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CYBG PLC (VMUK)

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Wednesday 15 May, 2019

CYBG PLC

Half-year Report

RNS Number : 0799Z
CYBG PLC
15 May 2019
 

 

 

 

 

 

 

 

 

 

 

CYBG PLC

INTERIM FINANCIAL REPORT

SIX MONTHS TO 31 MARCH 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIS OF PRESENTATION

CYBG PLC (the 'Company'), together with its subsidiary undertakings (which together comprise the 'Group'), operate under the Clydesdale Bank, Yorkshire Bank, B and Virgin Money brands. It offers a range of banking services for both retail and business customers through retail branches, business banking centres, direct and online channels, and brokers. This release covers the results of the Group for the six months ended 31 March 2019.

Statutory basis: Statutory information is set out on pages 43 to 79. The IFRS 9 accounting standard replaced IAS 39 ('Financial Instruments: Recognition and Measurement'), introducing changes to the classification and measurement of financial instruments and the impairment of financial assets. Virgin Money adopted IFRS 9 on 1 January 2018 and CYBG on 1 October 2018.

Pro forma results: On 15 October 2018, the Company acquired all the voting rights in Virgin Money Holdings (UK) plc (Virgin Money) by means of a scheme of arrangement under Part 26 of the UK Companies Act 2006, with the transaction being accounted for as an acquisition of Virgin Money. We believe that it is helpful to also provide additional information which is more readily comparable with the historic results of the combined businesses. Therefore we have also prepared Pro forma results for the Group as if CYBG PLC and Virgin Money had always been a Combined Group, in order to assist in explaining trends in financial performance by showing a full 6 months performance for the Combined Group for both the current period and prior period, as well as a full 12 month performance of the Combined Group for the most recent year end results. A reconciliation between the results on a Pro forma basis and a statutory basis is included on page 17. The pro forma results are also presented on an underlying basis as there have been a number of factors which have had a significant effect on the comparability of the Group's financial position and results.

Underlying basis: The pro forma results are adjusted to remove certain items that do not promote an understanding of historical or future trends of earnings or cash flows, and therefore allows a more meaningful comparison of the Group's underlying performance. A reconciliation from the underlying pro forma results to the pro forma basis is shown on pages 15 to 16 and management's rationale for the adjustments is shown on page 80.

Alternative performance measures: the financial key performance indicators (KPIs) used by management in monitoring the Group's performance and reflected throughout this report are determined on a combination of bases (including statutory, regulatory and alternative performance measures), as detailed at 'Measuring financial performance - glossary' on pages 246 to 247 of the Group Annual Report and Accounts for the year ended 30 September 2018. 

Certain figures contained in this document, including financial information, may have been subject to rounding adjustments and foreign exchange conversions. Accordingly, in certain instances, the sum or percentage change of the numbers contained in this document may not conform exactly to the total figure given.

 

 

FORWARD LOOKING STATEMENTS

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

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

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

 

 

Interim financial report

 

For the six months ended 31 March 2019

 

Contents

 

H1 2019 highlights

1

 

 

Business and financial review

3

 

 

Risk management

18

 

 

Statement of Directors' responsibilities

41

 

 

Independent review report to CYBG PLC

42

 

 

Interim condensed consolidated financial statements

 

 

 

Interim condensed consolidated income statement

43

 

 

Interim condensed consolidated statement of comprehensive income

44

 

 

Interim condensed consolidated balance sheet

45

 

 

Interim condensed consolidated statement of changes in equity

46

 

 

Interim condensed consolidated statement of cash flows

47

 

 

Notes to the interim condensed consolidated financial statements

48

 

 

Additional information       

80

 

 

 

 

 

 

 

 

 

 

 

CYBG PLC Interim Results 2019

 

Our new, enlarged group delivered a resilient underlying financial performance in H1, with integration progressing well. We are now developing customer propositions that leverage our differentiated brand, digital capability and full product suite, and we will set out our ambitions at our Capital Markets Day on 19 June.

 

 

Note: this summary is on a pro forma basis as if Virgin Money was acquired on 1 October 2017 (actual completion 15 October 2018)

Resilient underlying financial performance; statutory profit impacted by acquisition and integration costs

-     Pro forma underlying profit before tax of £286m is 5% lower year on year due to the anticipated increase in impairments, but up 2% on H2 18; underlying Return on Tangible Equity (RoTE) was 10.4%

-     Pro forma profit before tax of £9m impacted by significant acquisition and integration costs; statutory profit after tax was £29m due to the tax charge and acquisition timing impact

-     Total underlying income of £843m in the first six months was in line with both H1 18 and H2 18:

Net interest income was down 1% on H1 18 with a lower Net Interest Margin (NIM) of 171bps due to the mortgage pricing pressures seen in 2018, although up 1% on H2 18 after pricing started to stabilise

Non-interest income was up 11% year on year due to growth in Virgin Atlantic credit card fee income

-     Underlying costs down 3% year on year to £480m; underlying cost to income ratio was 2%pts lower at 57%

-     Impairments increased to £77m; cost of risk of 21bps. In line with expectations reflecting the adoption of IFRS 9, a return to more normal levels in SME, as well as the growth and seasoning of our credit card portfolio

Continued delivery of sustainable customer growth

-     Customer lending growth of 2.4% to £72.7bn driven by:

Disciplined mortgage balance growth of 2.5% to £60.5bn

SME growth of 1.1% to £7.6bn; strong new business drawdowns of £1.1bn offset by higher redemptions

Unsecured balances up 4.2% to £4.5bn with strong growth from the Virgin Atlantic credit cards

-     Customer deposits up 1.2% to £61.7bn with an increase in relationship savings balances as we optimise mix

Integration progressing well; significant acquisition and integration costs incurred during the period

-     Integration programme progressing well with the top two layers of management rationalisation complete

-     Cost synergies being delivered in line with expectations; £33m of annual run-rate synergies realised to date

-     Acquisition and integration costs of £214m includes integration costs of £45m, VM transaction costs of £55m, capital neutral intangible asset write-offs of £127m and other accounting adjustments

Strong capital position maintained; acquisition costs, conduct and distributions impacted capital in H1 19

-     CET1 capital ratio of 14.5%; c.60bps reduction compared to the 30 Sep 2018 pro forma ratio of 15.1% reflects acquisition and integration costs, a small conduct provision top-up, as well as dividend and AT1 distributions

-     Conduct provision top-up of £33m primarily due to increased processing costs from speculative PPI claims

 

 

David Duffy, Chief Executive Officer of CYBG PLC commented:

"I am pleased to report that the Group has delivered a resilient underlying financial performance during the first half of the year and our three year integration programme is making good progress. As previously announced we have also increased our forecast of the total cost synergies available by £30m to a minimum of £150m by the end of FY 2021. We have already realised £33m of annual run-rate cost synergies in the first six months. As expected, profit before tax has been impacted by the significant Virgin Money acquisition and integration costs.

Our number one priority remains offering our customers attractive products and quality service, and we are pleased to have maintained strong Net Promoter Scores for both our B and Virgin Money brands, while our Clydesdale and Yorkshire Bank NPS continue to improve.

Despite sustained competition in the mortgage market and a continued uncertain economic backdrop, we have delivered solid growth in our mortgage book and we have seen signs that mortgage pricing has started to stabilise. In our SME business, we have maintained momentum in the origination of new customer facilities and we are also seeing good growth from our Virgin Atlantic credit card proposition.

We remain on track to deliver 2019 performance in line with guidance and look forward to updating the market in June on our refreshed strategy and the significant opportunities for our combined business."

Enquiries:

 

Investors and Analysts

 

Andrew Downey

Head of Investor Relations

+44 20 3216 2694

+44 7823 443 150

 

[email protected]

 

 

Media (UK)

 

Christina Kelly

+44 7484 905 358

Senior Media Relations Manager

[email protected]

 

 

Simon Hall

+44 7855 257 081

Media Relations Manager

[email protected]

 

 

Press Office

+44 800 066 5998

 

[email protected]

 

 

Powerscourt

 

Victoria Palmer-Moore

07725 565 545

Andy Smith

07872 604 889

 

 

Media (Australia)

 

Citadel Magnus

 

Peter Brookes

+61 407 911 389

James Strong

+61 448 881 174

 

 

CYBG PLC will be hosting a presentation for analysts and investors covering the interim results at the London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS, starting at 08:30 BST today (17:30 AEST). The meeting will be webcast live and available at www.cybg.com/investor-centre/financial-results. Webcast participants will be able to send questions into the meeting. A recording of the webcast and conference call will be made available on the website www.cybg.com/investor-centre/financial-results shortly after the meeting.

 

Dial in details:

UK Toll Free 0800 640 6441

Australia Toll Free 1 800 512 331

Australia Local 02 8417 2995

USA Toll Free 1 800 249 2588

USA Local 1 646 664 1960

All other locations +44 20 3936 2999

 

Participant Access Code - 016428

 

 

 

Business and financial review

Chief Executive Officer's statement

 

"I am pleased with our first six months as a combined business which has seen both clear progress in our integration programme and the delivery of a resilient underlying financial performance in challenging market conditions. With a strong platform on which to build, we now look forward to our Capital Markets Day in June where we will lay out our Group strategy as the first true national competitor to the status quo."

Our business performance has been resilient during the period against a challenging backdrop and we have made a good start to the integration work following the acquisition of Virgin Money. We have been working hard to refine our strategy and to explore the opportunities we have, including those available through the Virgin brand, to create leading propositions for Retail and SME customers in the marketplace. We look forward to sharing more about our longer term ambitions on 19 June.

The UK economic outlook remains uncertain, as it has done for some time, and the delay to the resolution of the UK's negotiations with the EU is likely to extend this. While this has caused some customers to pause investment and consumption, demand has remained robust. Strong competition continues in several of our key markets, although we have seen signs that pricing in the mortgage market has started to stabilise.

Despite these uncertainties, our focus on customer proposition and service has enabled us to continue to grow our business and attract new customers. SME drawdowns in the half were our strongest so far at £1.1bn, and with a strong pipeline into the second half, we remain on track to deliver our commitment to provide at least £6bn of new lending to SMEs over three years by the end of 2019. Although we were surprised to have not received an award from the BCR's Capability and Innovation Fund, we are excited about the prospects for our SME business and will update in June on our plans for delivering a differentiated SME proposition.

In mortgages, we have leveraged our two differentiated propositions to respond to market conditions and achieve disciplined balance growth, underpinned by strong customer retention. Although the unsecured personal lending market is showing signs of more muted activity, our new propositions in partnership with Virgin Atlantic Airways (VAA) and Salary Finance, as well as an improved digital unsecured loan offering, have enabled us to grow within our risk appetite. The success of the VAA cards in particular demonstrates the opportunities available through partnership models with other Virgin Group companies.

We have delivered solid deposit growth during the period, with continued success in attracting relationship savings deposits, partly offset by a reduction in more costly term deposits as we optimise our mix of funding. We also continue to ensure appropriate funding diversification through our secured wholesale programmes, with over £1bn of successful issuance across mortgage-backed securities and covered bonds in the first half.

On a pro forma basis, the financial results for the first half show a resilient performance, with underlying profit of £286m 5% lower than the first half of 2018, but up 2% on the second half. We have continued to reduce costs in line with plan, down 3% year on year, benefitting from previous restructuring activity and initial integration cost synergies. Income has been resilient as we focus on optimising our balance sheet to mitigate some of the competitive margin pressures and other income generation has been supportive. As expected, impairments have increased following the adoption of IFRS 9, a return to more normal impairment levels in our SME book following an unusually benign 2018, and the seasoning of our credit card portfolio. However, our cost of risk is in line with our expectations at 21bps. Underlying return on tangible equity was 10.4% in the first half and we remain on track to deliver full year performance in line with our NIM and cost guidance.

As expected, largely due to the significant upfront costs related to the acquisition of Virgin Money, we have reported a small pro forma profit before tax of £9m. This also reflects a small additional PPI provision top-up due to the processing costs of managing a higher volume of speculative claims and our expectation for slightly higher complaint levels ahead of August's time bar. Our capital position remains strong with a CET1 ratio at 14.5%.  This has reduced c.60bps from the pro forma position reported for 30 September 2018, due to acquisition and integration costs incurred, the conduct charge, as well as ordinary dividend and AT1 distributions.

 

 

Business and financial review

Chief Executive Officer's statement

 

We are progressing well with our integration programme, with £33m of annual run-rate cost synergies already realised through addressing senior management duplication and the initial harmonisation of some central cost activities. Six months into our three year integration process we have already increased our expected cost synergies to £150m, from the £120m announced at the time of the acquisition. The two businesses are coming together well and we have rolled out our new purpose for the Group. I have been delighted to see colleagues getting behind this and using it to drive better outcomes for our customers and stakeholders.

We continue to make progress in improving the service we offer our 6.4m customers. Virgin Money remains one of the best rated retail banks in the UK for customer advocacy in comparison to our peers and NPS has increased for all of our historic CYBG brands since September 2018, including an NPS on the B account of +35 in Q2.

Our digital transformation is also continuing. Our iB platform has been further extended with the launch of Business Internet Banking. Our open architecture allowed us to go live with the B store on the web and in-app, creating a new product platform for the bank to launch and test concepts with real customers in a live B app environment. We also launched B currency in the App Store helping customers take the hassle out of currency conversion. With a 4.8 rating in the App Store, it also won Most Innovative Product of the Year at the FSTech Awards.

In our Clydesdale Bank mortgage franchise we were pleased to have been awarded the 'Best Large Loan Lender' at the 2019 Mortgage Strategy Awards demonstrating our continued customer focus through our differentiated mortgage propositions. In SME, we opened our new state-of-the-art SME hub, B Works, in the heart of Manchester during January, further underlining our track record of supporting SMEs across the UK. Finally, our sponsorship of the Virgin Money London Marathon in April enabled c.18k runners to donate a record £27m through Virgin Money Giving, an increase of 15% compared to 2018.

The Virgin Money acquisition was a landmark moment for the Group and the combination will create the first true national competitor to the status quo in UK banking. Everything we have seen since completing the transaction, including our exciting engagement with the Virgin Group, has given us further confidence that we can achieve our ambitions. We have an opportunity to create a more efficient, fully digitally-enabled bank and believe the Virgin brand and potential Virgin Group partnerships will provide a strong competitive advantage. The completion of the FSMA part VII process is therefore a key milestone for us and we are progressing well towards that and continue to expect completion by the end of calendar year 2019.

Finally, I want to thank our colleagues and the Board for their support and willingness to engage positively at a time of considerable change for the Group. I look forward to sharing our plans with you at the Capital Markets Day on 19 June and continuing the exciting progress we have made so far.

 

 

 

 

David Duffy, Chief Executive Officer - 14 May 2019

 

 

 

Business and financial review

Overview of Group results - Statutory basis

 

The following tables present the Group on a statutory basis. That is, they include the results of Virgin Money from the date of acquisition on 15 October 2018. The acquisition has had a significant impact on the Group's statutory results and financial position as shown below. Accordingly, we believe that it is helpful to also provide additional historical information which is more readily comparable with the results of the combined businesses. This information, described as the pro forma results, is covered in detail on pages 7 to 14.

 

Summary income statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6 months to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 Mar 2019

31 Mar 2018

30 Sep 2018

 

 

 

 

 

 

 

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

 

820

 

426

 

425

Non-interest income

 

 

 

 

 

106

 

77

 

79

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income

 

 

 

 

 

 

926

 

503

 

504

Operating and administrative expenses

 

 

 

(711)

 

(576)

 

(554)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit/(loss) before impairment losses

 

 

 

215

 

(73)

 

(50)

Impairment losses on credit exposures(1)

 

 

 

(173)

 

(22)

 

(19)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statutory profit/(loss) on ordinary activities before tax

42

 

(95)

 

(69)

Tax (expense)/credit

 

 

 

 

 

 

(13)

 

19

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statutory profit/(loss) after tax

 

 

 

 

 

29

 

(76)

 

(69)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                 

 

 (1) Impairment losses on credit exposures relate solely to loans and advances to customers (refer to note 3.3 to the financial statements) and exclude credit risk adjustments on loans at fair value through profit or loss which are incorporated in the movement in other assets and liabilities at fair value within non-interest income (refer to note 2.3 to the financial statements). Impairment losses on credit exposures for the current period are calculated on an expected credit loss (ECL) basis under IFRS 9, which the Group adopted on 1 October 2018. For all other periods, impairment losses are calculated under the incurred loss basis as required by IAS 39.

 

The Group has recognised a statutory profit after tax of £29m (31 March 2018: loss of £76m). The increase in profit year on year primarily reflects the acquisition of Virgin Money and a substantial reduction in conduct charges.  Together, these have more than offset a number of one-off charges that have arisen principally in connection with the acquisition of Virgin Money.

 

Summary balance sheet

 

 

 

 

 

 

 

                    As at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 Mar 2019

30 Sep 2018

 

 

 

 

 

 

 

 

 

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer loans

 

 

 

 

 

 

 

 

72,670

 

33,281

Other financial assets

 

 

 

 

 

 

 

 

16,027

 

9,234

Other non-financial assets

 

 

 

 

 

 

 

1,458

 

941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

 

90,155

 

43,456

 

 

 

 

 

 

 

 

 

 

 

 

Customer deposits

 

 

 

 

 

 

 

 

(61,688)

 

(28,854)

Wholesale funding

 

 

 

 

 

 

 

 

(19,754)

 

(8,095)

Other liabilities

 

 

 

 

 

 

 

 

(3,355)

 

(3,321)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

 

 

 

 

 

(84,797)

 

(40,270)

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary shareholders' equity

 

 

 

 

 

 

 

(4,239)

 

(2,736)

 

AT1 equity

 

 

 

 

 

 

 

 

(697)

 

(450)

Non-controlling interests

 

 

 

 

 

 

 

(422)

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

(5,358)

 

(3,186)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

 

 

 

 

 

 

(90,155)

 

(43,456)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                             

 

 

 

 

 

 

Business and financial review

Overview of Group results - Statutory basis

 

Key performance indicators(1)

 

 

 

 

 

6 months to

6 months to

12 months to

 

 

 

 

31 Mar 2019

31 Mar 2018

30 Sep 2018(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profitability:

 

 

 

 

 

 

Statutory return on tangible equity (RoTE)

 

 

0.1%

(7.0)%

(6.9)%

Statutory cost to income ratio (CIR)

 

 

77%

115%

112%

Statutory return on assets

 

 

 

0.06%

(0.36)%

(0.34)%

Statutory basic earnings/(loss) per share (EPS)

 

0.2p

(10.2)p

(19.7)p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at:

 

 

 

31 Mar 2019

31 Mar 2018

30 Sep 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory Capital:

 

 

 

 

 

 

CET1 ratio

 

 

 

14.5%

11.3%

10.5%

Tier 1 ratio

 

 

 

18.6%

13.5%

12.7%

Total capital ratio

 

 

 

21.9%

16.7%

15.9%

Capital Requirements Directive (CRD IV) leverage ratio

 

4.7%

6.0%

5.6%

UK leverage ratio

 

 

 

5.3%

7.0%

6.5%

Tangible net asset value (TNAV) per share

 

260.1p

276.7p

262.3p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding and Liquidity:

 

 

 

 

 

 

Loan to deposit ratio (LDR)

 

 

 

118%

115%

115%

Liquidity coverage ratio (LCR)

 

 

158%

131%

137%

Net stable funding ratio (NSFR)

 

 

125%

119%

119%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

For a definition of each of the KPIs, refer to 'Measuring financial performance - glossary' on pages 246 to 247 of the Group Annual Report and Accounts for the year ended 30 September 2018. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.

(2)

Profitability KPIs are provided with a full year to 30 September 2018 comparative in line with the statutory income statement presentation in the financial statements and as previously reported in the 2018 Group Annual Report and Accounts.

 

 

 

 

         

 

 

 

Business and financial review

Overview of Group results - Pro forma basis

 

The pro forma information in this section presents the Group results as if CYBG PLC and Virgin Money had always been a Combined Group. This assists in explaining trends in financial performance by showing a full 6 month performance for the Combined Group for both the current period and prior periods of the Combined Group for the most recent year end results. A reconciliation between the results on a pro forma basis and a statutory basis is included on page 17.

 

Summary income statement - underlying and pro forma basis(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6 months to

 

 

 

 

 

 

 

31 Mar 2019

31 Mar 2018

30 Sep 2018

 

 

 

 

 

 

 

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying net interest income

 

 

 

 

 

 

728

738

719

Non-interest income

 

 

 

 

 

 

115

104

124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total underlying operating income

 

 

 

 

 

843

842

843

Underlying operating and administrative expenses

 

 

 

(480)

(493)

(505)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying operating profit before impairment losses

 

 

 

363

349

338

Underlying impairment losses on credit exposures(2)

 

 

 

(77)

(48)

(58)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying profit on ordinary activities before tax

 

 

 

286

301

280

 

 

 

 

 

 

 

 

 

 

Acquisition and integration costs

 

 

 

(214)

-

(39)

Legacy conduct

 

 

 

 

 

 

(33)

(220)

(176)

Restructuring and separation

 

 

 

 

 

(2)

(28)

(18)

Other(3)

 

 

 

 

 

 

(28)

(7)

(9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma profit on ordinary activities before tax

 

 

 

9

46

38

                           

 

 

(1) The summary income statement is presented on an underlying and pro forma basis as explained in the Basis of Presentation.   

(2) Impairment losses on credit exposures relate solely to loans and advances to customers (refer to note 3.3 to the financial statements) and exclude credit risk adjustments on loans at fair value through profit or loss which are incorporated in the movement in other assets and liabilities at fair value within non-interest income (refer to note 2.3 to the financial statements).

(3) Other includes a £17m charge in relation to SME transformation, including preparations to participate in the RBS Incentivised Switching remedy, and a charge of £11m for Guaranteed Minimum Pension (GMP) equalisation in the Group's defined benefit scheme.

 

On a pro forma basis, the Group has reported underlying profit before tax of £286m (31 March 2018: £301m). Operating income is flat year on year and operating costs reduced from £505m in the 6 months to 30 September 2018 to £480m in the current period due to cost savings delivered through the Group's cost efficiency and integration programmes. Impairment losses increased to £77m primarily due to the combination of the adoption of IFRS 9, a return to more normal levels of SME impairments following a benign 2018, and the growth and seasoning of the Retail unsecured portfolios. The increase in impairment charges is the primary driver of the reduction in underlying RoTE from 11.8% to 10.4%, and underlying basic EPS from 16.1p to 13.4p.

 

The Group recorded pro forma profit before tax of £9m, after allowing for a number of items, principally costs, that are exceptional in nature and have therefore been removed from the underlying performance of the business.  These include acquisition and integration costs of £214m, including integration costs of £45m and acquisition costs of £169m. Acquisition costs comprise a charge of £67m (net) in relation to the unwind of acquisition accounting adjustments, a (capital neutral) charge of £127m in relation to the rationalisation of the Group's software estate following the Virgin Money acquisition; an effective interest rate (EIR) adjustment of £80m relating to the mortgage portfolio following the harmonisation of accounting policies across the Group; and £55m of transaction costs incurred as part of the acquisition of Virgin Money. The Group has also incurred further costs of £33m in respect of dealing with legacy conduct matters. The majority of the legacy conduct charges related to PPI (£30m) albeit the scale of PPI charges has substantially reduced compared to prior periods (£202m for the 6 months to 31 March 2018 and £150m for the 6 months to 30 September 2018). Due to the size and nature of these adjustments they are not shown within the underlying performance of the Group. 

 

 

 

Business and financial review

Overview of Group results - Pro forma basis

 

 

Summary balance sheet

 

 

 

 

 

 

 

                  As at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 Mar 2019

30 Sep 2018

 

 

 

 

 

 

 

 

 

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer loans

 

 

 

 

 

 

 

 

72,670

 

70,939

 

Other financial assets

 

 

 

 

 

 

 

 

16,027

 

16,202

 

Other non-financial assets

 

 

 

 

 

 

 

1,458

 

1,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

 

90,155

 

88,548

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer deposits

 

 

 

 

 

 

 

 

(61,688)

 

(60,963)

 

Wholesale funding

 

 

 

 

 

 

 

 

(19,754)

 

(18,675)

 

Other liabilities

 

 

 

 

 

 

 

 

(3,355)

 

(3,726)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

 

 

 

 

 

(84,797)

 

(83,364)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary shareholders' equity

 

 

 

 

 

 

 

(4,239)

 

(4,312)

 

AT1 equity

 

 

 

 

 

 

 

 

(697)

 

(450)

 

Non-controlling interests

 

 

 

 

 

 

 

(422)

 

(422)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

(5,358)

 

(5,184)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

 

 

 

 

 

 

(90,155)

 

(88,548)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                             

 

 

 

 

Business and financial review

Overview of Group results - Pro forma basis

 

Key performance indicators(1)

 

 

 

 

 

 

 

 

6 months to

6 months to

6 months to

 

 

 

 

 

 

 

31 Mar 2019

31 Mar 2018

30 Sep 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profitability:

 

 

 

 

 

 

 

 

 

NIM

 

 

 

 

 

 

1.71%

1.84%

1.72%

Underlying RoTE

 

 

 

 

 

 

10.4%

11.8%

10.2%

Underlying CIR

 

 

 

 

 

 

57%

59%

60%

Underlying return on assets

 

 

 

 

 

 

0.49%

0.61%

0.51%

Underlying basic EPS(2)

 

 

 

 

 

 

13.4p

16.1p

13.7p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at:

 

 

 

 

 

 

 

31 Mar 2019

30 Sep 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality:

 

 

 

 

 

 

 

 

 

Impairment charge to average customer loans (cost of risk)

 

 

 

 

0.21%

0.15%

Total provision to customer loans

 

 

 

 

 

 

0.52%

0.51%

Indexed LTV of mortgage portfolio(3)

 

 

 

 

58.2%

57.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory Capital:

 

 

 

 

 

 

 

 

 

CET1 ratio(4)

 

 

 

 

 

 

 

14.5%

15.1%

Tier 1 ratio

 

 

 

 

 

 

 

18.6%

18.3%

Total capital ratio

 

 

 

 

 

 

 

21.9%

20.6%

CRD IV leverage ratio

 

 

 

 

 

 

 

4.7%

4.6%

UK leverage ratio

 

 

 

 

 

 

 

5.3%

5.1%

TNAV per share(5)

 

 

 

 

260.1p

260.0p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding and Liquidity:

 

 

 

 

 

 

 

 

 

LDR

 

 

 

 

 

 

 

118%

116%

LCR

 

 

 

 

 

158%

161%

NSFR

 

 

 

 

 

125%

126%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

For a definition of each of the KPIs, refer to 'Measuring financial performance - glossary' on pages 246 to 247 of the Group Annual Report and Accounts for the year ended 30 September 2018 and in the Glossary on pages 81 to 82. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.

(2)

For pro forma purposes, the weighted average number of ordinary shares in issue assumes that the 540,856,644 share issuance arising on the acquisition of Virgin Money was completed on 1 October 2017, and excludes own shares held. 

(3)

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

(4)

The pro forma CET 1 ratio at 30 September 2018 reflects the impact of the acquisition of Virgin Money and IRB accreditation.

(5)

The pro forma total number of ordinary shares in issue used in the TNAV per share calculation for the comparative periods is the number of ordinary shares in issue on 15 October 2018 following the acquisition of Virgin Money (excluding own shares held).  This has been applied across all periods for comparability purposes.

 

 

 

Business and financial review

Financial performance review - Pro forma basis

1. Sustainable growth in customer lending and deposit balances

 

 

 

 

 

 

 

 

As at

 

 

 

 

 

 

 

 

 

31 Mar 2019

30 Sep 2018

 

 

 

£m

£m

 

 

 

 

 

 

 

 

 

 

Mortgages

 

 

60,543

59,074

SME lending

 

 

7,619

7,538

Unsecured personal lending

 

 

4,508

4,327

 

 

 

 

 

 

 

 

 

 

Gross loans and advances to customers

 

 

72,670

70,939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current accounts

 

 

(14,728)

(14,665)

Variable rate savings accounts

 

 

(24,536)

(22,447)

Fixed rate term deposits

 

 

(22,424)

(23,851)

 

 

 

 

 

 

 

 

 

 

Total customer deposits

 

 

(61,688)

(60,963)

 

 

 

 

 

 

 

 

 

 

Mortgages

Our continued focus on our differentiated mortgage propositions has resulted in annualised growth of 5.0% in the period, above system growth(1) of 2.6%. On a pro forma basis our market share has increased from 4.2% to 4.3%.

 

The mortgage market has remained highly competitive during the period. A large number of active lenders, combined with the surplus liquidity deployment from the large incumbent banks' ring-fenced entities, has resulted in an over-supply of lending and a dilution in mortgage margins. The uncertain economic backdrop and the maturity profile of business means that the gross lending market continues to be driven by remortgaging activity, up 10% on the prior period.

 

We continued to see a growing number of customers favour longer term fixed rate mortgage products, as customers seek to further capitalise on the prevailing low interest rate environment. Conversely, UK variable rate and Standard Variable Rate (SVR) balances have reduced. The buy-to-let (BTL) property market has been more subdued following last year's changes in tax relief for landlords, an increase in stamp duty and enhanced affordability assessments.

 

The average LTV of new lending increased slightly to 69.5% from 68.8% and the average LTV of the mortgage book also increased to 58.2% from 57.3.%.  Our proportion of residential mortgages 90 days in arrears was stable at 0.30%.

 

We expect the pace of lending growth in our mortgage book to slow in the second half as we look to optimise the mix of lending in our portfolio and proactively reduce volume in selected segments in order to mitigate some of the margin pressures.

 

SME lending

Our targeted lending strategy, supported by lending proposition teams with sector specialisms (such as Healthcare, Hotels & Real Estate, Social Housing, Energy, and Growth Finance) has resulted in growth in our SME lending portfolio of £81m in the period (2.1% annualised), slightly lower than system growth(2) of 2.6%.

 

While we had a strong six months in terms of new business drawdowns (£1.1bn during the period), we are slightly behind market growth on a net basis due to higher redemptions following several customer driven business disposals during the period, as well as our decision to be more selective on refinancing activity. The Group remains on target to deliver on its pledge to lend SMEs £6bn over the three years to 2019.

 

Underlying asset quality in our SME book remains resilient and stable, reflective of the diversity within the portfolio as a result of controlled risk appetite and an economic environment which continues to support business performance.

 

SMEs are facing an extended period of uncertainty due to the continuation of Brexit negotiations. Despite this uncertainty, at a macro-economic level the market appears to have performed well and sectors which have previously struggled, such as construction and manufacturing, have shown improvement. We expect to see growth in our SME portfolio over the second half of the year as we look to attract new business banking customers and grow our SME franchise through participating in the RBS switching scheme.

 

(1)       System growth sourced from the BoE 'Mortgages outstanding by type of lender, UK (BOE)' report (MM4).

(2)       System growth sourced from the BoE 'Industrial analysis of monetary financial institutions' lending to UK residents' report (C1,2), excluding individuals and individual trusts, activities auxiliary to financial intermediation, insurance companies and pension funds, and financial intermediation results.

Business and financial review

Financial performance review - Pro forma basis

 

Unsecured personal lending

Credit card balances have increased by £104m to £3,609m. We have benefitted from the continued diversification of the portfolio through the VAA proposition, which was launched in April 2018. Performance of the VAA credit cards is strong and has driven the recruitment of new high quality customers, reflecting the more affluent nature of the customer base, with increased levels of retail spend, and over 110,000 new VAA cards issued by March 2019.

Unsecured personal loans have grown by £76m to £843m in the period driven by competitive pricing on our fixed rate personal loans which grew by 10% annualised over the period from £743m to £780m. In addition, in February 2019 we announced that we had entered into a joint venture agreement with Salary Finance Limited which adds a differentiated digital channel to our personal lending business. As at March 2019, customers had drawn £42m through Salary Finance which has helped contribute to the growth in our personal loan book.

Customer lending asset quality

 

 

 

 

6 months ended 31 March 2019

 

 

 

 

6 months ended 31 March 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail - secured

Retail - unsecured

SME

Total

 

Retail - secured

Retail - unsecured

SME

Total

 

bps

bps

bps

bps

 

bps

bps

bps

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross cost of risk(1)

1

317

55

26

 

1

226

       37

       19

Specific provision releases and recoveries

 

 

 

            (5)

 

 

 

 

             (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cost of risk(1)

 

 

 

21

 

 

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                     

 

(1)

Cost of risk is calculated on an annualised basis.

 

The Group's net cost of risk has increased from 14bps to 21bps on a pro forma basis inclusive of the move to IFRS 9. Mortgage impairment levels remain low, while the Retail unsecured cost of risk has increased due to a combination of growth and portfolio seasoning. In line with expectations, cost of risk for SME lending has returned to more normal levels following very low impairments in FY2018. Group impairment losses are expected to remain around current levels for the remainder of 2019, but with the continued risk from external economic uncertainty having the potential to impact on possible future impairment outcomes.

 

Current accounts

Current account deposits increased by £63m to £14,728m in the period. We continue to be successful in opening new business current accounts with further growth in the period of £169m taking total business current account balances to £6,561m. This has been partially offset by a reduction in retail current account balances as a result of a high level of competitor incentivisation activity during the period which has impacted both attrition and new business levels.

 

Variable rate savings accounts

Funding from variable rate savings accounts increased by £2,089m from £22,447m to £24,536m as we sought to optimise our deposit mix by refinancing more expensive term deposits with more efficient savings deposits.

 

Fixed rate term deposits

Our fixed rate term deposit book decreased by £1,427m from £23,851m to £22,424m as a result of deliberate management action to reduce maturity mismatch risk and optimise mix, primarily in the acquired Virgin Money book.

 

Funding and liquidity

The Group continues to maintain its strong funding and liquidity position. Our loan to deposit ratio was broadly stable over the period at 118% (30 September 2018: 116%), while the Group's liquidity surplus continues to comfortably exceed our regulatory minimum and internal risk appetite, with an LCR of 158% (30 September 2018: 161%) and NSFR of 125% (30 September 2018: 126%) at 31 March 2019.

 

In addition to Retail and SME deposits, we ensure appropriate diversification in our funding base through a number of wholesale funding programmes.  We successfully completed further issuances of mortgage-backed securities through the Group's Lanark programme across USD and GBP tranches, raising $325m and £350m in February 2019. In addition, the inaugural issuance from the Virgin Money Covered Bond programme raised £500m in March 2019.

 

The Group recognises the consistency risks associated with its drawings from the Bank of England's Term Funding Scheme and plans gradual repayment, ahead of contractual maturity, to reduce this risk.  The first such early repayment of £150m occurred in March 2019, reducing the outstanding amount to £8,487m at 31 March 2019.
 

Business and financial review

Financial performance review - Pro forma basis

 

Net interest income

 

6 months ended 31 March 2019

 

6 months ended 31 March 2018

 

Average
balance

Interest income/ (expense)

Average
yield/ (rate)(1)

 

Average
balance

Interest income/ (expense)

Average
yield/ (rate)(1)

Average balance sheet

£m

£m

%

 

£m

£m

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

Mortgages

59,991

783

2.62

 

57,449

782

2.73

SME lending(2)

7,500

156

4.17

 

7,276

141

3.88

Unsecured personal lending

4,506

172

7.65

 

4,246

151

7.12

Liquid assets

11,984

49

0.82

 

10,120

26

0.51

Due from other banks

1,647

6

0.74

 

1,313

2

0.25

Swap income/other

-

(6)

n/a

 

-

(27)

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average interest-earning assets

85,628

1,160

2.72

 

80,404

1,075

2.68

Total average non-interest-earning assets

3,243

 

 

 

3,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average assets

88,871

 

 

 

83,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

Current accounts

11,581

(9)

(0.16)

 

11,520

(6)

(0.09)

Savings accounts

23,352

(99)

(0.85)

 

22,538

(68)

(0.61)

Term deposits

23,213

(185)

(1.60)

 

22,078

(175)

(1.59)

Wholesale funding

19,100

(139)

(1.46)

 

15,741

(88)

(1.12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average interest-bearing liabilities

77,246

(432)

(1.12)

 

71,877

(337)

(0.94)

Total average non-interest-bearing liabilities

6,522

 

 

 

6,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average liabilities

83,768

 

 

 

78,260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average equity

5,103

 

 

 

5,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average liabilities and average equity

88,871

 

 

 

83,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

728

 

 

 

738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Average yield is calculated by annualising the interest income/expense for the period.

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

 

Group NIM of 1.71% has reduced from 1.84% since March 2018, but is stable compared to H2 2018 (1.72%).

 

The largest impact on Group NIM has been the continued dilution in mortgage margins due to sustained competition and more recent pressure in the higher margin segments of the market.  Furthermore we continue to see mortgage customers favouring fixed rate deals and this customer preference, alongside proactive early retention programmes across the industry, continues to exert pressure on mortgage margins through competitive fixed rate pricing and lower SVR balances.

 

We saw improved yields in our SME book with a steady increase over the last 3 periods from 3.88% in the period to March 2018 to 4.17% in the period to March 2019, with an emphasis on pricing discipline and a higher interest rate environment helping to deliver this result. Pricing in the unsecured personal lending market remains very competitive, however the average gross yield has increased from 7.12% to 7.65% driven by the successful launch of the VAA cards towards the end of FY2018, and the seasoning effect in the Virgin Money credit card book with more balances now cash yielding.

 

Within our deposit portfolio the average cost of savings accounts increased from 0.61% to 0.85%. This increase was attributable to passing on the August 2018 base rate increase to our customers and we were able to manage market pricing pressure through product mix.

 

Wholesale funding costs have increased as a result of an increase in the issuance of senior debt as we position to meet MREL requirements and the issuance of £250m of subordinated debt in December 2018.

 

Given the ongoing margin pressures, we continue to expect our FY19 NIM to be within a guidance range of 165-170bps.

 

 

Business and financial review

Financial performance review - Pro forma basis

 

Non-interest income

Non-interest income increased by £11m (11%) compared with March 2018 from £104m to £115m. Excluding the impact of gains and losses on financial instruments held at fair value, non-interest income grew £9m from £109m to £118m, primarily due to the success of the VAA credit cards launched in April 2018 and growth in our SME banking fee income.  

 

2. Delivering on our efficiency programme

 

 

 

 

 

 

 

 

6 months to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31 Mar 2019

31 Mar 2018

30 Sep 2018

 

Operating and administrative expenses

 

 

 

£m

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel expenses

 

 

 

 

 

 

203

 

207

 

216

Depreciation and amortisation expenses

 

 

 

54

 

59

 

62

Other operating and administrative expenses

 

223

 

227

 

227

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total underlying operating and administrative expenses

480

 

493

 

505

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition and integration costs

 

 

 

 

 

 

228

 

-

 

39

Legacy conduct

 

 

 

 

 

 

33

 

220

 

176

Restructuring and separation

 

 

 

2

 

28

 

18

Other(1)

 

 

 

 

 

 

28

 

7

 

12

 

 

 

 

 

 

 

 

 

 

 

 

Total pro forma operating and administrative expenses

771

 

748

 

750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                         

 

(1) Other includes a £17m charge in relation to SME transformation, including preparations to participate in the RBS Incentivised Switching remedy, and a charge of £11m for Guaranteed Minimum Pension (GMP) equalisation in the Group's defined benefit scheme.

 

Underlying operating expenses reduced from £493m to £480m, with the full impact of run-rate savings from the final year of  our Sustain efficiency programme and delivery of initial cost savings from our integration programme.

We are progressing well with our integration programme, with £33m of annual run-rate cost synergies already realised through addressing senior management duplication and the initial harmonisation of some central cost activities. Six months into our three year integration process we have already increased our expected cost synergies to £150m, from the £120m announced at the time of the acquisition, and will give an update at our Capital Markets Day in June on the broader cost opportunity for the combined Group.

The acquisition of Virgin Money in October 2018 marked the next phase in our strategic transformation journey and inevitably led to the Group incurring a higher level of non-underlying costs, both one-off and recurring in nature, which overall caused a £23m increase in pro forma operating and administrative expenses, from £748m to £771m.

Acquisition and integration costs of £228m in the period included £55m of one-off transaction related costs and £45m of integration costs as it embarked upon a three year programme to fully integrate both banks. Incidental to the integration programme, a £127m charge was recognised in the period following a review of the Group's software estate, which identified a number of core assets (including £70m in relation to the Virgin Money Digital Bank asset) that are no longer of value to the Group's future strategy and therefore required to be written down. However this charge is capital neutral.

During the period, the Group also reassessed the level of provision that was considered appropriate to meet current and future expectations in relation to the mis-selling of PPI policies and concluded that a further charge of £30m was required, mainly due to the higher volume of speculative information requests received which is driven by the increased activity by claims management companies ahead of the August 2019 industry deadline. It also incorporates a reassessment of the costs of processing cases and the impact of experience adjustments. The Group has also recognised additional costs of £3m for other less significant conduct related matters.

Our strong track record in delivering cost efficiencies will help to underpin the Group's future profits and capital generation. We continue to expect the Group's underlying operating expenses to be less than £950m in FY2019, down from a pro forma combined cost base of £998m in FY2018.

 

 

 

Business and financial review

Financial performance review - Pro forma basis

 

3. Capital optimisation

 

 

 

As at

 

 

 

 

 

 

 

 

 

 

 

 

31 Mar 2019

 

30 Sep 2018

 

 

£m

 

£m

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital

 

3,460

 

3,459

Additional Tier 1 capital

 

977

 

729

Tier 2 capital

 

783

 

536

 

 

 

 

 

 

 

 

 

 

Total capital

 

5,220

 

4,724

 

 

 

 

 

 

 

 

 

 

Risk weighted assets

 

23,864

 

22,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6 months to

31 Mar 2019

 

 

%/bps

 

 

 

 

 

 

Opening CET1 ratio

 

10.5%

IRB accreditation impact

 

3.5%

IRB pro forma CET1 ratio

 

14.0%

Virgin Money acquisition impact

 

1.1%

Opening Combined Group pro forma CET1 ratio (pre IFRS 9 impact)

 

15.1%

IFRS 9 transitional impact

 

(0.02)%

Opening Combined Group pro forma CET1 ratio as at 1 October 2018 (post IFRS 9 impact)

 

15.1%

Generated

 

114

RWA growth

 

(56)

Investment spend

 

(20)

AT1 distributions

 

(12)

 

 

 

 

 

 

Underlying capital generated

 

26

 

 

 

 

 

 

Acquisition and integration costs

 

(41)

Legacy conduct

 

(12)

Ordinary dividends paid

 

(19)

Other

 

(11)

 

 

 

 

 

 

Net capital absorbed

 

(57)

 

 

 

 

 

 

Closing CET1 ratio

 

14.5%

 

 

 

 

 

 

The Group delivered a CET1 ratio of 14.5% and total capital ratio of 21.9% at March 2019. In October 2018, the Group received accreditation to move onto IRB methodology for calculating risk-weighted assets on mortgages and corporate exposures, which increased the CET1 ratio by 3.5%. Also in October, the acquisition of the Virgin Money group increased the CET1 ratio by a further 1.1%, which when coupled with the impact of the introduction of IFRS 9, increased the September 2018 pro forma CET1 ratio to 15.1%.

 

Underlying capital generation in the period was 26bps, largely driven by strong underlying profits, offset by growth in lending with risk weighted assets increasing by £921m. Investment spend absorbed 20bps and AT1 distributions a further 12bps. After non-underlying items, principally acquisition and integration costs, as well as a further legacy conduct charge, the Group's CET1 ratio was 57bps lower at 14.5%.

 

The Group continues to maintain a significant buffer to its regulatory capital requirements and remains confident in its ability to deliver net capital generation going forward.

 

 

 

Business and financial review

Reconciliation of pro forma to underlying results

The underlying results presented within this section reflect the Group's results prepared on an underlying basis and as presented to the CEO and the Executive Leadership Team and the Board. These exclude certain items that are included in the pro forma results, as management believes that these items are not reflective of the underlying business and do not aid meaningful period on period comparison. The tables below reconcile the pro forma results to the underlying basis, and full details on the adjusted items are included on page 80:

 

Statutory results

Include Virgin Money pre-acquisition results

Pro forma results

Acquisition and integration costs  

Legacy conduct

Restructuring and separation

Other

Underlying basis

6 months to 31 Mar 2019

£m

£m

£m

£m

£m

£m

£m

£m

Net interest income

820

22

842

(114)

-

-

-

728

Non-interest income

106

9

115

-

-

-

-

115

Total operating income

926

31

957

(114)

-

-

-

843

Total operating and administrative expenses before impairment losses

(711)

(60)

(771)

228

33

2

28

(480)

Operating profit/(loss) before impairment losses

215

(29)

186

114

33

2

28

363

Impairment losses on credit exposures

(173)

(4)

(177)

100

-

-

-

(77)

Profit/(loss) on ordinary activities before tax

42

(33)

9

214

33

2

28

286

Financial performance measures

 

 

 

 

 

 

 

 

RoTE

0.1%

(1.5)%

(1.4)%

9.1%

 1.4%

0.1%

1.2%

10.4%

CIR

 77%

 4%

 81%

(15)%

(5)%

-%

(4)%

 57%

Return on assets

0.06%

(0.06)%

-%

0.38%

 0.06%

-%

0.05%

 0.49%

Basic EPS

0.2p

(2.0)p

(1.8)p

11.8p

1.8p

0.1p

1.5p

13.4p

 

 

 

 

 

 

 

 

 

 

 

Statutory results

Include Virgin Money pre-acquisition results

Pro forma results

Virgin Money acquisition costs

Legacy conduct

Restructuring and separation

Other

Underlying basis

6 months to 30 Sep 2018

£m

£m

£m

£m

£m

£m

£m

£m

Net interest income

425

294

719

-

-

-

-

719

Non-interest income

79

48

127

-

-

-

(3)

124

Total operating income

504

342

846

-

-

-

(3)

843

Total operating and administrative expenses before impairment losses

(554)

(196)

(750)

39

176

18

12

(505)

Operating (loss)/profit before impairment losses

(50)

146

96

39

176

18

9

338

Impairment losses on credit exposures

(19)

(39)

(58)

-

-

-

-

(58)

(Loss)/profit on ordinary activities before tax

(69)

107

38

39

176

18

9

280

 

 

Statutory results

Include Virgin Money pre-acquisition results

Pro forma results

Legacy conduct

Restructuring and separation 

Other

Underlying basis

6 months to 31 Mar 2018

£m

£m

£m

£m

£m

£m

£m

Net interest income

426

312

738

-

-

-

738

Non-interest income

77

27

104

-

-

-

104

Total operating income

503

339

842

-

-

-

842

Total operating and administrative expenses before impairment losses

(576)

(172)

(748)

220

28

7

(493)

Operating (loss)/ profit before impairment losses

(73)

167

94

220

28

7

349

Impairment losses on credit exposures

(22)

(26)

(48)

-

-

-

(48)

(Loss)/profit on ordinary activities before tax

(95)

141

46

220

28

7

301

Financial performance measures

 

 

 

 

 

 

 

RoTE

(7.0)%

7.0%

-%

 10.2%

1.3%

 0.3%

11.8%

CIR

 115%

 (26)%

 89%

(26)%

(3)%

(1)%

 59%

Return on assets

(0.36)%

0.43%

0.07%

 0.47%

0.06%

 0.01%

 0.61%

Basic EPS

(10.2)p

10.3p

0.1p

13.8p

1.8p

0.4p

16.1p

 

 

 

 

 

 

 

 

Business and financial review

Reconciliation of pro forma to underlying results (continued)

 

 

 

 

Statutory results

Include Virgin Money pre- acquisition results

Pro forma results

Virgin Money acquisition costs

Legacy conduct

Restructuring and separation

Other

Underlying basis

12 months to 30 Sep 2018

£m

£m

£m

£m

£m

£m

£m

£m

Net interest income

851

606

1,457

-

-

-

-

1,457

Non-interest income

156

75

231

-

-

-

(3)

228

Total operating income

1,007

681

1,688

-

-

-

(3)

1,685

Total operating and administrative expenses before impairment losses

(1,130)

(368)

(1,498)

39

396

46

19

(998)

Operating (loss)/profit before impairment losses

(123)

313

190

39

396

46

16

687

Impairment losses on credit exposures

(41)

(65)

(106)

-

-

-

-

(106)

(Loss)/profit on ordinary activities before tax

(164)

248

84

39

396

46

16

581

Financial performance measures

 

 

 

 

 

 

 

 

RoTE

(6.9)%

6.4%

(0.5)%

0.9%

 9.1%

 1.1%

0.4%

11.0%

CIR

 112%

 (23)%

 89%

(2)%

(24)%

(3)%

(1)%

 59%

Return on assets

(0.34)%

0.38%

0.04%

0.04%

 0.41%

 0.05%

0.02%

 0.56%

Basic EPS

(19.7)p

18.4p

(1.3)p

2.4p

24.8p

2.9p

1.0p

29.8p

 

 

 

 

 

 

 

 

 

 

 

 

Business and financial review

Reconciliation of statutory to pro forma results

 

The statutory basis presented within this section reflects the Group's results as reported in the financial statements. These exclude items that areincluded in Virgin Money's pre-acquisition results, as these items are not reflective of the reported results.  The underlying results reflect the Group's results prepared on an underlying basis and as presented to the CEO and the Executive Leadership Team and the Board. These exclude certain items that areincluded in the statutory results, as management believes that these items are not reflective of the underlying business and do not aid meaningful period on period comparison. The table below reconciles the statutory results to the pro forma results, and full details on the adjusted items to the underlying results are included onpage 80:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statutory basis

Include Virgin Money pre-acquisition results

Pro forma basis

 

 

6 months to
31 Mar
2019

6 months to
31 Mar
2018

6 months to
30 Sep
2018

1 Oct to
15 Oct
2018

6 months to
31 Mar
2018

6 months to
30 Sep
2018

6 months to
31 Mar 2019

6 months to
31 Mar 2018

6 months to
30 Sep
2018

 

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

820

426

425

22

312

294

842

738

719

 

Non-interest income(1)

106

77

79

9

27

48

115

104

127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income

926

503

504

31

339

342

957

842

846

 

Operating and administrative expenses

(711)

(576)

(554)

(60)

(172)

(196)

(771)

(748)

(750)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit/(loss) before impairment losses

215

(73)

(50)

(29)

167

146

186

94

96

 

Impairment losses on credit exposures

(173)

(22)

(19)

(4)

(26)

(39)

(177)

(48)

(58)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) on ordinary activities before tax

42

(95)

(69)

(33)

141

107

9

46

38

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition and integration costs

 

 

 

 

 

 

214

-

39

 

Legacy conduct

 

 

 

 

 

 

33

220

176

 

Restructuring and separation

 

 

 

 

 

 

2

28

18

 

Other items

 

 

 

 

 

 

28

7

9

 

Underlying profit on ordinary activities before tax

 

 

 

 

 

 

286

301

280

 

 

 

 

 

 

 

 

 

 

 

 

                           

 

 

 

(1) 'Fair value gains and losses on financial instruments' were previously treated as an adjustment to underlying profit within the Virgin Money accounts but have been reclassified to underlying non-interest income in line with CYBG presentation.

 

 

Risk management

Risk overview

 

The approach to and management of risk is defined in the Group's Risk Management Framework. Integral to the framework is the identification of principal risks, the process by which the Group sets its risk appetite and the nature and extent of risk it is willing to assume to achieve its strategic objectives. The framework identifies eight principal risks: credit risk; financial risk; regulatory and compliance risk; conduct risk; operational risk (including resilience and information security); financial crime risk; strategic and business risk; and people risk.

 

Mapped to the principal risk categories, the Group maintains a risk landscape, capturing the highest priority risks with potential to impact the Group's current and medium term outlook. These risks are appropriately categorised with owners, required actions and mitigation plans in place. The risks currently being monitored include but are not limited to: geopolitical uncertainty including Brexit risk; technology risk and financial crime risk; regulatory change; integration risk; the continued risk of customer detriment; service interruption and third party supplier risk. These risks and the overall risk landscape are monitored by both Executive and Board Risk Committees.

 

Further detail on risks and how they are managed is available in the 2018 Annual Report and Accounts.

 

Credit risk

 

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

 

In the period to 31 March 2019, the following changes have had a material impact on the Group's credit risk methodology and calculation, and how this is presented within this report:

1.     The adoption of IFRS 9 'Financial Instruments' with effect from 1 October 2018; and

2.     The acquisition of Virgin Money on 15 October 2018.

 

The adoption of IFRS 9 'Financial Instruments' with effect from 1 October 2018

The Group has elected not to restate comparative figures on an IFRS 9 basis as permitted by the standard. Where a comparative has been presented in the credit risk report, the basis of preparation is either:

-       As at 30 September 2018: representing the position under IAS 39 as originally disclosed in the 2018 Annual Report and Accounts; or

-       As at 1 October 2018: representing the position as at 30 September 2018 (excluding Virgin Money) as amended for the adoption of IFRS 9.

 

For those 30 September 2018 IAS 39 comparatives not included within this report, these can be found in the 2018 Annual Report and Accounts which is available on the Group's website.

 

The acquisition of Virgin Money on 15 October 2018

In addition to the adoption of IFRS 9 from 1 October 2018, the Group results for the six month period to 31 March 2019 have also been impacted by the Group's acquisition of Virgin Money on 15 October 2018.

Virgin Money adopted IFRS 9 with effect from 1 January 2018 and therefore had the required policies, methodologies, judgements and models in place to produce an expected credit loss (ECL) calculation in accordance with the standard before the acquisition on 15 October 2018.

While the overall policies and methodologies developed by the Group in preparing for its adoption of IFRS 9 on 1 October 2018 have many similarities to those used by Virgin Money, there are differences in the detail relating to the inputs and process supporting the ECL calculation. The complexity of the underlying data, model related methodology and inputs used means that a single methodology in providing a combined Group ECL view, while being developed, is not possible at this point in time, with each subsidiary retaining its own distinct set of IFRS 9 compliant models, macroeconomic inputs, scenarios and weightings.

 

 

Risk management

Credit risk

 

Therefore, the detailed judgement and methodology commentary contained in the credit risk report relate to their application in the CYBG subsidiary models, pre-acquisition of Virgin Money (see Supplementary Information - IFRS 9, starting on page 37).

Further detail on the Virgin Money ECL methodology is contained in Note 5.4 to the 2018 Virgin Money Annual Report and Accounts which can be found at: https://uk.virginmoney.com/virgin/investor-relations/results/virgin-money-group-annual-report-and-accounts-2018.pdf. The policies and methodology adopted have not materially changed in the period from those audited and disclosed at December 2018.

The Group's statutory impairment charge for the period is £173m, which includes the effect of the acquired Virgin Money assets that are required to be assessed under the staging criteria introduced by IFRS 9, irrespective of the fact that the fair value of the acquired assets incorporated an adjustment for credit risk.

A number of the Group's key credit metrics are no longer applicable as a result of the change to an IFRS 9 basis of calculating ECLs and have been replaced with metrics appropriate to the revised basis.  These have been highlighted in the table below.

 

Key credit metrics

 

As at:

31 Mar 2019

(unaudited)

£m

1 Oct 2018(1)

(unaudited)

£m

30 Sept 2018(1)

(audited)

£m

31 Mar 2018(1)

(unaudited)

£m

Impairment provisions held on credit exposures

 

 

 

SME lending

163

150

136

153

Retail lending

187

74

59

58

 

350

224

195

211

Of which:

 

 

 

 

Individually assessed

50

43

43

54

Modelled/calculated

300

181

152

157

 

350

224

195

211

 

 

 

 

 

 

6 months to

 

12 months to

6 months to

For the period ended:

31 Mar 2019

(unaudited)

£m

1 Oct 2018(1)

(unaudited)

£m

30 Sept 2018(1)

(audited)

£m

31 Mar 2018(1)

(unaudited)

£m

 

 

 

 

Underlying impairment charge on credit exposures

 

 

 

SME lending

18

N/a

15

8

Retail lending

55

N/a

26

14

 

73

N/a

41

22

Asset quality measures:

 

 

 

 

Underlying impairment charge (2) to average customer loans (cost of risk)

0.21%

N/a(3)

0.12%

0.13%

90+ days past due (DPD) plus impaired assets to customer loans

N/a

N/a

0.91%

1.02%

Stage 3 assets to customer loans

1.08%

1.77%

N/a

N/a

Total provision to customer loans

0.49%

0.68%

0.61%

0.67%

Specific provision to impaired assets

N/a

N/a

35.50%

33.60%

Stage 3 provision to Stage 3 loans

15.00%

14.55%

N/a

N/a

 

(1)

 

These exclude the impact of the acquisition of Virgin Money with March 2018 and September 2018 ratios presented on an IAS 39 basis

(2)

Inclusive of gains/losses on assets held at fair value and excludes the acquisition accounting impact on impairment losses shown on page 18.

(3)

An opening IFRS 9 impairment charge was not calculated as at 1 October 2018 and therefore this metric cannot be calculated for that date.

 

 

 

Risk management

Credit risk

 

Reconciliation of the impairment loss allowance from IAS 39 to IFRS 9

The movement in the Group's impairment provision as a result of adopting an ECL impairment methodology as required by IFRS 9 from 1 October 2018 is illustrated below:

 

 

£m

Closing IAS 39 impairment provision as at 30 September 2018 (audited)

195

Less: removal of IAS 39 collective provision

 

(152)

Add: introduction of a 12 month ECL calculation (Stage 1)

 

53

Add: introduction of a lifetime ECL calculation (Stage 2 and 3)

121

Add: undrawn balances

 

5

Add: multiple economic scenarios

 

2

Opening IFRS 9 impairment provision as at 1 October 2018 (unaudited)

224

 

Removal of IAS 39 collective provision

The IAS 39 concept of a collective impairment provision to cover losses that have been incurred but not yet identified on loans subject to an individual assessment is no longer an acceptable basis for impairment provisioning under IFRS 9.

Introduction of a 12 month ECL calculation

IFRS 9 requires a 12 month ECL calculation on all assets which have not undergone a significant increase in credit risk since origination. These are classed as Stage 1 under IFRS 9, with the calculation on loans and advances allocating the ECL at an individual account level.

Introduction of a lifetime ECL calculation

IFRS 9 requires a lifetime ECL calculation where a financial asset has been assessed as experiencing a significant increase in credit risk based on the Group's staging criteria. These can be classed as either Stage 2 or Stage 3 under IFRS 9, with the calculation on loans and advances allocating the ECL at an individual account level. Not all of these accounts would have been included in the IAS 39 collective provision, with the quantum of the ECL calculation also higher due to the requirement for lifetime losses to be included.

 

Add: undrawn balances

IFRS 9 requires that impairment allowances be held on an expected loss basis rather than the incurred loss basis under IAS 39.  This change has brought into scope products (such as pipeline exposure) where no drawdown had occurred at the IFRS 9 adoption date, and for which no impairment allowance was held previously.

 

Add: multiple economic scenarios

This represents the difference, at adoption of IFRS 9, between calculated provisions under the Group's base scenario and the final aggregate position over the three scenarios (base, mild upside and severe downside).

 

 

 

Risk management

Credit risk

 

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

 

As at 31 March 2019

(unaudited)

 

 

 

 

 

 

 

 

 

 

Stage 2

Stage 2

Stage 2

 

Stage 3

 

 

Stage 1

<30 DPD

>30 DPD

Total

Stage 3

POCI

Total

 

 

£m

£m

£m

£m

£m

£m

£m

 

Mortgages

 58,850

 1,417

 126

 1,543

 316

 121

 60,830

 

Retail unsecured of which:

 4,307

 315

 30

 345

 53

 13

 4,718

 

 - credit cards

 3,469

 276

 24

 300

 37

 13

 3,819

 

 - retail overdrafts

 51

 -  

 1

 1

 4

 -  

 56

 

 - other retail lending

 787

 39

 5

 44

 12

 -  

 843

 

SME

 4,582

 2,397

 11

 2,408

 285

 -  

 7,275

 

Closing balance

 67,739

 4,129

 167

 4,296

 654

 134

 72,823

 

 

 

As at 1 October 2018

(unaudited, excluding Virgin Money)

 

 

 

 

 

 

 

 

 

Stage 2

Stage 2

Stage 2

 

Stage 3

 

 

Stage 1

<30 DPD

>30 DPD

Total

Stage 3

POCI

Total

 

 

£m

£m

£m

£m

£m

£m

£m

 

Mortgages

 23,572

 605

 84

 689

 279

 -  

 24,540

 

Retail unsecured of which:

 1,143

 28

 10

 38

 22

 -  

 1,203

 

 - credit cards

 370

 1

 3

 4

 7

 -  

 381

 

 - retail overdrafts

 50

 -  

 1

 1

 4

 -  

 55

 

 - other retail lending

 723

 27

 6

 33

 11

 -  

 767

 

SME

 4,741

 2,161

 9

 2,170

 263

 -  

 7,174

 

Closing balance

 29,456

 2,794

 103

 2,897

 564

 -  

 32,917

 

 

Overall, the lending portfolio increased by £39.9bn between 1 October 2018 and 31 March 2019.  In addition to underlying growth, the increase reflects the acquisition of Virgin Money on 15 October 2018, with the acquired portfolio totalling £39.0bn as at 31 March 2019. Of this, £134m is Stage 3 POCI, representing the Virgin Money assets that were classed as credit impaired at date of acquisition.

 

Mortgages - With total gross loans and advances of £60.8bn as at 31 March 2019, there has been continued underlying growth in the portfolio, although the increase in lending balance results mainly from the Virgin Money acquisition.  The majority reside in Stage 1 and with the weighting further towards a secured Mortgage portfolio, this has resulted in the overall proportion of loans within Stages 2 and 3 reducing to 3.3% (1 October 2018: 3.9%). Stage 3 POCI for Mortgages, has reduced from £137m on acquisition to £121m as at 31 March 2019 as a result of customer redemptions and balance paydowns.

 

Retail Unsecured - Of the £4.7bn total Retail Unsecured portfolio, the majority is credit cards, at £3.8bn. The level of growth has been most prevalent from the successful take up of the Virgin Atlantic credit cards. The unsecured portfolio evidences stable performance with 91% of balances classed as stage 1. Stage 3 POCI for unsecured Retail has reduced from £34m on acquisition to £13m as at 31 March 2019 due to customer balance paydowns.

 

SME - At £7.3bn, SME lending continues to evidence core underlying growth.  The proportions in Stages 2 have marginally increased from 30% to 33% in the period to 31 March 2019 reflecting the controlled and cautious approach to identifying customers experiencing financial difficulty.

 

 

 

Risk management

Credit risk

 

The following tables disclose the impairment allowance by portfolio:

 

As at 31 March 2019

(unaudited)

 

 

 

 

 

 

 

 

 

Stage 2

Stage 2

Stage 2

 

Stage 3

 

 

Stage 1

<30 DPD

>30 DPD

Total

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

£m

£m

Mortgages

 6

 4

 3

 7

 23

 -  

 36

Retail unsecured of which:

 52

 49

 15

 64

 35

 -

 151

 - credit cards

 41

 43

 10

 53

 24

 -

 118

 - retail overdrafts

 2

 -  

 1

 1

 3

 -  

 6

 - other retail lending

 9

 6

 4

 10

 8

 -  

 27

SME

 29

 73

 1

 74

 60

 -  

 163

Closing balance

 87

 126

 19

 145

 118

 -

 350

 

As at 1 October 2018

(unaudited, excluding Virgin Money)

 

 

 

 

 

 

 

 

Stage 2

Stage 2

Stage 2

 

Stage 3

 

 

Stage 1

<30 DPD

>30 DPD

Total

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

£m

£m

Mortgages

 3

 2

 1

 3

 23

 -  

 29

Retail unsecured of which:

 15

 5

 7

 12

 18

 -  

 45

 - credit cards

 6

 -  

 1

 1

 7

 -  

 14

 - retail overdrafts

 2

 -  

 1

 1

 3

 -  

 6

 - other retail lending

 7

 5

 5

 10

 8

 -  

 25

SME

 35

 71

 -  

 71

 44

 -  

 150

Closing balance

 53

 78

 8

 86

 85

 -  

 224

 

The Group's impairment allowance has increased by £126m in the period from 1 October 2018 to 31 March 2019.  The increase is a combination of the impact of the acquisition of Virgin Money, amounting to £110m, together with underlying movements in portfolio values and an adverse impact on credit outlook from the continued economic uncertainty.

 

Acquisition accounting requires that the Virgin Money loans and advances balance be fair valued on acquisition, resulting in a £Nil ECL allowance immediately following acquisition. The loans and advances balance is then subject to the IFRS 9 ECL methodology with a full ECL allowance calculated. Further detail on the ECL allowance of the Virgin Money acquired loans and advances can be found in the Supplementary Information - IFRS 9 section of the risk report starting on page 37.

 

Mortgages - The Mortgage impairment allowance of £36m is reflective of the level of collateral held and the low ECL for this portfolio.

 

Retail Unsecured - The total impairment allowance for the unsecured portfolio of £151m has increased by £106m in the period, primarily due to the £101m impairment allowance relative to the £3.5bn acquired Virgin Money credit card portfolio. The underlying impairment allowance for these portfolios marginally increased resulting from the combined effect of portfolio growth, higher default rates due to seasoning of the portfolio and a lower level of recoveries.

 

SME - The impairment allowance for SME increased by £13m to £163m; consistent with the stage allocations, this reflects a controlled and cautious approach to the impairment assessment of customers experiencing financial difficulty.

 

 

Risk management

Credit risk

 

Coverage ratios

 

As at 31 March 2019

(unaudited)

 

 

 

 

 

 

 

 

 

Stage 2

Stage 2

Stage 2

 

Stage 3

 

 

Stage 1

<30 DPD

>30 DPD

Total

Stage 3

POCI

Total

 

%

%

%

%

%

%

%

Mortgages

0.01%

0.30%

2.62%

0.48%

7.24%

-

0.06%

Retail unsecured of which:

1.21%

15.59%

50.38%

18.66%

70.08%

-

3.24%

 - credit cards

1.17%

15.35%

44.40%

17.69%

67.48%

-

3.08%

 - retail overdrafts

4.13%

12.27%

61.94%

52.56%

84.87%

-

10.48%

 - other retail lending

1.21%

17.49%

77.37%

24.86%

73.58%

-

3.46%

SME

0.62%

2.99%

7.89%

3.01%

20.60%

-

2.19%

Closing balance

0.13%

3.02%

11.67%

3.36%

18.08%

-

0.48%

 

As at 1 October 2018

(unaudited, excluding Virgin Money)

 

 

 

 

 

 

 

 

Stage 2

Stage 2

Stage 2

 

Stage 3

 

 

Stage 1

<30 DPD

>30 DPD

Total

Stage 3

POCI

Total

 

%

%

%

%

%

%

%

Mortgages

0.01%

0.32%

1.61%

0.48%

8.19%

-

0.12%

Retail unsecured of which:

1.38%

18.17%

65.20%

30.04%

80.36%

-

3.78%

 - credit cards

1.78%

9.52%

53.16%

39.89%

94.32%

-

3.94%

 - retail overdrafts

3.66%

10.02%

59.21%

51.07%

78.12%

-

10.06%

 - other retail lending

1.03%

18.61%

71.71%

28.05%

72.56%

-

3.24%

SME

0.73%

3.25%

5.13%

3.26%

16.79%

-

2.08%

Closing balance

0.18%

2.77%

7.86%

2.95%

15.05%

-

0.68%

 

The impact of the Virgin Money acquisition results in a proportionately higher volume of the total portfolio being mortgage lending which requires a lower proportionate impairment allowance, consequently the total portfolio coverage has reduced by 24bps in line with the revised portfolio profile.  Offsetting the reduction has been a modest 4bps underlying increase across the portfolios.

 

Mortgages - The coverage rate reduced by 6bps in the period as a result of the quality and value of the acquired Virgin Money mortgage portfolio.

 

Retail Unsecured - The total rate of coverage reduced by 54bps, primarily in the credit card portfolio where the quality of the growing Virgin Atlantic credit cards portfolio is stronger than the pre-existing portfolios.

 

SME - Coverage for SME lending increased by 11bps, reflective of migrations into Stages 2 and 3 which attract a lifetime loss impairment allowance.

 

 

 

Risk management

Credit risk

 

Credit quality of loans and advances as at 31 March 2019 (unaudited)

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

Retail Secured and Unsecured

·      Strong: broadly consistent with an internal probability of default (PD) rating of <=0.5%

·      Good: broadly consistent with an internal PD rating of >0.5% to 2.0%

·      Satisfactory: broadly consistent with an internal PD rating of >2.0% to 99.9%

·      Default: where the Group's internal definition of default has been breached

 

 

 

                Gross carrying amount

 

 

 

Stage 1

12 month ECLs

Stage 2

(not credit impaired) Lifetime ECLs

Stage 3

(credit impaired) Lifetime ECLs

Stage 3

(POCI) Lifetime ECLs

Total

Retail Secured

£m

£m

£m

£m

£m

Strong

 51,728

 569

 -

 -  

 52,297

Good

 6,363

 477

 -  

 -  

 6,840

Satisfactory

 759

 497

 -  

 -  

 1,256

Default

 -  

 -  

 316

 121

 437

Total

 58,850

 1,543

 316

 121

 60,830

 

 

 

                Gross carrying amount

 

 

 

Stage 1

12 month ECLs

Stage 2

(not credit impaired) Lifetime ECLs

Stage 3

(credit impaired) Lifetime ECLs

Stage 3

(POCI) Lifetime ECLs

Total

Retail Unsecured

£m

£m

£m

£m

£m

Strong

 1,563

 14

 -

 -  

 1,577

Good

 2,059

 49

 -  

 -  

 2,108

Satisfactory

 685

 282

 -  

 -  

 967

Default

 -

 -

 53

 13

 66

Total

 4,307

 345

 53

 13

 4,718

 

 

SME

·      Strong: broadly consistent with Standard & Poor's ratings of AAA to BBB (internal rating 1 to 11);

·      Good: broadly consistent with Standard & Poor's ratings of BBB- to BB (internal rating 12 to 17);

·      Satisfactory: broadly consistent with Standard & Poor's rating of BB to CCC+ (internal rating 18 to 23);

·      Default: broadly consistent with Standard & Poor's rating of CCC- (internal rating 98 and 99).

 

 

 

 

Gross carrying amount

 

 

 

Stage 1

12 month ECLs

Stage 2

(not credit impaired) Lifetime ECLs

Stage 3

(credit impaired) Lifetime ECLs

Total

 

PD range % 

£m

£m

£m

£m

Strong

0 - 0.5

 1,522

 54

 -

 1,576

Good

>0.5 - 2.0

 2,305

 1,052

 -

 3,357

Satisfactory

>2.0 - 99.99

 755

 1,302

 -

 2,057

Default

100

 -  

 -  

 285

 285

Total

 

 4,582

 2,408

 285

 7,275

 

 

 

 

Risk management

Credit risk

 

Retail mortgage lending

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

 

 

31 Mar 2019

30 Sep 2018(1)

 

(unaudited)

(audited)

LTV(2)

%

%

Less than 50%

33

31

50% to 75%

48

51

76% to 80%

7

6

81% to 85%

5

5

86% to 90%

5

4

91% to 95%

2

2

96% to 100%

-

-

Greater than 100%

-

-

Unknown

-

1

 

100

100

 

  (1)

30 September 2018 shown as Reported, excluding Virgin Money.

(2)

LTV of the mortgage portfolio is defined as mortgage portfolio weighted by balance.  The Clydesdale Bank PLC portfolio is indexed using the MIAC Acadametrics indices at a given date, while the Virgin Money portfolio is indexed using the Markit indices.  The Group view is a combined summary of the two portfolios.  'Unknown' in the prior period represented loans where data was not available due to front book data matching and a de minimis amount due to weaknesses in historic data capture processes.

 

 

 

 

Risk management

Credit risk

 

Forbearance

Retail forbearance

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

 

As at 31 March 2019

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

      Impairment allowance on Retail

 

Total Retail secured loans and advances

secured loans and advances subject to

 

subject to forbearance measures

forbearance measures

 

 

Number of loans

Gross

carrying

amount

 

% of total portfolio

 

Impairment

allowance

 

 

Coverage

 

 

 

 

£m

 

 

 

£m

 

%

 

Formal arrangements

1,353

 

147

 

0.24

 

4.4

 

3.02

 

Temporary arrangements

916

 

115

 

0.19

 

3.0

 

2.57

 

Payment arrangement

323

 

38

 

0.06

 

0.6

 

1.52

 

Payment holiday

544

 

76

 

0.13

 

0.4

 

0.46

 

Interest only conversion

320

 

51

 

0.08

 

0.3

 

0.50

 

Term extension

184

 

18

 

0.03

 

0.1

 

0.44

 

Other

43

 

4

 

0.01

 

-

 

0.54

 

Legal

133

 

13

 

0.02

 

0.3

 

2.52

 

Total secured loans

3,816

 

462

 

0.76

 

9.1

 

1.95

 

                                   

 

 

As at 30 September 2018(1)

 

 

 

 

 

 

 

 

 

 

(audited)

 

 

 

 

 

 

      Impairment allowance on Retail

 

 

Total Retail secured loans and advances

secured loans and advances subject to

 

 

subject to forbearance measures

forbearance measures

 

 

 

Number of loans

Gross

carrying amount

 

% of total portfolio

 

Impairment

allowance

 

 

Coverage

 

 

 

 

£m

 

 

 

£m

 

%

 

Formal arrangements

1,497

 

168

 

0.68

 

3.3

 

2.00

 

Temporary arrangements

1,275

 

161

 

0.66

 

2.3

 

1.45

 

Interest only conversion

231

 

32

 

0.13

 

0.1

 

0.18

 

Term extension

150

 

12

 

0.05

 

0.1

 

0.48

 

Other

41

 

4

 

0.02

 

-

 

0.36

 

Legal

148

 

15

 

0.06

 

0.5

 

3.34

 

Total secured loans

3,342

 

392

 

1.60

 

6.3

 

1.61

 

                         

 

  (1)

30 September 2018 shown as Reported, excluding Virgin Money.

 

When all other avenues of resolution including forbearance have been explored, the Group will take steps to repossess and sell underlying collateral. In the period to 31 March 2019, there were 38 repossessions of which 9 were voluntary (12 months to 30 September 2018: 38 including 16 voluntary).

 

 

Risk management

Credit risk

 

Retail forbearance - unsecured consumer credit

The Group currently exercises limited forbearance strategies in relation to other types of consumer credit, including current accounts, unsecured loans and credit cards. The Group has assessed the total loan balances subject to forbearance on other types of consumer credit to be £34m as at 31 March 2019 (30 September 2018: £12m), representing 0.66% of the unsecured retail portfolio (30 September 2018: 1.02%).

Impairment provisions on forborne balances totalled £12.7m as at 31 March 2019 (30 September 2018: £4.2m) providing overall coverage of 37.53% (30 September 2018: 34.36%).

 

SME forbearance 

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

As at 31 March 2019

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

Impairment allowance on

 

Total SME loans and advances

SME loans and advances subject to

 

subject to forbearance measures

forbearance measures

 

 

Number of loans

Gross

carrying amount

 

% of total portfolio

 

Impairment allowance

 

 

Coverage

 

 

 

 

£m

 

 

 

£m

 

%

 

Term extension

205

 

186

 

2.40

 

16.6

 

8.93

 

Deferral of contracted capital repayments

104

 

141

 

1.83

 

24.3

 

17.25

 

Reduction in contracted interest rate

2

 

1

 

0.01

 

-

 

3.94

 

Alternative forms of payment

3

 

24

 

0.31

 

7.2

 

30.01

 

Debt forgiveness

3

 

7

 

0.09

 

0.2

 

2.18

 

Refinancing

16

 

9

 

0.11

 

1.3

 

14.79

 

Covenant breach/reset/waiver

58

 

185

 

2.41

 

9.8

 

5.25

 

 

391

 

553

 

7.16

 

59.4

 

10.74

 

                       

 

As at 30 September 2018

 

 

 

 

 

 

 

 

 

 

(audited)

 

 

 

 

 

 

       Impairment allowance on SME

 

Total SME loans and advances

    loans and advances subject to

 

subject to forbearance measures

           forbearance measures

 

 

Number of loans

Gross

carrying amount

 

% of total portfolio

 

Impairment allowance

 

 

Coverage

 

 

 

 

£m

 

 

 

£m

 

%

 

Term extension

179

 

162

 

2.15

 

10.5

 

6.48

 

Deferral of contracted capital repayments

103

 

129

 

1.73

 

15.6

 

12.02

 

Reduction in contracted interest rate

2

 

1

 

0.01

 

-

 

4.05

 

Alternative forms of payment

4

 

25

 

0.33

 

7.5

 

30.46

 

Debt forgiveness

4

 

11

 

0.14

 

0.6

 

5.64

 

Refinancing

17

 

10

 

0.13

 

1.0

 

9.87

 

Covenant breach/reset/waiver

61

 

207

 

2.75

 

9.2

 

4.43

 

 

370

 

545

 

7.24

 

44.4

 

8.14

 

                       

 

Included in other financial assets at fair value is a portfolio of loans that is included in the above table. The value of fair value loans subject to forbearance as at 31 March 2019 is £10m (30 September 2018: £15m), representing 0.12% of the total SME portfolio (30 September 2018: 0.19%). Impairment allowances on these amounts totalled £0.4m (30 September 2018: £2m), a coverage of 4.21% (30 September 2018: 11.66%).

 

 

 

 

Risk management

Financial risk

 

The financial services industry is highly regulated with ongoing changes in the regulatory environment expected to influence the risks and their management.  The key risks include capital, liquidity and funding risks, market risk which in the case of the Group is non-traded market risk (incorporating interest rate and foreign exchange risks), pension risk and non-traded equity risk.

 

Capital

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

 

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

 

Regulatory capital (unaudited)(1)

 

 

 

 

31 Mar 2019

 

30 Sep 2018

CET1 capital

£m

 

£m

Capital instruments and share premium

146

 

89

Retained earnings and other reserves

4,074

 

2,637

CET1 capital before regulatory adjustments

4,220

 

2,726

CET1 capital: regulatory adjustments(2)

 

 

 

Defined benefit pension fund assets

(142)

 

(138)

Prudent valuation adjustment

(5)

 

(3)

Intangible assets

(485)

 

(412)

Goodwill

(10)

 

-

Deferred tax asset relying on future profitability

(102)

 

(99)

Cash flow hedge reserve

24

 

39

IRB shortfall of credit risk adjustments to expected losses

(80)

 

-

IFRS 9 transitional relief

40

 

-

Total regulatory adjustments to CET1

(760)

 

(613)

CET1 capital

3,460

 

2,113

AT1 capital instruments

 

 

 

Capital instruments and related share premium

697

 

450

Instruments issued by subsidiaries that are given recognition in AT1 capital(3)

242

 

-

AT1 capital before regulatory adjustments

939

 

450

AT1 capital: regulatory adjustments

 

 

 

Fair value adjustment on acquisition of Virgin Money AT1 instruments

38

 

-

Total regulatory adjustments to AT1 capital

38

 

-

AT1 capital

977

 

450

Total Tier 1 capital

4,437

 

2,563

Tier 2 capital: instruments and provisions

 

 

 

Subordinated debt

723

 

474

Credit risk adjustments(4)

-

 

152

Instruments issued by subsidiaries that are given recognition in Tier 2 capital(5)

60

 

-

Tier 2 capital before regulatory adjustments

783

 

626

Total Tier 2 capital

783

 

626

Total capital

5,220

 

3,189

 

(1)

The table shows the capital position on a CRD IV `fully loaded` basis and transitional IFRS 9 basis

(2)

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

(3)

Qualifying Tier 1 capital of subsidiaries is restricted per CRR articles 85-87, subject to threshold calculations.

(4)

The current period does not include Tier 2 credit risk adjustments due to the transition to IFRS 9 reporting.

(5)

Under CRD IV, an element of disallowed Tier 1 capital of subsidiaries is added back to Tier 2, subject to threshold calculations (CRR article 88).

 

 

 

 

 

 

 

 

 

 

Risk management

Financial risk

 

Capital (continued)

 

Reconciliation of statutory total equity to regulatory capital (unaudited)

31 Mar 2019

 

30 Sep 2018

 

£m

 

£m

Statutory total equity

5,358

 

3,186

Deductions from capital

(760)

 

(613)

Foreseeable AT1 dividends and charges

(19)

 

(10)

Non-controlling interests deduction

(142)

 

-

Regulatory Tier 1 capital

4,437

 

2,563

 

 

Regulatory capital flow of funds (unaudited)(1)

31 Mar 2019

 

30 Sep 2018

 

£m

 

£m

CET1 capital(2)

 

 

 

CET1 capital at 1 October

2,113

 

2,437

Share capital and share premium

3

 

1

Retained earnings and other reserves (including structured entities)

(76)

 

(217)

Acquisition of Virgin Money

1,567

 

-

Prudent valuation adjustment

(2)

 

1

Intangible assets

(73)

 

(73)

Goodwill

(10)

 

-

Deferred tax asset relying on future profitability

(3)

 

(71)

Defined benefit pension fund assets

(4)

 

(3)

Cash flow hedge reserve

(15)

 

38

IRB shortfall of credit risk adjustments to expected losses

(80)

 

-

IFRS 9 transitional relief

40

 

-

Total CET1 capital

3,460

 

2,113

 

 

 

 

Tier 1 capital

 

 

 

Tier 1 capital at 1 October

450

 

450

Share capital issued: Additional Tier 1 Capital

247

 

-

Instruments issued by subsidiaries that are given recognition in AT1 capital

242

 

-

Fair value adjustment on acquisition of Virgin Money AT1 instruments

38

 

-

 

977

 

450

Total Tier 1 capital

4,437

 

2,563

 

 

 

 

Tier 2 capital

 

 

 

Tier 2 capital at 1 October

626

 

627

Credit risk adjustments(3)

(152)

 

(2)

Other movements

2

 

1

Capital instruments issued: subordinated debt

247

 

-

Instruments issued by subsidiaries that are given recognition in Tier 2 capital

60

 

-

Total Tier 2 capital

783

 

626

Total capital

5,220

 

3,189

 

(1)

The table shows the capital position on a CRD IV `fully loaded` basis and transitional IFRS 9 basis.

(2)

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

  (3)

The transition to IFRS 9 reporting has removed the requirement for Tier 2 credit risk adjustments.

 

 

 

 

 

 

 

 

 

Risk management

Financial risk

 

Capital (continued)

 

31 Mar 2019

 

30 Sep 2018

Minimum Pillar 1 capital requirements (unaudited)

£m

 

£m

Credit risk

1,671

 

1,449

Operational risk

208

 

132

Counterparty risk

16

 

10

Credit valuation adjustment

13

 

17

Tier 1 regulatory capital requirements

1,908

 

1,608

 

 

IFRS 9 Transitional arrangements(1) (unaudited)

31 Mar 2019 (£m)

 

As reported

Excluding

impact of IFRS 9

Available Capital (amounts)

 

 

CET1 capital

3,460

3,420

Tier 1 capital

4,437

4,397

Total capital

5,220

5,180

Risk-weighted assets (amounts)

 

 

Total Risk-weighted assets

23,864

23,809

Capital ratios

 

 

CET1 (as a percentage of risk exposure amount)

14.5%

14.4%

Tier 1 (as a percentage of risk exposure amount)

18.6%

18.5%

Total capital (as a percentage of risk exposure amount)

21.9%

21.8%

Leverage ratio

 

 

Leverage ratio total exposure measure

93,916

93,876

Leverage ratio

4.7%

4.7%

 

(1)

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

 

RWA movements

 

 

 

 

 

6 months to 31 Mar 2019

6 months to 31 Mar 2018

 

RWA flow statement (unaudited)(1)

IRB RWA £m

STD RWA

£m

Other RWA(2)

£m

Total

£m

Capital

required £m

IRB RWA

£m

 

STD RWA £m

Other RWA(2)

£m

Total

£m

Capital

required £m

 

RWAs at 1 October

-

18,104

1,998

20,102

1,608

-

17,753

1,925

19,678

1,574

 

Asset size

344

269

-

613

49

-

302

-

302

24

 

Asset quality

39

(10)

-

29

2

-

3

-

3

-

 

Model updates(3)

115

-

-

115

9

-

-

-

-

-

 

Methodology and policy

243

-

-

243

19

-

6

-

6

-

 

Acquisitions and disposals

4,330

2,870

966

8,166

653

-

-

-

-

-

 

IRB accreditation

10,247

(15,592)

-

(5,345)

(428)

-

-

-

-

-

 

Other

-

(64)

5

(59)

(5)

-

-

(40)

(40)

(2)

 

RWAs at 31 March

15,318

5,577

2,969

23,864

1,908

-

18,064

1,885

19,949

1,596

 

                               

 

 

(1)

While the Bank has obtained IRB accreditation, the PRA has now released a final policy statement outlining its approach to implementing definition of default in line with EBA regulations. Further to this, there are recommended changes to both PD and LGD model components relating directly to the calculation of risk-weighted capital requirements for residential mortgage portfolios. These changes are required to be implemented by 31 December 2020, subject to PRA approval.

(2)

Other RWA includes operational risk, CVA and counterparty credit risk.

(3)

Formal FIRB accreditation for the SME portfolios was received in October 2018 for a suite of re-calibrated models which were implemented during November and which resulted in a £170m model impact, included within the 'Model updates' row above. The differential is predominantly in relation to the Retail Mortgage quarterly PD model recalibrations. Since this implementation, no additional model changes have occurred.

 

 

 

 

 

Risk management

Financial risk

 

Capital (continued)

 

Pillar 1 RWAs and capital requirements by business line (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 March 2019

 

At 30 September 2018

 

 

 

Capital required

 

RWA

 

 

Exposure

 

Capital required

 

RWA

 

 

Exposure

 

Capital requirements for calculating RWAs

£m

 

£m

 

£m

 

£m

 

£m

 

£m

 

Corporates

484

 

6,049

 

8,234

 

-

 

-

 

-

 

    Of which: specialised lending

-

 

-

 

-

 

-

 

-

 

-

 

    Of which: SMEs

373

 

4,661

 

6,802

 

-

 

-

 

-

 

Retail

742

 

9,269

 

64,838

 

-

 

-

 

-

 

    Secured by real estate property

742

 

9,269

 

64,838

 

-

 

-

 

-

 

        Of which: SMEs

-

 

-

 

-

 

-

 

-

 

-

 

        Of which: non-SMEs

742

 

9,269

 

64,838

 

-

 

-

 

-

 

Total IRB approach

1,226

 

15,318

 

73,072

 

-

 

-

 

-

 

Central governments or central banks

-

 

-

 

16,512

 

-

 

1

 

11,361

 

Regional governments or local authorities

1

 

12

 

158

 

1

 

12

 

143

 

Public sector entities

-

 

5

 

275

 

-

 

2

 

155

 

Multilateral development banks

-

 

-

 

973

 

-

 

-

 

155

 

Institutions

17

 

210

 

1,501

 

11

 

136

 

630

 

Corporates

26

 

323

 

356

 

316

 

3,956

 

4,311

 

    Of which: SMEs

12

 

154

 

175

 

-

 

-

 

-

 

Retail

286

 

3,580

 

4,774

 

90

 

1,124

 

1,499

 

    Of which: SMEs

-

 

-

 

-

 

-

 

-

 

-

 

Secured by mortgages on immovable property

37

 

462

 

821

 

938

 

11,708

 

28,423

 

    Of which: SMEs

31

 

383

 

628

 

-

 

-

 

-

 

Exposures in default

5

 

57

 

48

 

45

 

562

 

465

 

    Of which: SMEs

1

 

11

 

8

 

-

 

-

 

-

 

Collective investments undertakings

-

 

1

 

1

 

-

 

1

 

1

 

Equity exposures

1

 

12

 

9

 

-

 

5

 

4

 

Items associated with particularly high risk

5

 

60

 

40

 

4

 

49

 

33

 

    Of which: SMEs

5

 

60

 

40

 

-

 

-

 

-

 

Covered bonds

10

 

131

 

1,309

 

5