)
Expense relating to leases of low-value assets that are not short-term leases	(1)	(1)
Amounts recognised in the income statement	(32)	(29)

Total leasing cash outflow in the year was £27m (2022: £28m).

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.6 Lessee accounting continued

b) Amounts recognised on the balance sheet

Right-of-use assets

	2023 £m	2022  £m
As at 1 October	113	135
Additions	76	4
Remeasurements	(4)	1
Disposals	(1)	(1)
Depreciation and impairment	(31)	(26)
As at 30 September	153	113
Of which:
Property, plant and equipment (note 3.4)	115	113
Investment property (note 3.4)	38	-

In February 2023, the Group announced plans for the closure of six leased office properties. Following the announcement, the associated right-of-use assets were assessed for impairment. An impairment charge of £3m has been recognised within operating and administrative expenses.

In July 2023, the Group announced plans for the closure of 39 stores, of which 34 were leasehold properties. Following the announcement, the associated right-of-use assets were assessed for impairment. Where it is expected that the Group can sub-lease the property, the recoverable amount was determined based on expected sub-lease income. Where the Group does not expect to be able to generate any cash inflows beyond the closure date, the value-in-use was determined to be £Nil. An impairment charge of £7m has been recognised within operating and administrative expenses. In addition to the impairment charge relating to the right-of-use assets, a provision has been recognised for other costs associated with the closures (note 3.7).

In the prior year, 19 surplus properties were impaired following a reduction in estimated value-in-use, resulting in an impairment charge of £4m. In addition, an impairment of £5m was recognised in relation to right-of-use assets for office estate where no further economic benefit was expected following exit.

Sub-leases

Future undiscounted minimum payments receivable in respect of sub-leased assets at 30 September were as follows:

	2023 £m	2022 £m
Operating leases	3	1
Finance leases	2	3
	5	4

Lease liabilities

	2023 £m	2022 £m
Lease liabilities(1)	180	132

(1)   Lease liabilities are presented within other liabilities (note 3.5) on the balance sheet.

Future undiscounted minimum payments under lease liabilities at 30 September are as follows:

Amounts falling due	2023 £m	2022 £m
Within 1 year	22	22
Between 1 and 5 years	63	60
Over 5 years	142	66
	227	148

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.6 Lessee accounting continued

c) Lease commitments not recognised on the balance sheet

In addition to the lease liabilities recognised on the balance sheet, the Group also has lease commitments relating to leases which have not yet commenced at the balance sheet date.

Future undiscounted minimum payments on leases which are yet to commence were as follows:

Amounts falling due	2023 £m	2022 £m
Within 1 year	-	4
Between 1 and 5 years	1	22
Over 5 years	5	99
	6	125

d) Leased investment property

Right-of-use asset additions shown in 3.6(b) above include £43m of assets classified as investment property (2022: £Nil). Depreciation charges of £1m were recognised in the year (2022: £Nil) and a £4m impairment charge was also recognised (2022: £Nil) relating to leased investment property floors. The leased investment property balance at 30 September 2023 was £38m (2022: £Nil).

3.7 Provisions for liabilities and charges

	Employee related  costs provision £m	Customer related provision £m	Property provision £m	Off-balance sheet ECL provisions(1) £m	Total
As at 1 October 2021	22	19	55	8	104
Charge/(credit) to the income statement	2	8	-	(5)	5
Utilised	(17)	(14)	(28)	-	(59)
As at 30 September 2022	7	13	27	3	50
Charge to the income statement	7	-	24	2	33
Utilised	(6)	(3)	(5)	-	(14)
As at 30 September 2023	8	10	46	5	69

(1)   The Group's ECL accounting policy can be found in note 3.1.1.1.

Employee related costs provision

This includes provision for staff redundancies and for NIC on equity based compensation. During the year, provisions of £7m (2022: £2m) were raised relating to staff redundancy costs.

Customer related provision

This relates to customer matters, legal proceedings, and claims arising in the ordinary course of the Group's business. A number of these matters are now reaching a conclusion and the risk that the final amount required to settle the Group's potential liabilities in these matters being materially more than the remaining provision is now considered to be low.

Property provision

This includes costs for stores and office closures. During the year, provisions of £24m (2022: £Nil) were raised.

Group financial statements

Notes to the consolidated financial statements

Section 4: Capital

4.1 Equity

4.1.1 Share capital and share premium

	2023 £m	2022 £m
Share capital	134	141
Share premium	9	7
Share capital and share premium	143	148

	2023 Number of shares	2022 Number of shares	2023 £m	2022 £m
Ordinary shares of £0.10 each - authorised, allotted, called up and fully paid
Opening ordinary share capital	1,408,530,988	1,439,993,431	141	144
Issued under employee share schemes	3,947,282	2,982,745	-	-
Share buyback programme	(67,837,302)	(34,445,188)	(7)	(3)
Closing ordinary share capital	1,344,640,968	1,408,530,988	134	141

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 30 September 2023 rank equally with regard to the Company's residual assets.

The following dividends were declared in the current and prior periods:

·   A final dividend in respect of the year ended 30 September 2021 of 1p per ordinary share in the Company, amounting to £14m, was paid in March 2022.

·   An interim dividend in respect of the year ended 30 September 2022 of 2.5p per ordinary share in the Company, amounting to £36m, was paid in June 2022.

·   A final dividend in respect of the year ended 30 September 2022 of 7.5p per ordinary share in the Company, amounting to £103m, was paid in March 2023.

·   An interim dividend in respect of the year ended 30 September 2023 of 3.3p per ordinary share in the Company, amounting to £45m, was paid in June 2023.

The Directors have recommended a final dividend in respect of the year ended 30 September 2023 of 2.0p per ordinary share in the Company, to be paid in March 2024. The payment of the final dividend is subject to approval of the shareholders at the 2024 AGM. These financial statements do not reflect the recommended dividend.

The following share buybacks have been announced in the current and prior periods:

·   On 30 June 2022, the Company announced an initial repurchase of up to £75m. The buyback commenced on 30 June 2022 and ended on 9 December 2022.

·   On 21 November 2022, the Company announced an extension to the share buyback programme with an intent to repurchase a further £50m. The buyback extension commenced on 21 November 2022 and ended on 7 March 2023.

·   On 2 August 2023, the Company announced a new share buyback programme to repurchase £50m. The buyback commenced on 2 August 2023 and ended on 22 November 2023.

68m ordinary shares (2022: 34m), with a nominal value of £7m (2022: £3m), were repurchased in the year for a total consideration of £112m (2022: £50m).

Each buyback is completed in aggregate between the Company's ordinary shares of £0.10 each listed on the LSE and CDIs, each representing one share, listed on the ASX. The Company repurchased shares and CDIs in approximately equal proportions. All shares repurchased were cancelled and the nominal value of the share cancellation transferred to the capital redemption reserve with the premium paid deducted from retained earnings.

On 23 November 2023, the Company announced a further share buyback with an intent to repurchase another £150m, ending no later than 16 May 2024.

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.

A description of the other equity categories included within the consolidated statement of changes in equity, and significant movements during the year, is provided below:

Group financial statements

Notes to the consolidated financial statements

Section 4: Capital

4.1.2 Other equity instruments

Other equity instruments comprises AT1 capital which consists of the following Perpetual Contingent Convertible Notes:

	2023		2022
	Carrying value £m	Nominal value £m	Carrying value £m	Nominal value £m
Perpetual securities (fixed 8% up to the first reset date) issued on 8 February 2016 with an optional redemption on 8 December 2022.	-	-	72	73
Perpetual securities (fixed 9.25% up to the first reset date) issued on 13 March 2019 with an optional redemption on 8 June 2024.	247	250	247	250
Perpetual securities (fixed 8.25% up to the first reset date) issued on 17 June 2022 with an optional redemption on 17 June 2027.	347	350	347	350
	594	600	666	673

On 8 December 2022, perpetual securities (fixed 8% up to the first reset date) issued on 8 February 2016 totalling £72m were redeemed.

The issuances are treated as equity instruments in accordance with IAS 32 'Financial instruments: presentation' with the proceeds included in equity, net of transaction costs, which is the difference between the nominal and carrying values. AT1 distributions of £54m were paid in the year (2022: £70m).

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.

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) Limited. 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) Limited established an EBT (the 'VMH 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 VMH EBT were converted to the Company's shares at a ratio of 1.2125 Company shares for each Virgin Money Holdings (UK) Limited share. The investment in own shares as at 30 September 2023 is £0.3m (2022: £0.6m). The market value of the shares held in the VMH EBT at 30 September 2023 was £0.2m (2022: £0.4m).

During the current year, Virgin Money UK PLC also established an EBT (the 'VMUK EBT') in connection with the operation of its share plans. The investment in own shares as at 30 September 2023 was £2.0m (2022: £Nil). The market value of the shares held in the VMUK EBT at 30 September 2023 was £1.9m (2022: £Nil).

The total investment in own shares as at 30 September 2023 was £2.3m (2022: £0.6m). The total market value of the shares held in both EBTs at 30 September 2023 was £2.1m (2022: £0.4m).

As part of the buyback programme, the Company has entered a non-discretionary arrangement with Citigroup Global Markets Limited to purchase shares as riskless principal and to make trading decisions independently of the Company. Any purchase of shares pursuant to this engagement will be carried out on the LSE or other recognised investment exchange. This arrangement results in the recognition of a liability (included within due to other banks) and a deduction from retained earnings of £14m at 30 September 2023 (2022: £11m). The liability will reduce as shares are repurchased and cancelled with the impact on share capital and capital redemption reserve as described elsewhere within this note.

Capital redemption reserve

Under UK companies legislation, when shares are redeemed or purchased wholly or partly out of the company's profits, the amount by which the company's issued share capital is diminished must be transferred to the capital redemption reserve. The capital maintenance provisions of UK companies legislation apply to the capital redemption reserve as if it were part of the company's paid up share capital. The nominal value of the shares repurchased and cancelled under the buyback programmes has been transferred to the capital redemption reserve.

Deferred shares reserve

The deferred shares 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) Limited share awards, which will be settled through the issuance of the Company's 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.

FVOCI reserve

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

Group financial statements

Notes to the consolidated financial statements

Section 4: Capital

4.1.5 Other reserves continued

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.

	2023 £m	2022  £m
At 1 October	699	10
Amounts recognised in other comprehensive income:
Cash flow hedge - interest rate risk
Effective portion of changes in fair value of interest rate swaps	(268)	962
Amounts transferred to the income statement	(12)	(13)
Taxation	77	(260)
Cash flow hedge - foreign exchange risk
Effective portion of changes in fair value of cross currency swaps	-	-
Amounts transferred to the income statement	-	-
At 30 September	496	699

4.2 Pillar 3 disclosures

UK Capital Requirements Regulation

Pillar 3 disclosure requirements are set out within the Disclosure (CRR) part of the PRA rulebook. The disclosures required under the PRA framework are substantially equivalent to those required by Part Eight of the EU CRR. The consolidated disclosures of the Group, for the 2023 financial year, will be issued concurrently with the Annual Report and Accounts and can be found at www.virginmoneyukplc.com/investor-relations/results-and-reporting/annual-reports/

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes

5.1 Contingent liabilities and commitments

Accounting policy Financial guarantees The Group provides guarantees in the normal course of business on behalf of its customers. Guarantees written are conditional commitments issued by the Group to guarantee the performance of a customer to a third party and are primarily issued to support direct financial obligations such as commercial bills or other debt instruments issued by a counterparty. The rating of the Group as a guarantee provider enhances the marketability of the paper issued by the counterparty in these circumstances. The ECL requirements as described in note 3.1.1 apply to loan commitments and financial guarantee contracts, with the ECL allowance held as part of the provisions for liabilities and charges balance (note 3.7).

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 default. 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.

	2023 £m	2022 £m
Guarantees and assets pledged as collateral security:
Due in less than 3 months	12	33
Due between 3 months and 1 year	18	23
Due between 1 year and 3 years	8	9
Due between 3 years and 5 years	1	3
Due after 5 years	40	44
	79	112
Other credit commitments
Undrawn formal standby facilities, credit lines and other commitments to lend at call	17,921	19,247

Capital commitments

The Group had future capital expenditure which had been contracted for, but not provided for, at 30 September 2023 of £0.1m (2022: £0.4m).

Other contingent liabilities

Conduct risk related matters and legal claims

There continues to be uncertainty with judgement required in determining the quantum of conduct risk related liabilities, with note 3.7 reflecting the Group's current position where a provision can be reliably estimated. Until all matters are resolved the final amount required to settle the Group's potential liabilities for conduct related matters remains uncertain.

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.

The Group's subsidiary, Clydesdale Bank PLC, along with its former parent company, National Australia Bank Limited, is a defendant in nine separate claims (comprising 904 individual claimants) co-ordinated by the claims management company, RGL Management Limited, in connection with (i) the payment of break costs and (ii) the composition of fixed interest rates, both, in respect of historic tailored business loans. The cases involving four individual claimants (being the first and fourth claims) are currently being heard before His Majesty's High Court of Justice, with the hearing scheduled to conclude on 20 December 2023. The remaining claims are currently stayed by agreement and court order. Clydesdale Bank PLC is robustly defending all such claims. No provision has been made in these financial statements in respect of the current claims, nor any other claims of a similar nature which may be brought by other claimants.

The Group is named in and is defending a number of other 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.

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes

5.2 Equity based compensation

The equity settled share based payment charge for the year is £5m (2022: £5m).

Virgin Money UK PLC awards

The Group issues awards to employees under the following share plans:

Plan	Eligible employees	Nature of award	Vesting conditions(1)	Grant dates(2)
DEP(3)	Selected employees	Conditional rights to shares	Continuing employment or leaving in certain limited circumstances	2017, 2018, 2019, 2020, 2021 and 2022
LTIP	Selected senior employees	Conditional rights to shares	Continuing employment or leaving in certain limited circumstances and achievement of delivery of the Group's strategic goals and growth in shareholder value	2017, 2018, 2019, 2020, 2021 and 2022

(1)   All awards are subject to vesting conditions and therefore may or may not vest.

(2)   The year in which grants have been made under the relevant plan.

(3)   Grants made under the DEP are made the year following the financial year to which they relate.

Further detail on each plan is provided below:

DEP

Under the plan, employees are awarded conditional rights to Virgin Money UK PLC shares. The shares are subject to forfeiture conditions including forfeiture as a result of resignation, termination by the Group or failure to meet compliance requirements. Awards include:

·   the upfront and deferred elements of bonus awards where required to comply with the PRA Remuneration Code or the Group's deferral policy; and

·   buyout of equity from previous employment.

LTIP

Under the plan, employees are awarded conditional rights to Virgin Money UK PLC shares. The shares are subject to forfeiture conditions including forfeiture as a result of resignation, termination by the Group or failure to meet compliance requirements. The performance conditions of the plan must be met over a three-year performance period. The measures reflect a balanced approach between financial and non-financial performance and are aligned to the Group's strategic goals. Measures, relative weightings and the quantum for assessing performance are outlined in the Directors' remuneration report contained in the Group's Annual Report and Accounts.

Awards/rights made during the year

Plan	Number  outstanding at  1 October 2022	Number  awarded	Number forfeited	Number released	Number outstanding at  30 September 2023	Average fair value of awards at grant  pence
DEP
2016 Commencement	1,310	-	-	(1,310)	-	266.03p
2017 Bonus	2,120	-	-	(2,120)	-	313.20p
2018 Bonus	136,520	-	-	(34,129)	102,391	192.35p
2019 Bonus	79,160	-	-	(18,388)	60,772	174.50p
2019 Commencement	8,046	-	-	(5,195)	2,851	174.50p
2020 Commencement	9,600	-	-	(5,908)	3,692	135.40p
2021 Commencement	107,747	-	-	(64,315)	43,432	142.70p
2022 Bonus	-	1,289,482	-	(1,109,992)	179,490	176.75p
2023 Commencement	-	567,651	-	(110,384)	457,267	158.95p
LTIP
2017 LTIP	269,629	-	-	(125,918)	143,711	313.20p
2018 LTIP	2,000,311	-	-	(620,091)	1,380,220	190.47p
2019 LTIP	6,941,307	-	(4,721,502)	(694,962)	1,524,843	174.50p
2020 LTIP	8,359,759	-	(274,998)	-	8,084,761	135.40p
2021 LTIP	6,487,823	-	(531,566)	-	5,956,257	172.65p
2022 LTIP	-	7,265,385	(365,233)	-	6,900,152	176.75p

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes

5.2 Equity based compensation continued

Determination of grant date fair values

Where awards are subject to only non-market performance conditions the grant date fair value of the awards has been taken as the middle market share price value on the day immediately preceding the grant. An estimate is made of the number of awards expected to vest in order to determine the overall share based payment charge to be recognised over the vesting period. Where awards contain market performance conditions, these are incorporated into the calculation of grant date fair value using Monte Carlo simulation pricing models. During the year, awards were granted under the LTIP on 9 December 2022 and under the DEP on 9 December 2022 and 20 June 2023, based on the middle market share price on the day immediately preceding the grant.

5.3 Related party transactions

The Group undertakes activity with the following entities which are considered to be related party transactions:

Yorkshire and Clydesdale Bank Pension Scheme ('the Scheme')

The Group provides banking services to the Scheme, with customer deposits of £7m (2022: £12m). Pension contributions of £7m were made to the Scheme in the year (2022: £7m).

During the year, the Group and Trustee to the Scheme ceased their previous contingent security arrangement, subsequently the Group has granted a £75m uncommitted liquidity facility to the Scheme as an additional contingency against future short-term liquidity challenges resulting from unexpected market turbulence. As at 30 September 2023, the amount drawn under the facility was £Nil. There is also a £7m BACS facility held for the Scheme in relation to payments to the Scheme's members (2022: £7m). As at 30 September 2023, the amount drawn on the facility was £Nil (2022: £Nil).

JVs and associates

The Group holds investments in JVs of £10m (2022: £10m). The total share of profit for the year was £Nil (2022: loss of £4m). In addition, the Group had the following transactions with JV entities during the year:

·   Salary Finance - the Group provides Salary Finance with a revolving credit facility funding line, of which the current gross lending balance was £290m (2022: £318m) and the undrawn facility was £60m (2022: £32m). The facility is held under Stage 2 for credit risk purposes (2022: Stage 2), with an ECL allowance of £22m (2022: £19m) held against the lending. An impairment charge of £3m (2022: £19m) was recognised in the year. The lending made via Salary Finance continues to be held as part of the Group's Unsecured lending portfolio and consists of personal lending to Salary Finance customers. During the year, the number of customers not maintaining scheduled loan repayments has reduced slightly with no material change to the ECL allowance held from that at September 2022. Additionally, the Group received £16m (2022: £10m) of interest income from Salary Finance in the year and holds deposits of £10m (2022: £10m). Board approval is in place for this facility up until December 2025 with £350m being the approved limit; and

·   UTM - the Group provides banking services to UTM which has resulted in amounts due of £3m (2022: £4m). Additionally, the Group received £9m of recharge income in the year (2022: £7m) from UTM in accordance with a Service Level Agreement in respect of resourcing, infrastructure and marketing. During the year, the Group provided no additional funding to UTM (2022: £4m). The Group has also paid consortium relief to UTM of £1m (2022: £Nil) for losses surrendered from UTM in respect of FY21 and FY22. During the year, the Group provided UTM with a 30 day notice account with customer deposits of £17m (2022: £Nil) which resulted in interest of £0.5m being paid to UTM (2022: £Nil). The Group also provided UTM with five term deposit accounts during the year. £16m was originally held in deposit, however these matured in September 2023 (2022: £Nil).

Other related party transactions with Virgin Group

The Group has related party transactions with other Virgin Group companies⁽¹⁾:

·   Licence fees due to Virgin Enterprises Limited for the use of the Virgin Money brand trademark resulted in an amount payable of £5m (2022: £5m), with expenses incurred in the year of £17m (2022: £15m).

·   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. Amounts payable to VAA totalled £2m (2022: £1m) and expenses of £17m were incurred in the year (2022: £16m).

·   The Group incurs charges and receives commissions concerning the cashback incentive scheme with Virgin Red Limited in relation to the credit card and PCA portfolio. Amounts receivable totalled £0.2m (2022: £0.1m), amounts payable totalled £0.1m (2022: £1m) and during the year this resulted in expenses of £0.5m (2022: £3m) along with income of £0.4m (2022: £0.5m).

·   The Group has an arrangement with Virgin Start Up Limited to host a series of events, podcasts and videos and other digital content. During the year this resulted in amounts payable of £0.1m (2022: £Nil) and expenses of £0.4m (2022: £0.5m).

·   The Group paid £20m (2022: £7m) of ordinary dividends to Virgin Group Holdings Limited.

(1)   All companies are incorporated in England and Wales with the exception of Virgin Group Holdings Limited, which is incorporated in the British Virgin Islands.

Charities

The Group provides banking services to The Virgin Money Foundation ('the Foundation') which has resulted in customer deposits of £1m (2022: £1m). The Group has made donations of £1m in the year (2022: £1m) to the Foundation to enable it to pursue its charitable objectives. The Group has also provided a number of support services to the 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 £0.5m (2022: £0.4m).

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes

5.3 Related party transactions continued

Compensation of key management personnel (KMP)

KMP comprises Directors of the Company and members of the Executive Leadership Team.

	2023 £m	2022 £m
Salaries and short-term benefits	9	9
Equity based compensation(1)	3	3
	12	12

(1)   The expense recognised in the year is in accordance with IFRS 2 'Equity based compensations', including associated employers' NIC.

The following information regarding Directors' remuneration is presented in accordance with the Companies Act 2006.

	2023 £m	2022 £m
Aggregate remuneration(1)	5	5

(1)   Aggregate remuneration includes amounts paid for the 2023 financial year and amounts paid under the LTIPs in relation to the 2018 and 2019 LTIP awards. LTIP figures in the single figure table for Executive Directors' 2023 remuneration in the Remuneration report contained in the Group's Annual Report and Accounts relate to the 2019 LTIP award in respect of the 2020-2022 LTIP performance period cycle.

None of the Directors were members of the Group's defined contribution or defined benefit pension schemes during 2023 (2022: none).

None of the Directors hold share options and none were exercised during the year (2022: none).

Transactions with KMP

KMP, their close family members, and any entities controlled or significantly influenced by the KMP have undertaken the following transactions with the Group in the normal course of business. The transactions were made on the same terms and conditions as applicable to other Group employees, or on normal commercial terms:

	2023 £m	2022 £m
Loans and advances	1	1
Deposits	1	1

No provisions have been recognised in respect of loans provided to KMP (2022: £Nil). There were no debts written off or forgiven during the year to 30 September 2023 (2022: £Nil). Included in the above are five (2022: five) loans totalling £0.6m (2022: £0.3m) made to Directors. In addition to the above, there are guarantees of £Nil (2022: £Nil) made to Directors and their related parties.

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes

5.4 Notes to the statement of cash flows

	2023 £m	2023 £m
Adjustments included in the profit before tax
Interest receivable	(3,833)	(2,217)
Interest payable	2,146	641
Depreciation, amortisation and impairment (note 2.3)	116	179
Derivative financial instruments fair value movements	12	17
Impairment losses on credit exposures (note 3.1.1.1)	309	52
Net charge in respect of provisions for liabilities and charges	31	-
Equity based compensation (note 5.2)	5	4
Gain on disposal of FVOCI assets (note 2.2)	(1)	(4)
Other non-cash movements(1)	8	2
	(1,207)	(1,326)
Changes in operating assets
Net (increase)/decrease in:
Balances with supervisory central banks	-	(3)
Derivative financial instruments	(269)	1,847
Financial assets at FVTPL	18	57
Loans and advances to customers	(303)	(713)
Defined benefit pension assets	(7)	(7)
Other assets	17	31
	(544)	1,212
Changes in operating liabilities
Net increase/(decrease) in:
Due to other banks	(627)	1,235
Derivative financial instruments	(37)	119
Customer deposits	1,249	(1,510)
Provisions for liabilities and charges	(14)	(50)
Other liabilities	(287)	(32)
	284	(238)

(1)   Included within other non-cash movements is a net credit in respect of defined benefit pension schemes of £49m (2022: £24m) (note 2.3) and the share of post-tax losses of associates and joint ventures of £Nil (2022: £4m).

For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances with less than three months' maturity from the date of acquisition. This includes cash and liquid assets and amounts due from other banks (to the extent less than 90 days).

	2023 £m	2022 £m
Cash and balances with central banks (less mandatory deposits)	11,007	11,955
Due from other banks (less than three months)	666	656
	11,673	12,611

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes

5.5 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.

The Group operates under four commercial lines: Mortgages, Unsecured, Business, and Deposits, which are reported through the Chief Commercial Officer. At this point in time, 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.

Summary income statement

	2023 £m	2022 £m
Net interest income	1,687	1,576
Non-interest income	140	140
Total operating income	1,827	1,716
Operating and administrative expenses	(1,173)	(1,069)
Impairment losses on credit exposures	(309)	(52)
Segment profit before tax	345	595
Average interest earning assets	89,810	86,275

The Group has no operations outside the UK and therefore no secondary geographical area information is presented. The Group is not reliant on a single customer. Liabilities are managed on a centralised basis.

5.6 Post-balance sheet events

On 23 November 2023, the Company announced a further share buyback with an intent to repurchase another £150m in aggregate of shares and CDIs, ending no later than 16 May 2024.

Additional information

Measuring the Group's performance

As highlighted within the Strategic report, Financial results, Directors' remuneration report, and Risk report, all contained in the Group's Annual Report and Accounts, a range of metrics are considered that measure and track the Group's performance. Some of these metrics will be the Group's KPIs, which are a set of quantifiable measurements used to gauge the Group's overall long-term performance. Others are not referred to as KPIs, but are still useful metrics for the Group to reflect on and are disclosed to aid comparisons with peers.

These metrics fall into two main categories:

·   Financial - which are further split into:

o  IFRS based - meaning the basis of the calculation is derived from a measure that can be found and is directly required under generally accepted accounting principles (GAAP); and

o  Non-IFRS based - these are also referred to as APMs and can be derived from non-GAAP measures.

·   Non-Financial - being those that are not directly linked to the Group's financial performance, but more in relation to other external factors.

Non-IFRS based financial performance metrics can be calculated on either a statutory or an 'underlying' basis; further detail on how the underlying measure is arrived at, along with management's reasoning for excluding the impact of certain items from the Group's current underlying performance rationale, can be found on page 133, directly following this section.

Financial performance metrics

Profitability:

Metric	KPI	LTIP	LTIP Year	Basis	Definition/formula	Why it matters
Gross annualised cost savings	Yes	No	N/a	Non-IFRS	Annualised gross cost savings benefits driven from the Group's efficiency programmes.	It provides an annualised progress indicator for the Group's accelerated digital strategy and stated target of delivering approximately £175m of additional cost savings by FY24, enabled by £275m of restructuring investment.
Statutory return on tangible equity (RoTE)	Yes	Yes	2023 2022 2021 2020 2019	Non-IFRS	Statutory profit after tax attributable to ordinary equity holders as a percentage of average tangible equity (average total equity less intangible assets and AT1) for a given year. 2023 2022 2021 2020 Statutory profit after tax attributable to ordinary equity holders (a) £192m £467m £395m £(220)m Average tangible equity (b) £4,971m £4,539m £3,875m £3,554m Statutory RoTE (a)/(b) 3.9% 10.3% 10.2% (6.2)%	It's an indicator of the Group's profitability and gives the return generated for shareholders as a percentage of the Group's tangible equity.
Underlying cost: income ratio	Yes	Yes	2021 2020 2019	Non-IFRS	Underlying operating and administrative expenses as a percentage of underlying total operating income for a given year. 2023 Restated(1) 2022 Restated(1) 2021 Restated(1) 2020 Underlying operating and administrative expenses (a) £971m £914m £902m £917m Underlying total operating income (b) £1,873m £1,742m £1,564m £1,558m Underlying cost: income ratio (a)/(b) 51.9% 52.5% 57.7% 58.9%	It's a measure of efficiency in terms of how total operating expenses compare to total operating income on an underlying basis.

(1)   Hedge ineffectiveness (2022: income of £13m, 2021: income of £8m, 2020: expense of £16m) is now presented as an adjustment to underlying earnings. The comparative periods have been adjusted accordingly. This restatement does not impact the statutory results of the Group.

Additional information

Measuring the Group's performance

Financial performance metrics continued

Profitability continued:

Metric	KPI	LTIP	LTIP Year	Basis	Definition/formula	Why it matters
Net interest margin (NIM)	No	No	N/a	Non-IFRS	Underlying NII as a percentage of average interest earning assets (which is adjusted to exclude short-term repos used for liquidity management purposes) for a given year. 2023 2022 2021 2020 Underlying NII (a) £1,716m £1,592m £1,412m £1,351m Average interest earning assets (b) £89,810m £86,275m £86,947m £86,826m Short-term repos used for liquidity management (c) £-m £12m £16m £16m NIM (a)/((b)-(c)) 1.91% 1.85% 1.62% 1.56%	It's an indicator of the Group's profitability by showing the difference between how much the Group is earning in interest on its loans compared to how much it is paying out in interest on deposits.
Statutory basic earnings per share (EPS)	No	No	N/a	IFRS	Statutory profit after tax attributable to ordinary equity shareholders, divided by the weighted average number of ordinary shares in issue for a given year (which includes deferred shares and excludes own shares held or contingently returnable shares). 2023 2022 2021 2020 Statutory profit/(loss) after tax attributable to ordinary equity shareholders (a) £192m £467m £395m £(220)m Weighted average number of ordinary shares in issue (b) 1,375m 1,441m 1,442m 1,440m Statutory basic earnings/(loss) per share (a)/(b) 14.0p 32.4p 27.3p (15.3)p	It's an indicator of the Group's profitability on a statutory basis.
Statutory cost: income ratio	No	No	N/a	Non-IFRS	Statutory operating and administrative expenses as a percentage of statutory total operating income for a given year. 2023 2022 2021 2020 Statutory operating and administrative expenses (a) £1,173m £1,069m £1,203m £1,104m Statutory total operating income (b) £1,827m £1,716m £1,489m £1,443m Statutory cost: income ratio (a)/(b) 64.2% 62.3% 80.8% 76.5%	It's a measure of efficiency in terms of how total operating expenses compare to total operating income on a statutory basis.
Statutory return on assets	No	No	N/a	Non-IFRS	Statutory profit after tax as a percentage of average total assets for a given year. 2023 2022 2021 2020 Statutory profit/(loss) after tax (a) £246m £537m £474m £(141)m Average total assets (b) £92,188m £89,504m £90,537m £90,522m Statutory return on assets (a)/(b) 0.27% 0.60% 0.52% (0.16)%	It's an indicator of the Group's profitability on a statutory basis.

Additional information

Measuring the Group's performance

Financial performance metrics continued

Profitability continued:

Metric	KPI	LTIP	LTIP Year	Basis	Definition/formula	Why it matters
Underlying basic EPS	No	No	N/a	Non-IFRS	Underlying profit after tax attributable to ordinary equity shareholders, divided by the weighted average number of ordinary shares in issue for a given year (which includes deferred shares and excludes own shares held or contingently returnable shares). 2023 Restated(1) 2022 Restated(1) 2021 Restated(1) 2020 Underlying profit after tax attributable to ordinary equity shareholders (a) £376m £602m £685m £33m Weighted average number of ordinary shares in issue (b) 1,375m 1,441m 1,442m 1,440m Underlying basic earnings per share (a)/(b) 27.4p 41.8p 47.5p 2.3p	It's an indicator of the Group's profitability on an underlying basis.
Underlying profit before tax	No	No	N/a	Non-IFRS	Statutory profit before tax plus total underlying adjustments to the statutory view of performance. 2023 Restated(1) 2022 Restated(1) 2021 Restated(1) 2020 Statutory profit/(loss) before tax (a) £345m £595m £417m £(168)m Restructuring charges (b) £131m £82m £146m £139m Acquisition accounting unwinds (c) £29m £35m £88m £113m Legacy conduct (d) £12m £8m £76m £26m Hedge ineffectiveness (e) £16m £(13)m £(8)m £16m Other (f) £60m £69m £74m £14m Underlying profit before tax (a) + (b) + (c) + (d) + (e) + (f) £593m £776m £793m £140m	It's an indicator of the Group's profitability on an underlying basis.
Underlying profit after tax attributable to ordinary equity shareholders	No	No	N/a	Non-IFRS	Underlying profit before tax less underlying tax charge, less AT1 distributions. The underlying tax charge (or credit) is the difference between the statutory tax charge (or credit) and the tax attributable to exceptional items. 2023 Restated(1) 2022 Restated(1) 2021 Restated(1) 2020 Underlying profit before tax (a) £593m £776m £793m £140m Underlying tax charge (b) £163m £104m £29m £28m AT1 distributions (c) £54m £70m £79m £79m Underlying profit after tax attributable to ordinary equity shareholders (a) - (b) - (c) £376m £602m £685m £33m	It's an indicator of the Group's profitability on an underlying basis.

(1)   Hedge ineffectiveness (2022: income of £13m, 2021: income of £8m, 2020: expense of £16m) is now presented as an adjustment to underlying earnings. The comparative periods have been adjusted accordingly. This restatement does not impact the statutory results of the Group.

Additional information

Measuring the Group's performance

Financial performance metrics continued

Profitability continued:

Metric	KPI	LTIP	LTIP Year	Basis	Definition/formula	Why it matters
Underlying RoTE	No	No	N/a	Non-IFRS	Underlying profit after tax attributable to ordinary equity holders as a percentage of average tangible equity (average total equity less intangible assets and AT1) for a given year. 2023 Restated(1) 2022 Restated(1) 2021 Restated(1) 2020 Underlying profit after tax attributable to ordinary equity holders (a) £376m £602m £685m £33m Average tangible equity (b) £4,971m £4,539m £3,875m £3,554m Underlying RoTE (a)/(b) 7.6% 13.3% 17.7% 0.9%	It's an indicator of the Group's profitability on an underlying basis and gives the return generated for shareholders as a percentage of the Group's tangible equity.

(1)   Hedge ineffectiveness (2022: income of £13m, 2021: income of £8m, 2020: expense of £16m) is now presented as an adjustment to underlying earnings. The comparative periods have been adjusted accordingly. This restatement does not impact the statutory results of the Group.

Additional information

Measuring the Group's performance

Financial performance metrics continued

Lending (Basis - non-IFRS):

Metric	KPI	LTIP	LTIP Year	Definition and formula (where applicable)	Why it matters
Target lending segment asset growth	Yes	No	N/a	Target lending segment asset growth over the year. Target lending is defined as Unsecured and BAU Business lending (excluding Government lending schemes noting these are closed and in run off). 2023 2022 2021 2020 Total lending - current year (a) £14,632m £13,448m £12,573m £13,006m Total lending - prior year (b) £13,448m £12,573m £13,006m £12,900m Target lending growth ((a)-(b))/(b) 8.8% 7.0% (3.3)% 0.8%	It's an indicator of how well the Group is performing against its 'pioneering growth' strategic priority.
Relationship deposits growth	No	Yes	2021 2020	Relationship deposit growth over the year. 2023 2022 2021 2020 Total relationship deposits - current year (a) £35,394m £34,649m £30,596m £25,675m Total relationship deposits - prior year (b) £34,649m £30,596m £25,675m £21,347m Relationship deposit growth ((a)-(b))/(b) 2.2% 13.2% 19.2% 20.3%	It's an indicator of how well the Group is performing against its 'pioneering growth' strategic priority.

Additional information

Measuring the Group's performance

Financial performance metrics continued

Asset quality (Basis - non-IFRS):

Metric	KPI	LTIP	LTIP Year	Definition/formula	Why it matters
Impairment charge to average customer loans (cost of risk)	No	No	N/a	Impairment losses on credit exposures as a percentage of average customer loans (defined as loans and advances to customers, other financial assets at fair value and due from customers on acceptances). 2023 2022 2021 2020 Impairment charge/(credit) (a) £309m £52m £(131)m £501m Average customer loans (b) £72,770m £71,989m £72,447m £73,403m Cost of risk (a)/(b) 0.42% 0.07% (0.18)% 0.68%	It's an indicator of the asset quality of the Group's lending portfolio.
% of loans in Stage 2	No	No	N/a	Stage 2 loans as a percentage of gross loans and advances. 2023 2022 2021 2020 Stage 2 loans (a) £6,326m £5,736m £10,178m £12,844m Gross loans and advances (b) £73,295m £73,146m £72,551m £72,925m % of loans in stage 2 (a)/(b) 8.6% 7.8% 14.1% 17.7%	It allows period-on-period comparison of Stage 2 loans as a percentage of overall gross loans and advances and therefore provides insight into the asset quality of the Group's lending portfolio over time.
% of loans in Stage 3	No	No	N/a	Stage 3 loans as a percentage of gross loans and advances. 2023 2022 2021 2020 Stage 3 loans (a) £1,080m £1,038m £957m £862m Gross loans and advances (b) £73,295m £73,146m £72,551m £72,925m % of loans in Stage 3 (a)/(b) 1.5% 1.4% 1.3% 1.2%	It allows period-on-period comparison of Stage 3 loans as a percentage of overall gross loans and advances and therefore provides insight into the asset quality of the Group's lending portfolio over time.
Total book coverage	No	No	N/a	Total impairment provisions on credit exposures as a percentage of total customer loans. 2023 2022 2021 2020 Impairment provisions on credit exposures (a) £617m £457m £504m £735m Gross loans and advances (b) £73,295m £73,146m £72,551m £72,925m Total book coverage (a)/(b) 0.84% 0.62% 0.70% 1.03%	It provides a measure of the level of provision the Group holds for the total lending portfolio.

Additional information

Measuring the Group's performance

Financial performance metrics continued

Asset quality (Basis - non-IFRS):

Metric	KPI	LTIP	LTIP Year	Definition/formula	Why it matters
Stage 2 coverage	No	No	N/a	Stage 2 impairment provisions as a percentage of Stage 2 gross loans and advances (excluding government backed loans). 2023 2022 2021 2020 Stage 2 impairment provisions on credit exposures (a) £400m £268m £302m £465m Stage 2 gross loans and advances (b) £6,305m £5,736m £10,178m £12,844m Total stage 2 book coverage (a)/(b) 6.33% 4.72% 3.02% 3.66%	It provides a measure of the level of provision the Group holds for the lifetime of the Stage 2 lending portfolio.
Stage 3 coverage	No	No	N/a	Stage 3 impairment provisions as a percentage of Stage 3 gross loans and advances (excluding government backed loans). 2023 2022 2021 2020 Stage 3 impairment provisions on credit exposures (a) £128m £104m £91m £134m Stage 3 gross loans and advances (b) £920m £1,038m £957m £862m Total Stage 3 book coverage (a)/(b) 13.93% 11.24% 9.59% 15.73%	It provides a measure of the level of provision the Group holds for the lifetime of the Stage 3 lending portfolio.

Additional information

Measuring the Group's performance

Financial performance metrics continued

Capital (Basis - non-IFRS):

Metric	KPI	LTIP	LTIP Year	Definition/formula	Why it matters
Announced shareholder distributions	Yes	No	N/a	Dividends announced for the year plus buybacks as a percentage of statutory profit after tax attributable to ordinary shareholders. 2023 2022 2021 2020 Interim dividend (a) £45m £36m n/a n/a Final dividend (b) £27m £106m £14m n/a Buybacks (c) £200m £125m n/a n/a Statutory profit after tax attributable to ordinary equity holders (d) £192m £467m £395m £(220)m Announced shareholder distributions ((a)+(b)+(c))/(d) 142% 57% 4% n/a	It shows how much of our profits after tax and distributions we are paying out to our shareholders.
Common Equity Tier 1 (CET1) ratio (IFRS 9 transitional)	No	No	N/a	CET1 capital as a percentage of RWAs, on an IFRS 9 transitional basis. 2023 2022 2021 2020 CET1 capital (IFRS 9 transitional) (a) £3,711m £3,633m £3,616m £3,271m RWA (IFRS 9 transitional) (b) £25,176m £24,148m £24,232m £24,399m CET1 ratio (IFRS 9 transitional) (a)/(b) 14.7% 15.0% 14.9% 13.4%	It's an indicator of bank solvency that gauges the strength of the Group's CET1 capital relative to RWA.
CET1 ratio (IFRS 9 fully loaded)	No	No	N/a	CET1 capital as a percentage of RWAs, on an IFRS 9 fully loaded basis. 2023 2022 2021 2020 CET1 capital (IFRS 9 fully loaded) (a) £3,599m £3,519m £3,482m £2,961m RWA (IFRS 9 fully loaded) (b) £25,087m £24,056m £24,156m £24,246m CET1 ratio (IFRS 9 fully loaded) (a)/(b) 14.3% 14.6% 14.4% 12.2%	It's an indicator of bank solvency that gauges the strength of the Group's CET1 capital without adjusting for temporary IFRS 9 relief.
Tier 1 ratio	No	No	N/a	Tier 1 capital as a percentage of RWAs. 2023 2022 2021 2020 Tier 1 capital (a) £4,305m £4,299m £4,313m £4,186m RWA (b) £25,176m £24,148m £24,232m £24,399m Tier 1 ratio (a)/(b) 17.1% 17.8% 17.8% 17.2%	It's an indicator of bank solvency that gauges the strength of the Group's Tier 1 capital relative to RWA.

Additional information

Measuring the Group's performance

Financial performance metrics continued

Capital (Basis - non-IFRS):

Metric	KPI	LTIP	LTIP Year	Definition/formula	Why it matters
Total capital ratio	No	No	N/a	Total capital resources as a percentage of RWAs. 2023 2022 2021 2020 Total capital (a) £5,327m £5,319m £5,332m £4,935m RWA (b) £25,176m £24,148m £24,232m £24,399m Total capital ratio (a)/(b) 21.2% 22.0% 22.0% 20.2%	It's an indicator of bank solvency that gauges the strength of the Group's total capital relative to RWA.
Tangible net asset value (TNAV) per share	No	No	N/a	Tangible equity (total equity less intangible assets and AT1) divided by the number of ordinary shares in issue at the year end (which includes deferred shares and excludes own shares held). 2023 2022 2021 2020 Tangible equity (a) £4,840m £5,407m £4,185m £3,526m Number of ordinary shares in issue (b) 1,345m 1,409m 1,440m 1,439m Deferred shares (c) 2m 3m 5m 6m Own shares held (d) 1.3m 0.3m 0.1m 0.2m Tangible net asset value per share (a)/((b)+(c)-(d)) 359.8p 383.0p 289.8p 244.2p	It represents the value per share of the Group based on the Group's tangible net assets and can be used as a comparison against the current market share price.
Total shareholder return (TSR)	No	Yes	2023 2022	Share price at the end of the financial period, less the share price at the start of the financial period including dividends received over the period, divided by the share price at the start of the financial period. 2023 2022 2021 2020 Share price at the end of the financial period (a) 168.4p 124.3p 204.4p 73.0p Share price at the start of the financial period (b) 124.3p 204.4p 73.0p 114.9p Dividends (assuming reinvestment) (c) 12.6p 3.2p n/a n/a Total shareholder return ((a)-(b)+(c))/(b) 45.5% (37.6)% 180.1% (36.5)%	The use of total shareholder return enables us to target a measure that is directly linked to an investor's total return on a share, incorporating both share price movement and dividends paid.

Additional information

Measuring the Group's performance

Non-financial performance metrics:

Metric	KPI	LTIP	LTIP Year	Definition/formula (where applicable)	Why it matters
Colleague engagement	Yes	No	N/a	Outcomes from the-- colleague engagement survey preceding the end of the financial year	Measures our understanding of employee sentiment noting our Purpose of Making you happier about money extends to our colleagues and ensures our customers will be supported by delighted colleagues working in a healthy, flexible, digitally-led environment.
Customer complaints per 1,000 accounts	Yes	No	N/a	In line with FCA regulations, number of complaints per thousand accounts calculated as: Total number of complaints received in six-month period to reporting date x 1,000 Total number of accounts as at reporting date Currently excludes complaints relating to Insurance and Pure Protection FCA reporting group given historically skewed influence of legacy payment protection insurance.	Provides a measure to benchmark against peers and drives accountability within the Group to improve customer service and ensure we are making our customers happier about money.
Digital primacy	Yes	No	N/a	It measures the proportion of active PCA and Card customers who are digital-only in their engagement with Virgin Money. To qualify, each customer must: 1.  be digitally adopted and active (successfully logged in to the mobile app in the past 90 days); 2.  be signed up to our paperless proposition; 3.  have not transacted in stores within the last 90 days; and 4.  have not completed an authenticated call with contact centres in the past 90 days.	Measures the level of digitisation across our customer journeys while demonstrating the realisation of our ambition 'to be the UK's best digital bank'.
Group diversity indicators	Yes	Yes	2023	Percentage of colleagues who identify as female within our 0-3 leadership population and percentage of colleagues from under-represented cultural heritage backgrounds within our 0-3 leadership population and overall Virgin Money colleague base.	Having a diverse and representative workforce at all levels of our organisation enables us to better reflect, understand and support our customers. It also creates the conditions for rapid innovation, balanced perspective on risk and improved problem solving organisationally
Group Smile score	Yes	No	N/a	% of interactions scored as a 'Smile'. A 'Smile' is determined by our customers and only counted as a 'Smile' if they score the following three aspects at the highest ranking: •    Whether the customer got what they wanted on an interaction. •    How easy the interaction was. •    How the interaction made them feel.	It's a score that is used to supplement NPS, however we use the Smile scores as our key customer experience metric given its ability to capture the role of emotion in customer advocacy.
Total active relationship customer accounts	Yes	No	N/a	Active PCA, BCA and Card customer accounts where active is defined as > £0 balance for Cards; transaction in the last 12 months for PCA and BCA customer accounts.	It's an indicator of how well the Group is performing against its 'pioneering growth' strategic priority.

Additional information

Measuring the Group's performance

Non-financial performance metrics:

Metric	KPI	LTIP	LTIP Year	Definition/formula (where applicable)	Why it matters
ESG scorecard	No	Yes	2023 2022	Demonstrating progress against the Group's short, medium and long-term targets for: 1.  senior colleague gender representation(1); 2.  senior colleague ethnic minority representation(1); 3.  Group-wide ethnic minority representation(1); 4.  carbon emissions, Scope 1 and 2; 5.  net zero plan delivery (financed emissions reduction); and 6.  colleague engagement. (1)   As a percentage of the population declared.	Our ESG scorecard tracks our progress in creating a sustainable future and the inclusion of an ESG scorecard within our LTIP ensures that Executive Director remuneration is aligned with the Group's aspiration to drive positive social and environmental impact through everything we do.
Risk scorecard	No	Yes	2023 2022	Demonstrating progress against the Group's targets for customer complaints, operational risk losses, cost of risk, Group risk profile and Group risk appetite.	Our Risk scorecard demonstrates our commitment to, and monitoring of, prudent risk management within the business, and its inclusion within our LTIP ensures Executive Director remuneration is aligned with the Group's aspirations to deliver exceptional customer experience and ensure operations and processes drive resilience and positive customer outcomes.

Additional information

Underlying adjustments to the statutory view of performance

Management exclude certain items from the Group's statutory position to arrive at an underlying performance basis. Management's approach to underlying adjustments is aligned to the European Securities and Markets Authority (ESMA) guidelines on APMs and recommendations are subject to review and agreement by the Board Audit Committee. Additional detail on these items is provided below to help understand their exclusion from underlying performance.

Item	2023 £m	Restated 2022 £m	Reason for exclusion from the Group's current underlying performance
Restructuring charges	(131)	(82)	These costs relate to the Group's Digital-First strategy. The Group expects to incur c.£275m of restructuring charges across FY22-24.
Acquisition accounting unwinds	(29)	(35)	This consists of the unwind of the IFRS 3 fair value adjustments created on the acquisition of Virgin Money Holdings (UK) PLC in October 2018. 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 underlying adjustments until the remaining amounts have been fully reversed.
Legacy conduct	(12)	(8)	These costs are historical in nature and are not indicative of the Group's current practices.
Hedge ineffectiveness(1)	(16)	13	The result of hedge accounting and fair value movements on derivatives in economic hedges to the extent they either do not meet the criteria for hedge accounting or give rise to hedge ineffectiveness. These items are often volatile, driven by accounting requirements and not generally considered as a component of the core financial result.
Other:
UTM transition costs	(2)	(9)	These costs relate to UTM's transformation costs, principally for the build of a new platform for administration and servicing.
VISA shares	1	2	A one-off gain on conversion of Visa B Preference shares to Series A preference shares.
Internally developed software adjustments	(47)	(62)	These costs relate to the write-off of WIP and intangible asset balances held on the balance sheet as a result of a reassessment of the Group's practices on capitalisation against the backdrop of the move to an Agile project delivery in FY22, and in FY23 the write-off charge is in relation to the Group's mortgage digitisation programme. Following an assessment of the progress of the project to upgrade the mortgage platform and challenges identified during testing, we now anticipate a significant deferral and redesign as we implement the upgraded capability.
Property, plant and equipment, and investment property adjustments	(12)	-	£6m of these costs relate to a data cleanse exercise conducted on the Group's fixed asset registers ahead of a migration to a single fixed asset register in FY24 and a £6m reduction in the valuation of an investment property due to changes in market conditions.
Total other	(60)	(69)
Total underlying adjustments	(248)	(181)

(1)   Hedge ineffectiveness is now presented as an adjustment to underlying earnings due to the increase in volatility caused by the recent significant changes in interest rates. The comparative period has been adjusted accordingly.

Additional information

Glossary

Term	Definition
Additional Tier 1 (AT1)	Securities that are considered AT1 capital in the context of CRD IV.
Agile	Agile working is about bringing people, processes, connectivity and technology, time and place together to find the most appropriate and effective way of working.
arrears	A customer is in arrears (or in a state of delinquency) when they fail to adhere to their contractual payment obligations resulting in an outstanding loan that is unpaid or overdue. When a customer is in arrears, the total outstanding loans on which payments are overdue are said to be delinquent.
average assets	Represents the average of assets over the year adjusted for any disposed operations.
Bank	Clydesdale Bank PLC.
Basel II	The capital adequacy framework issued by the Basel Committee on Banking Supervision (BCBS) in June 2004.
Basel III	Reforms issued by the BCBS in December 2017 with subsequent revisions.
Basel 3.1	An updated version of the Basel III reforms of the regulatory framework issued by the BCBS in December 2017. These are being implemented in the UK by the PRA from 1 July 2025.
basis points (bps)	One hundredth of a percent (0.01%); meaning that 100 basis points is equal to 1%. This term is commonly used in describing interest rate movements.
BAU Business lending	Business lending excluding government lending scheme balances.
Board	Refers to the Virgin Money UK PLC Board or the Clydesdale Bank PLC Board as appropriate.
Bounce back loan scheme	A scheme implemented by the UK Government to provide financial support to businesses across the UK that were losing revenue, and seeing their cash flow disrupted as a result of COVID-19, enabling them to benefit from £50,000 or less in finance.
Business lending	Lending to non-retail customers, including overdrafts, asset and lease financing, term lending, bill acceptances, foreign currency loans, international and trade finance, securitisation and specialised finance.
carbon related assets	Assets tied to the energy and utilities sectors under the Global Industry Classification Standard (mapped to internal industry classifications), excluding water utilities and independent power and renewable electricity producer industries.
carrying value (also referred to as carrying amount)	The value of an asset or a liability in the balance sheet based on either amortised cost or fair value principles.
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.
Code	The 2018 UK Corporate Governance Code.
collateral	The assets of a borrower that are used as security against a loan facility.
Common Equity Tier 1 capital (CET1)	The highest quality form of regulatory capital that comprises total shareholders' equity, less goodwill and intangible assets and certain other regulatory adjustments.
Company	Virgin Money UK PLC.
Coronavirus business interruption loan scheme	A scheme implemented by the UK Government to provide financial support to smaller businesses across the UK that were losing revenue, and seeing their cash flow disrupted, as a result of COVID-19.
Coronavirus large business interruption loan scheme	A scheme implemented by the UK Government to provide financial support to mid-sized and larger businesses across the UK that were suffering disruption to their cash flow due to lost or deferred revenues as a result of COVID-19.
counterparty	The other party that participates in a financial transaction, with every transaction requiring a counterparty in order for the transaction to complete.
Coverage ratio	Impairment allowance as at the year end shown as a percentage of gross loans and advances as at the year end.
covered bonds	A corporate bond with primary recourse to the institution and secondary recourse to a pool of assets that act as security for the bonds on issuer default. Covered bonds remain on the issuer's balance sheet and are a source of term funding for the Group.
CRD IV	Capital Requirements Directive (EU) 2013/36 revised by Directive (EU) 2019/878, as implemented in the UK by PRA Policy Statement 22/21 and incorporated into the PRA Rulebook from 1 January 2022.
credit conversion factor (CCF)	CCFs are used in determining the EAD in relation to a credit risk exposure. The CCF is an estimate of the proportion of undrawn and off-balance sheet commitments expected to be drawn down at the point of default.
Credit impaired financial asset	A financial asset that is in default or has an individually assessed provision. This is also referred to as a 'Stage 3' impairment loss and subject to a lifetime ECL calculation. The Group considers 90 DPD as a backstop in determining whether a financial asset is credit impaired.
Credit risk mitigation	Techniques to reduce the potential loss in the event that a customer (borrower or counterparty) becomes unable to meet its obligations. This may include the taking of financial or physical security, the assignment of receivables or the use of credit derivatives, guarantees, credit insurance, set-off or netting.
CRR	Capital Requirements Regulation (EU) 575/2013 revised by Regulation (EU) 2019/876, as implemented in the UK by PRA Policy Statement 22/21 and incorporated into the PRA Rulebook from 1 January 2022
customer deposits	Money deposited by individuals or corporate entities that are not credit institutions, and can be either interest bearing, non-interest bearing or term deposits.
days past due (DPD)	The number of days a facility has borrowing in excess of an agreed or expired limit or, where facilities are subject to a regular repayment schedule, contractual payments are not fully up to date.

Additional information

Glossary

Term	Definition
default	A customer is in default when either they are more than 90 DPD on a credit obligation to the Group, or are considered unlikely to pay their credit obligations in full without recourse to actions such as realisation of security (if held).
delinquency	See 'arrears'.
Demerger	The demerger of the Group from NAB which took effect on 8 February 2016 pursuant to which all of the issued share capital of CYB Investments Limited was transferred to the Company (formerly CYBG PLC) by NAB in consideration for the issue and transfer of the Company (formerly CYBG PLC) shares to NAB in part for the benefit of NAB (which NAB subsequently sold pursuant to the Company's IPO) and in part for the benefit of NAB shareholders under a scheme of arrangement under part 5.1 of the Australian Corporations Act.
derivative	A financial instrument that is a contract or agreement whose value is related to the value of an underlying instrument, reference rate or index.
effective interest rate (EIR)	The rate used to calculate interest income or expense under the effective interest method.
emissions intensity	Emission rate of a given pollutant per unit of economic output or activity.
encumbered assets	Assets that have been pledged as security, collateral or legally 'ring-fenced' in some other way which prevents those assets being transferred, pledged, sold or otherwise disposed.
exposure	A claim, contingent claim or position which carries a risk of financial loss.
exposure at default (EAD)	The estimate of the amount that the customer will owe at the time of default.
fair value	The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions.
Flood Re	A joint initiative between the UK Government and home insurers to provide widely available and affordable insurance for homes in high-risk flood areas.
forbearance	The term generally applied to the facilities provided or changes to facilities provided to assist borrowers, who are experiencing, or are about to experience, a period of financial stress.
full time equivalent (FTE)	The standardised method of measurement that represents the number of hours worked by all Virgin Money employees, both full time and part time (excluding contractors or long-term absences).
Group	Virgin Money UK PLC and its controlled entities.
hedge ineffectiveness	Represents the extent to which the income statement is impacted by changes in fair value or cash flows of hedging instruments not being fully offset by changes in fair value or cash flows of hedged items.
IFRS 9	The financial instrument accounting standard which was adopted by the Group with effect from 1 October 2018.
IFRS 9 transitional adjustments - dynamic	That part of the transitional adjustments on regulatory capital arising from the increase in impairment provisions (on non-credit impaired exposures) from the date of initial adoption of IFRS 9 to the reporting date.
IFRS 9 transitional adjustments - static	That part of the transitional adjustments on regulatory capital arising from the increase in impairment provisions on initial adoption of IFRS 9 from those calculated under IAS 39.
impairment allowances	An ECL provision held on the balance sheet for financial assets calculated in accordance with IFRS 9. The impairment allowance is calculated as either a 12-month or a lifetime ECL.
impairment losses	The ECL calculated in accordance with IFRS 9 and recognised in the income statement with the carrying value of the financial asset reduced by creating an impairment allowance. Impairment losses are calculated as either a 12-month or lifetime ECL.
Internal Capital Adequacy Assessment Process (ICAAP)	The Group's assessment of the levels of capital that it needs to hold through an examination of its risk profile from regulatory and economic capital viewpoints.
Internal Liquidity Adequacy Assessment Process (ILAAP)	The Group's assessment and management of balance sheet risks relating to funding and liquidity.
Internal Ratings-Based approach (IRB)	A method of calculating credit risk capital requirements using internal, rather than supervisory, estimates of risk parameters.
investment grade	The highest possible range of credit ratings, from 'AAA' to 'BBB', as measured by external credit rating agencies.
Level 1 fair value measurements	Financial instruments whose fair value is derived from unadjusted quoted prices for identical instruments in active markets.
Level 2 fair value measurements	Financial instruments whose fair value is derived from quoted prices for similar instruments in active markets and financial instruments valued using models where all significant inputs are observable.
Level 3 fair value measurements	Financial instruments whose fair value is derived from valuation techniques where one or more significant inputs are unobservable.
lifetime ECL	The ECL calculation performed on financial assets where a SICR since origination has been identified. This can be either a 'Stage 2' or 'Stage 3' impairment loss depending on whether the financial asset is credit impaired.
Listing Rules	Regulations applicable to any company listed on a UK stock exchange, subject to the oversight of the UK Listing Authority (UKLA). The Listing Rules set out mandatory standards for any company wishing to list its shares or securities for sale to the public.
loan to value ratio (LTV)	A ratio that expresses the amount of a loan as a percentage of the value of the property on which it is secured.
location-based emissions	Calculated using the average emissions intensity of the grids on which energy consumption occurs, using mostly grid-average emission factor data.
loss-absorbing capacity (LAC) requirement	The required level of MREL resources that the Group is required to hold to meet its MREL requirement and applicable capital buffers set by the BoE.

Additional information

Glossary

Term	Definition
loss given default (LGD)	The estimate of the loss that the Group will suffer if the customer defaults (incorporating the effect of any collateral held).
Low-carbon economy	An economy based on energy sources that produce low levels of greenhouse gas emissions.
market-based emissions	Calculated as the electricity that companies have purposefully chosen to purchase. It derives emission factors from contractual instruments, which include any type of contract between two parties for the sale and purchase of energy bundled with attributes about the energy generation, or for unbundled attribute claims.
medium-term notes	Debt instruments issued by corporates, including financial institutions, across a range of maturities.
Minimum Requirement for Own Funds and Eligible Liabilities (MREL)	A minimum requirement for institutions to maintain equity and eligible debt liabilities, to help ensure that if an institution fails the resolution authority can use these financial resources to absorb losses and recapitalise the continuing business.
National Databank	The National Databank provides free mobile data, texts and calls to people in need via Good Things Foundation's network of local community partners.
net interest income (NII)	The amount of interest received or receivable on assets, net of interest paid or payable on liabilities.
Net Promoter Score (NPS)	This is an externally collated customer loyalty metric that measures loyalty between a provider, who in this context is the Group, and a consumer.
Net zero	Negating the amount of greenhouse gases produced by human activity.
Paris Climate Agreement	Legally binding international treaty to limit global warming to below 2 degrees Celsius, and preferably to 1.5 degrees Celsius above pre-industrial levels.
Personal lending	Lending to individuals rather than institutions excluding mortgage lending which is reported separately.
probability of default (PD)	The probability that a customer will default over either the next 12 months or lifetime of the account.
Recovery loan scheme (RLS)	A scheme implemented by the UK Government to provide financial support to small and medium-sized businesses across the UK to promote growth and investment following the disruption caused by COVID-19.
regulatory capital	The capital which the Group holds, determined in accordance with rules established by the PRA.
relationship deposits	Current account and linked savings balances.
residential mortgage-backed securities (RMBS)	Securities that represent interests in groups or pools of underlying mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and principal).
ring-fencing	A regime of rules which require banks to change the way that they are structured by separating retail banking services from investment and international banking. This is to ensure the economy and taxpayers are protected in the event of any future financial crises.
risk appetite	The level and types of risk the Group is willing to assume within the boundaries of its risk capacity to achieve its strategic objectives.
risk-weighted asset (RWA)	On and off-balance sheet assets of the Group are allocated a risk weighting based on the amount of capital required to support the asset.
sale and repurchase agreement (repo)	A short-term funding agreement that allows a borrower to create a collateralised loan by selling a financial asset to a lender. As part of the agreement, the borrower commits to repurchase the security at a date in the future repaying the proceeds of the loan. For the counterparty (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement or a reverse repo.
Scheme	The Group's defined benefit pension scheme, the Yorkshire and Clydesdale Bank Pension Scheme.
Science based targets	Science based targets provide a clearly defined pathway for companies and financial institutions to reduce GHG emissions, helping prevent the worst impacts of climate change and future-proof business growth. Targets are considered 'science based' if they are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement - limiting global warming to 1.5°C above pre-industrial levels.
Scope 1/2/3 emissions	Scope 1, 2, and 3 emissions are a way of categorising business emissions, accounting for both direct and indirect emitted GHGs. Scope 1 emissions are GHGs released directly from a business. Scope 2 emissions are indirect GHGs released from the energy purchased by an organisation. Scope 3 emissions are also indirect GHG emissions, accounting for upstream and downstream emissions of a product or service, and emissions across a business's value chain.
secured lending	Lending in which the borrower pledges some asset (e.g. property) as collateral for the lending.
securitisation	The practice of pooling similar types of contractual debt and packaging the cash flows from the financial asset into securities that can be sold to institutional investors in debt capital markets. It provides the Group with a source of secured funding that can achieve a reduction in funding costs by offering typically 'AAA' rated securities secured by the underlying financial asset.
Segment	Generally refers to customer, product or commercial lines unless used within the financial statements where the results are disclosed on a single segment basis in line with that reported to the Group's Chief Operating Decision Maker.
significant increase in credit risk (SICR)	The assessment performed on financial assets at the reporting date to determine whether a 12-month or lifetime ECL calculation is required. Qualitative and quantitative triggers are assessed in determining whether there has been a SICR since origination. The Group considers 30 DPD as a backstop in determining whether a SICR since origination has occurred.
standardised approach	In relation to credit risk, a method for calculating credit risk capital requirements using External Credit Assessment Institutions ratings and supervisory risk weights. In relation to operational risk, a method of calculating the operational capital requirement by the application of a supervisory defined percentage charge to the gross income of eight specified business lines.
stress testing	The term used to describe techniques where plausible events are considered as vulnerabilities to ascertain how this will impact the own funds or liquidity which a bank holds.

Additional information

Glossary

Term	Definition
structured entity	An entity created to accomplish a narrow well-defined objective (e.g. securitisation of financial assets). An SE may take the form of a corporation, trust, partnership or unincorporated entity. SEs are often created with legal arrangements that impose strict limits on the activities of the SE. May also be referred to as an SPV.
subordinated debt	Liabilities which rank after the claims of other creditors of the issuer in the event of insolvency or liquidation.
Term Funding Scheme (TFS)	A scheme launched in 2016 by the BoE to allow banks and building societies to borrow from the BoE at rates close to base rate. This is designed to increase lending to businesses by lowering interest rates and increasing access to credit.
Tier 1 capital	A measure of a bank's financial strength defined by CRD IV. It captures CET1 capital plus other Tier 1 securities (as defined by CRD IV) in issue, subject to deductions.
Tier 2 capital	A component of regulatory capital, including qualifying subordinated debt, eligible collective impairment allowances and other Tier 2 securities as defined by CRD IV.
unsecured lending	Lending in which the borrower pledges no assets as collateral for the lending (such as credit cards and current account overdrafts).
value at risk (VaR)	A measure of the loss that could occur on risk positions as a result of adverse movements in market risk factors (e.g. rates, prices, volatilities) over a specified time horizon and to a given level of confidence.

Additional information

Abbreviations

ACS	Annual cyclical scenario
AFD	Approaching financial difficulty
AGM	Annual General Meeting
AI	Artificial intelligence
ALCO	Asset and Liability Committee
ALMV	A Life More Virgin
APM	Alternative Performance Measure
ASX	Australian Securities Exchange
AT1	Additional Tier 1
ATM	Automated teller machine
AUM	Assets under management
BAU	Business as usual
BCA	Business current account
BCBS	Basel Committee on Banking Supervision
BoE	Bank of England
bps	Basis points
BTL	Buy-to-let
CBES	Climate Biennial Exploratory Scenario
CBI	Confederation of British Industry
CCC	Climate Change Committee
CCF	Credit conversion factor
CCyB	Countercyclical Capital Buffer
CDI	CHESS Depositary Interest
CDP	Carbon Disclosure Project
CER	Certified Emissions Reduction
CET1	Common Equity Tier 1 Capital
CIPD	Chartered Institute of Personnel and Development
CMA	Competition and Markets Authority
CPI	Consumer Price Index
CRD	Capital Requirements Directive
CRE	Commercial Real Estate
CRR	Capital Requirements Regulation
CSRBB	Credit spread risk in the banking book
CYBI	CYB Investments Limited
DE&I	Diversity, equity and inclusion
DEP	Deferred Equity Plan
DPD	Days past due
DTR	Disclosure Guidance and Transparency Rules
EAD	Exposure at default
EBA	European Banking Authority
EBT	Employee benefit trust
ECL	Expected credit loss
EIR	Effective interest rate
EPC	Energy performance certificate
EPS	Earnings per share
ESG	Environmental, social and governance
EY	Ernst & Young LLP
FCA	Financial Conduct Authority
FIRB	Foundation internal ratings-based
FPC	Financial Policy Committee
FRC	Financial Reporting Council
FTE	Full time equivalent
FVOCI	Fair value through other comprehensive income
FVTPL	Fair value through profit or loss
GAAP	Generally Accepted Accounting Principles
GDIA	Group Director Internal Audit
GDP	Gross Domestic Product
GDPR	General Data Protection Regulation
GFC	Global financial crisis
GHFA	Green Homes Finance Accelerator
GHG	Greenhouse gases
G-SII	Global Systemically Important Institution
HaRi	Human resources meets artificial intelligence
HMRC	His Majesty's Revenue and Customs
HPI	House Price Index
HQLA	High Quality Liquid Asset
IAS	International Accounting Standard
IASB	International Accounting Standards Board
IBOR	Interbank Offered Rate
ICAAP	Internal Capital Adequacy Assessment Process
IFRS	International Financial Reporting Standard
ILAAP	Internal Liquidity Adequacy Assessment Process
IPO	Initial Public Offering
IRB	Internal ratings-based
IRRBB	Interest rate risk in the banking book
ISA	International Standards on Auditing
ISAE	International Standard on Assurance Engagements
ISDA	International Swaps and Derivatives Association
ISSB	International Sustainability Standards Board
JV	Joint venture
KMP	Key management personnel
KPI	Key Performance Indicator
LAC	Loss-absorbing capacity
LCR	Liquidity coverage ratio
LDR	Loan to deposit ratio
LGBTQ+	Lesbian, gay, bisexual, transgender, queer (or questioning) plus
LGD	Loss Given Default
LIBOR	London Interbank Offered Rate
LSE	London Stock Exchange
LTIP	Long-term incentive plan
LTV	Loan to value
MGC	Model Governance Committee
MREL	Minimum Requirement for Own Funds and Eligible Liabilities

Additional information

Abbreviations

MRT	Material Risk Takers
NAB	National Australia Bank Limited
NII	Net interest income
NIM	Net interest margin
NPS	Net promoter score
NSFR	Net stable funding ratio
NZBA	Net-Zero Banking Alliance
O-SII	Other Systemically Important Institution
PBT	Profit before tax
PCA	Personal current accounts
PCAF	Partnership for Carbon Accounting Financials
PD	Probability of Default
PIE	Pension Increase Exchange
POCI	Purchased or originated credit impaired
PRA	Prudential Regulation Authority
RACE	Risk Analytics Centre of Excellence
RAF	Risk Appetite Framework
RAS	Risk Appetite Statement
RLS	Recovery Loan Scheme
RMBS	Residential mortgage-backed securities
RMF	Risk Management Framework
RoTE	Return on Tangible Equity
RPI	Retail Price Index
RWA	Risk-weighted asset
SASB	Sustainability Accounting Standards Board
SBC	Sustainable Business Coach
SBTi	Science-based targets initiative
SDG	Sustainable Development Goal
SICR	Significant increase in credit risk
SIP	Statement of Investment Principles
SMCR	Senior Managers and Certification Regime
SME	Small or medium-sized enterprise
SMF	Sterling Monetary Framework
SONIA	Sterling Overnight Index Average
SST	Solvency Stress Test

STIP	Short-term Incentive Plan
TCFD	Task Force on Climate-related Financial Disclosures
TFS	Term Funding Scheme
TFSME	Term Funding Scheme with additional incentives for SMEs
TNAV	Tangible net asset value
TNFD	Taskforce on Nature-related Financial Disclosures
TPT	Transition Plan Taskforce
UK SDS	Sustainability Disclosure Standards
UN PRB	United Nations' Principles for Responsible Banking
UNEPFI	United Nations Environment Programme Finance Initiative
UTM	Virgin Money Unit Trust Managers Limited
VAA	Virgin Atlantic Airways Limited
VaR	Value at risk
VIU	Value-in-use
WIP	Work-in-progress
YoY	Year-on-year

Additional information

Country by country reporting

The Capital Requirements (Country by Country Reporting) Regulations 2013 came into effect on 1 January 2014 and place certain reporting obligations on financial institutions that are within the scope of the European Union's CRD IV. The purpose of the Regulations is to provide clarity on the source of the Group's income and the locations of its operations.

The vast majority of entities that are consolidated within the Group's financial statements are UK registered entities. The activities of the Group are described in the Strategic report contained in the Group's Annual Report and Accounts.

	2023 UK
Average FTE employees (number)	7,166
Total operating income (£m)	1,827
Profit before tax (£m)	345
Corporation tax paid (£m)	45
Public subsidies received (£m)	-

The only other non-UK registered entity of the Group is a Trustee company that is part of the Group's securitisation vehicles (Lanark and Lannraig). Lannraig Trustees Limited is registered in Jersey. This entity plays a part in the overall securitisation process by having the beneficial interest in certain mortgage assets assigned to it. This entity has no assets or liabilities recognised in its financial statements with the securitisation activity taking place in other UK registered entities of the structures. This entity does not undertake any external economic activity and has no employees. The results of this entity as well as those of the entire Lanark and Lannraig securitisation structures are consolidated in the financial statements of the Group.

Additional information

Other information

The financial information included in this results announcement does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 30 September 2023 were approved by the directors on 22 November 2023 and will be delivered to the Registrar of Companies following publication in December 2023. The auditor's report on those accounts was unqualified and did not include a statement under sections 498(2) (accounting records or returns inadequate or accounts not agreeing with records and returns) or 498(3) (failure to obtain necessary information and explanations) of the Companies Act 2006.

 

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