Virgin Money UK PLC Interim Results 2024

David Duffy, Chief Executive Officer:

 

"Over the first six months, we have continued to deliver on our strategic ambitions in line with expectations. While we expect there to be headwinds through the second half of the year, we remain well placed to deliver growth in our target segments."

 

Summary financials

						6 months to		6 months to				6 months to
						31 Mar 2024		31 Mar 2023		Change		30 Sep 2023				Change
						£m			£m	%				£m		%
Net interest income (excluding notable items)							868		855	2				861		1
Non-interest income (OOI) (excluding notable items)							72		78	(8)					79	(9)
Total operating income (excluding notable items)							940		933	1				940		-
Notable items in income(1)							(17)		(19)	(11)				(27)		(37)
Statutory total operating income							923		914	1				913		1
Operating and administrative expenses (excluding notable items)							(502)		(477)	5				(494)		2
Notable items in expenses(1)							(49)		(57)	(14)				(145)		(66)
Statutory operating and administrative expenses							(551)		(534)	3				(639)		(14)
Statutory operating profit before impairment losses							372		380	(2)				274		36
Impairment losses on credit exposures							(93)		(144)	(35)				(165)		(44)
Statutory profit on ordinary activities before tax							279		236	18				109		156
Performance metrics(2)
Total customer lending							£72,675m		£72,435m	0.3%				£72,754m		(0.1)%
Net interest margin (NIM)							1.94%		1.91%	3bps				1.91%		3bps
Return on tangible equity (RoTE)							9.1%		6.1%	3.0%pts				1.6%		7.5%pts
Cost: income ratio							59.7%		58.5%	1.2%pts				70.0%		(10.3)%pts
Adjusted cost: income ratio(3)							52.3%		51.1%	1.2%pts				52.6%		(0.3)%pts
Cost of risk (CoR)							0.26%		0.40%	(14)bps				0.42%		(16)bps
Common Equity Tier 1 (CET1) ratio (IFRS 9 transitional)							14.6%		14.7%	(0.1)%pts				14.7%		(0.1)%pts

 

(1)    Full details of notable items are included on page 88.

(2)    For definitions of the performance metrics, refer to 'Measuring the Group's performance' on pages 372 to 380 of the Group's 2023 Annual Report and Accounts. (3)    Adjusted to exclude all notable items and the new BoE Levy recognised in 2024 of £10m. Refer to page 89 for further details.

Delivered strong financial performance in H1 2024

·      NIM expanded further to 1.94% in H1 (Q224: 1.99%), supported by EIR adjustments in the credit card portfolio, reflecting strong customer activity and updated assumptions

·      OOI (excluding notable items) down 8% YoY, reflecting reclassification of insurance costs incurred on packaged current accounts

·      Operating expenses (excluding notable items) 5% higher YoY, driven by inflation and the new BoE Levy (£10m in Q2) partially offset by ongoing delivery of the cost savings programme; adjusted C:I ratio modestly higher YoY at 52.3%

·      Notable expenditure included £33m from restructuring activities and £15m related to new financial crime prevention programme

·      Impairment charge of £93m (CoR: 26bps), incorporating benefit from the ongoing SICR review of the Group's credit card portfolio and a modestly improving macroeconomic outlook; credit quality remains solid; stable provision coverage of 84bps (FY23: 84bps)

·      Statutory profit before tax increased 18% YoY to £279m (9.1% statutory RoTE), primarily reflecting the lower impairment charge

·      CET1 ratio remains strong at 14.6% (FY23: 14.7%); movement includes 2p foreseeable FY 2024 dividend and c.£63m returned to shareholders as part of the £150m buyback programme announced alongside FY23, prior to the cancellation of the programme

 

Further growth in target lending segments and relationship deposits, in line with strategy

·      2% growth in active relationship customer accounts during H1 to 3.8m accounts

·      Relationship deposits 2% higher in H1 at £36.3bn, remaining 53% of total deposits; total deposits increased 2% to £68.2bn

·      Continued growth in target segments; Unsecured +3%, driven by growth in cards; Business lending +7% as growth in BAU balances offset a reduction in Government scheme lending; Mortgages reduced 2% given subdued market; overall lending stable

 

Continued strategic execution

·      Completed purchase of abrdn's c.50% stake in Virgin Money Investments⁽⁴⁾ in April for £20m, following successful roll-out of new investment and pension services

·      Fully rolled-out premium broker service to 225 mortgage intermediaries, covering c.40% of VMUK applications, contributing to a stronger pipeline of recommended cases from those brokers

·      New virtual assistant Redi has now supported over 1 million conversations, attracting strong Smile scores and solving more than 50% of queries without the need for further escalation

·      Reduced office property footprint by c.35% in H1, supporting gross savings

·      Progressing second phase of Consumer Duty review ahead of July implementation

 

FY24 revised outlook

·      Anticipate 5-10% growth across target lending segments of business and unsecured lending in FY24, as guided at FY23

·      Continue to expect NIM to be in 190-195bps range for FY24, with NIM lower in H2 vs. H1, reflecting lower expected contribution from cards EIR adjustments, ongoing competition and lower interest rates, partially mitigated by the reinvestment rate of the structural hedge

·      In light of the proposed acquisition by Nationwide Building Society ('Nationwide'), the Group has deferred certain restructuring activities

·      Adjusted cost: income ratio anticipated to be higher in H2 vs. H1, reflecting the latest outlook for income, inflation, ongoing investment and cost savings

·      Continue to expect CoR of 30-35bps for FY24, incorporating SICR review on card portfolio & modestly improving economic outlook

·      Given the proposed acquisition by Nationwide, the Group does not intend to announce any further share buybacks or dividends

(4)    Legal entity name 'Virgin Money Unit Trust Managers Limited'

·      As a result of these factors, statutory RoTE expected to be lower in H2 vs H1

Contact details

 

For further information, please contact:

 

 

Investors and Analysts
Richard Smith Head of Investor Relations & Sustainability	+44 7483 399 303 richard.smith@virginmoney.com
Amil Nathwani	+44 7702 100 398
Senior Manager, Investor Relations	amil.nathwani@virginmoney.com
Martin Pollard Senior Manager, Investor Relations	+44 7894 814 195 martin.pollard1@virginmoney.com
Media
Andrew Scott Head of Media Relations   Simon Hall	+44 7483 911 591 andrew.s.scott@virginmoney.com   +44 7855 257 081
Senior Media Relations Manager	simon.hall@virginmoney.com
Press Office	+44 800 066 5998
	press.office@virginmoney.com
Teneo
Doug Campbell (UK) Julia Henkel (Australia)	+44 7753 136628 +61 406 918080

 

There will be no management presentation or conference call today.

 

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

 

Business and financial review

KPIs

Measuring strategic delivery

 

All figures as at H1 2024

 

Total active relationship customer accounts 3.8m FY23: 3.8m FY22: 3.6m 2021(1): 3.3m		Digital primacy(4) 68% FY23: 61% FY22: 56% H1 22(2): 51%			Target lending segment asset growth 6% in H1 FY23: 9% FY22: 7% FY21: (3)%
Gross annualised cost savings (cumulative) c.£150m FY23: £130m FY22: £69m Target: £200m		Customer complaints per 1k accounts 3.9 FY23: 4.0 FY22: 4.2 FY21: 3.7			Colleague engagement 83% FY23: 80% FY22: 79% FY21: 68%
Group Smile score(4) 57% FY23: 49% FY22: 46% FY21: 51%		Group diversity indicators Senior gender(3) 50% FY23: 55% FY22: 52% Target: 45-55%	Senior ethnicity(3) 9% FY23: 4% FY22: 8% Target: 10%			Group ethnicity 8% FY23: 6% FY22: 7% Target: 10%

 

(1)	As at October 2021 due to availability of source data.
(2)	As at March 2022 due to availability of source data.
(3)	Senior defined as top three levels.
(4)	H1 2024 outcomes reflect improved source data, not directly comparable to historic data

 

 

Business and financial review

Financial performance - summary

 

 

Summary income statement

									6 months to		6 months to				6 months to
									31 Mar 2024		31 Mar 2023		Change		30 Sep 2023				Change
									£m			£m	%				£m		%
Net interest income (excluding notable items)										868		855	2				861		1
Non-interest income (excluding notable items)										72		78	(8)					79	(9)
Total operating income (excluding notable items)										940		933	1				940		-
Notable items in income										(17)		(19)	(11)				(27)		(37)
Statutory total operating income										923		914	1				913		1
Operating and administrative expenses (excluding notable items)										(502)		(477)	5				(494)		2
Notable items in expenses										(49)		(57)	(14)				(145)		(66)
Statutory operating and administrative expenses										(551)		(534)	3				(639)		(14)
Statutory operating profit before impairment losses										372		380	(2)				274		36
Impairment losses on credit exposures										(93)		(144)	(35)				(165)		(44)
Statutory profit on ordinary activities before tax										279		236	18				109		156
Tax expense										(43)		(56)	(23)				(43)		-
Statutory profit after tax										236		180	31				66		258

 

Notable items

				6 months to	6 months to	6 months to
				31 Mar 2024	31 Mar 2023	30 Sep 2023
				£m	£m	£m
Operating income:
Acquisition accounting unwinds (net interest income)				(9)	(3)	(26)
Hedge ineffectiveness (non-interest income)				(8)	(16)	-
Other (non-interest income)				-	-	(1)
Total notable items in statutory operating income				(17)	(19)	(27)
Operating expenses:
Restructuring charges				(33)	(53)	(78)
Financial crime prevention programme				(15)	-	-
Legacy conduct				4	(4)	(8)
Other				(5)	-	(59)
Total notable items in statutory operating expenses				(49)	(57)	(145)
Operating profit before impairment losses (excluding notable items)				438	456	446

 

Performance metrics⁽¹⁾

					6 months to	6 months to		6 months to
					31 Mar 2024	31 Mar 2023	Change	30 Sep 2023	Change
Profitability:
Net interest margin (NIM)					1.94%	1.91%	3bps	1.91%	3bps
Statutory return on tangible equity (RoTE)					9.1%	6.1%	3.0%pts	1.6%	7.5%pts
Statutory cost: income ratio					59.7%	58.5%	1.2%pts	70.0%	(10.3)%pts
Earnings per share (EPS)					16.0p	11.0p	5.0p	3.0p	13.0p
Adjusted cost: income ratio(2)					52.3%	51.1%	1.2%pts	52.6%	(0.3)%pts
(1) For definitions of the performance metrics, refer to 'Measuring the Group's performance' on pages 372 to 380 of the Group's 2023 Annual Report and Accounts (2) Adjusted to exclude all notable items shown above and the new BoE Levy recognised in 2024 of £10m.

 

Business and financial review

Financial performance - summary

 

Performance metrics (continued)

As at:					31 Mar 2024	31 Mar 2023	Change		30 Sep 2023			Change
Asset quality
Cost of risk (CoR)(1)					0.26%	0.40%	(14)bps		0.42%			(16)bps
Total provision to customer loans					0.84%	0.72%	12bps		0.84%			-bps
Indexed loan to value ratio (LTV) of mortgage portfolio(2)					53.6%	53.6%	-%pts		52.9%			0.7%pts
Regulatory Capital:
CET1 ratio (IFRS 9 transitional)					14.6%	14.7%	(0.1)%pts		14.7%			(0.1)%pts
CET1 ratio (IFRS 9 fully loaded)					14.5%	14.4%	0.1%pts		14.3%			0.2%pts
Total capital ratio					20.9%	21.2%	(0.3)%pts		21.2%			(0.3)%pts
Minimum requirement for own funds and eligible liabilities (MREL) ratio					33.9%	31.0%	2.9%pts		31.9%			2.0%pts
UK leverage ratio					5.3%	5.0%	0.3%pts		5.0%			0.3%pts
Tangible net asset value (TNAV) per share					361.2p	350.5p	10.7p		359.8p			1.4p
Funding and Liquidity:
Loan to deposit ratio (LDR)					107%	108%	(1)%pt		109%			(2)%pts
Liquidity coverage ratio (LCR)					151%	153%	(2)%pts		146%			5%pts
(1)	CoR for the 6 months to March is calculated on an annualised basis.
(2)	LTV of the mortgage portfolio is defined as mortgage portfolio weighted by balance.

Summary balance sheet

									As at
									31 Mar 2024	30 Sep 2023			Change
									£m			£m	%
Customer loans									72,675			72,754	-
of which Mortgages									56,627			57,497	(2)
of which Unsecured									6,727			6,519	3
of which Business									9,321			8,738	7
Other financial assets									19,058			17,766	7
Other non-financial assets									1,300		1,266		3
Total assets									93,033			91,786	1
Customer deposits									68,184			66,609	2
of which relationship deposits(1)									36,267			35,394	2
of which non-linked savings									10,759			9,741	10
of which term deposits									21,158			21,474	(1)
Wholesale funding									16,223			16,658	(3)
Other liabilities									2,967			2,912	2
Total liabilities									87,374			86,179	1
Ordinary shareholders' equity									4,824			5,013	(4)
Additional Tier 1 (AT1) equity									835			594	41
Equity									5,659			5,607	1
Total liabilities and equity									93,033			91,786	1
Risk Weighted Assets (RWAs)									25,581			25,176	2

(1)   Current account and linked savings balances

 

 

 

 

 

Business and financial review

Chief Executive Officer's statement

Delivering against our strategy

"Over the first six months, we have continued to deliver on our strategic ambitions in line with expectations. While we expect there to be headwinds through the second half of the year, we remain well placed to deliver growth in our target segments."

 

David Duffy, CEO

Dear Stakeholder,

I am pleased to report that in the first half of the final year of our current strategic cycle, we have delivered continued operational, financial and strategic progress in line with our Purpose-led digital strategy.

 

In May, our shareholders voted to approve the Scheme of Arrangement ("Scheme") and associated resolutions in connection with the proposed acquisition of Virgin Money by Nationwide Building Society ("Nationwide"). Together, Virgin Money and Nationwide will become the second largest mortgage and savings provider in the UK. The proposed combination presents an exciting opportunity to build on Virgin Money's strategic and operational progress in recent years, including the consistent growth we have delivered in retail and business lending, and deposits, and the combined group will be able to offer more great products and services to a larger customer base. The proposed acquisition remains subject to the satisfaction or waiver of all remaining conditions of the Scheme, including regulatory approval, and final approval by the Court.

 

During the first half, we have delivered further growth across all our target segments, despite the competitive backdrop in UK banking. We've continued to invest in our capabilities throughout the period and our planned cost savings have helped partially mitigate ongoing inflationary pressure. The higher rate environment and ongoing Effective Interest Rate (EIR) adjustments in our credit cards portfolio, reflecting strong customer activity and updated assumptions, supported our net interest margin, which, combined with focused management of costs saw a stable adjusted cost: income ratio for H1, in line with our guidance.

 

So far this financial year, the macroeconomic backdrop has modestly improved, with inflation continuing to fall, though remaining above the Bank of England's target range. As a result, market interest rate expectations have been volatile through the period, but with continued low unemployment and wage inflation supporting customer affordability. Overall, whilst GDP growth remains low, the level of activity in key lending categories has shown some signs of improvement.

 

Against this backdrop, we've continued to execute our strategy, with growth in Business lending, up 7% in H1 24, and Unsecured, 3% higher in H1 24, offsetting a 2% reduction in mortgages. Overall deposits also grew 2% during the half supported by growth in our relationship deposit base where our digital propositions, including Personal and Business current accounts (PCAs and BCAs) continued to attract new customers. Following the relaunch of Virgin Money Investments (VMI) during FY23, we were pleased to complete the acquisition of VMI from abrdn in April, which will support further growth.

 

During H1, we've also continued to deliver our restructuring programme, with further gross costs savings realised during the period helping to partially offset inflationary impacts and investment. Given the proposed acquisition, we will now defer some activity that was due to take place later in the year, which will limit the level of cost savings realised in H2. As announced alongside FY23 results, we launched the financial crime prevention programme (FCPP) across H1 as we focus on upgrading our financial crime prevention and cyber capabilities. We are also reaching the final stages of our preparations for the implementation of the next phase of Consumer Duty, covering off-sale products and services, on 31 July 2024.

 

As we look forward over the remainder of the year, following a good first half we do expect some headwinds, with downward pressure on NIM relative to H1 driven by ongoing competition, lower interest rates and a lower expected contribution from Effective Interest Rate (EIR) adjustments in our credit cards portfolio. On costs, inflation and continuing investment will only be partially mitigated by the ongoing cost savings programme, where certain restructuring activities have now been deferred in light of the proposed acquisition by Nationwide, representing further headwinds relative to H1.

 

Following the successful shareholder vote in May, during the second half of the year we will also focus on concluding the transaction with Nationwide, which remains subject to the satisfaction or waiver of all remaining conditions of the Scheme, including regulatory approval and final approval by the Court. The terms of the cash acquisition comprise a 220p per share total cash price to compensate shareholders for the fundamental value of the Virgin Money Group. This includes an FY 2024 dividend of 2 pence per share, which the Board is pleased to announce today, and which will be paid on 30 July 2024. We continue to expect the transaction to conclude in calendar Q4 2024.

 

Good financial performance in H1 2024

The higher rate environment, combined with our strategic execution, saw the Group deliver good financial performance during H1. Statutory RoTE of 9.1% improved relative to last year (H1 2023: 6.1%), reflecting higher profit before tax and also a lower cash flow hedge reserve level, given the rate environment. Statutory profit before tax in H1 2024 was £279m, 18% up on H1 2023 (£236m), as higher income and lower impairments offset higher operating and administrative expenses.

 

Total income on a statutory basis increased 1% to £923m (H1 2023: £914m) compared to the same period a year ago. This was primarily driven by a continued improvement in net interest margin, to a 1.94% NIM for H1 (H1 2023: 1.91%), as the benefits from the reinvestment rate of the structural hedge and ongoing credit card EIR adjustments reflecting strong customer activity and updated assumptions, offset spread pressure in mortgages and deposit competition and migration. Non-interest income of £64m was 3% higher year-on-year, primarily reflecting lower hedge ineffectiveness.

Business and financial review

Chief Executive Officer's statement

 

Operating and administrative costs of £551m were 3% higher when compared to H1 2023 as gross cost savings from the restructuring programme were more than offset by persistent inflation, including higher wages and a £10m impact from the new Bank of England levy in Q2. The adjusted cost: income ratio, excluding the levy and notable items, of 52.3% was broadly stable half-on-half (H2 23: 52.6%).

 

Operating and administrative costs included £49m of notable expenditure during H1 (H1 2023: £57m), primarily relating to ongoing restructuring activity (£33m) and the financial crime prevention programme (£15m). Credit impairments of £93m were significantly lower year-on-year (H1 2023: £144m), with the cost of risk of 26bps (H1 2023: 40bps) reflecting updated, more benign macroeconomic assumptions and our ongoing review of the application of significant increases in credit risk criteria (SICR) on the credit card portfolio, which reduced the expected credit loss provision by £31m in H1.

 

Lending balances finished the period at £72.7bn, broadly stable compared to the 2023 level, reflecting the continued growth in our target segments of Business and Unsecured lending offset by lower mortgages balances. Overall deposit balances increased 2% to £68.2bn supported by growth in relationship deposits which remained at 53% of the total deposit base. With lending broadly stable, this enabled a reduction in the loan to deposit ratio to 107% (FY23: 109%).

 

The Group maintained a conservative balance sheet position, with resilient asset quality supported by the modestly improving economic outlook, while capital, funding and liquidity all remained robust, with provision coverage stable on FY23 at 84bps. The CET1 ratio remains strong at 14.6% (FY23: 14.7%), as underlying capital generation offset RWA growth in the period. The CET1 movement in H1 incorporated the c.£63m returned to shareholders as part of the £150m buyback programme announced alongside FY23 results, prior to the cancellation of the remainder of the programme given the proposed acquisition of the Company by Nationwide.

 

Continuing our strategic execution during the first half of 2024

 

We set out a three year plan at FY21 to digitise the bank and improve our financial performance. In the first 6 months of the final year of this plan, the Group delivered growth in key target lending segments, launched improved propositions, delivered savings, and invested in resilience and sustainability while providing further capital distributions to shareholders. Whilst we see some headwinds over the remainder of the year to the NIM and cost outlook, we continue to see an opportunity for further growth in our target segments.

 

Pioneering Growth

In Business lending, our established franchise continued to deliver strong growth, increasing balances by 7% in H1 to £9.3bn, supported by healthy demand at good margins in our resilient sector specialisms, and benefiting from our relationship manager-led approach. In Unsecured, lending increased 3% in H1 to £6.7bn, driven mainly by measured, 5% growth in credit cards, reflecting strong demand from existing customers, and further new account acquisition in a growing market. During the first half we also saw resilient credit card spending, broadly stable on a per account basis to a year ago.

 

In Mortgages, balances reduced by 2% in H1 to £56.6bn, reflecting a subdued market for completions in which we continued to trade nimbly to optimise performance, including the roll-out of our premium broker service to 225 mortgage intermediaries, covering c.40% of VMUK applications. Q2 saw higher application volumes than in Q1, against a backdrop of improving momentum across the market.

 

Relationship deposits also increased by 2% to £36.3bn, reflecting the strength of our current accounts and related exclusive propositions for customers. Current account balances were down 3% over the half, reflecting general market trends as customers migrated to higher yielding savings products. Despite lower balances, we continued to attract new customers during the period, selling c.62k new personal current accounts (H2 23: c.44k) and c.19k new business current accounts during the half (H2 23: c.19k). Overall relationship customer numbers continued to increase in the half, as we added c.60k, taking the total to 3.8m.

 

Delighted Customers and Colleagues

In February, Virgin Money announced we had reached agreement to buy out our joint venture (JV) partners abrdn and take full ownership of Virgin Money Investments (VMI), with the transaction subsequently completing in early April. This follows the launch of our new digital platform and pensions proposition last year, offering customers a range of award-winning investment products. The transaction will help support growth in AUM and enable Virgin Money and abrdn to focus on their respective strengths.

 

We continued to focus on digitising customer journeys and improving service levels in the first half, including continued automation of key processes. The Group's Smile Score is now 57% (FY23: 49%), which reflects enhancements to the customer survey on which this metric is based, which now gathers feedback from a wider range of customers, together with our ongoing focus on improving the customer experience.

 

Colleague Engagement levels were also strong, at 83% in our most recent survey, up 3% on the position at FY23. During H1, we've also continued to focus on the DE&I agenda and were pleased to be named in the Women in Finance Charter for our work on our BRAVER initiative.

 

Super-straightforward Efficiency

At H1, we delivered further cost savings as part of our cost savings programme, with c.£150m of annualised gross cost savings now realised (FY23: £130m), including benefits from sourcing, digitisation and organisational design. We have continued to make good progress post the period-end and the programme remains important to help offset headwinds from investment and inflation, including from annual wage rises, as well as maintaining resilience and service levels. Given the proposed acquisition, we will now defer some activity that was due to take place later in the year, which will limit the level of cost savings realised in H2.

 

Business and financial review

Chief Executive Officer's statement

 

In digital and service developments, our new virtual assistant Redi has now supported over 1 million conversations, attracting strong Smile scores and solving more than 50% of queries without the need for further escalation. Digital primacy, which measures the proportion of active PCA and Card customers who are digital-only in their engagement with Virgin Money, is now up to 68% (FY23: 61%), reflecting improved processes and data capture. We were also pleased to have delivered a significant year-on-year improvement in our online and mobile banking security as rated by Which?, demonstrating our focus on improving our digital defences.

 

Discipline and Sustainability

We have made a good start on our new financial crime prevention programme (FCPP), with the programme tracking in line with expectations. Over the next few months, we will be implementing the upgrade of our strategic financial crime platform to replace a number of current systems. Ahead of that we have increased our real time screening capabilities, upgraded our customer risk assessments, and added a new suite of financial crime detection triggers. In parallel, we have progressed several fraud prevention projects, including investing in a market leading anti-fraud system, which is now into its implementation phase. We are also making progress on the use of enhanced behavioural modelling and biometric validation, with further implementation expected in H2. c.£15m has been invested in the programme during the first half.

 

Credit quality remained solid during the half with the portfolio continuing to perform well, and with overall arrears trends remaining consistent with prior reporting, including a gradual increase in credit card arrears, as expected, mainly reflecting the ongoing portfolio maturation and diversification of our cards book.

 

From a sustainability perspective, we have continued to focus on developing customer propositions to support the transition to a low-carbon economy over time. Through our partnership with Good Things Foundation, all our stores are now Databanks offering free data to customers as we continue to focus on fighting the Poverty Premium.

 

Outlook

 

Overall the business has had a positive first half of the year with good delivery across key areas. As we look out in to the second half, the Group does expect downward pressure on NIM relative to H1. We also anticipate cost pressures from inflation and investment in H2, which will only be partially mitigated by the ongoing cost savings programme, where certain restructuring activities have now been deferred in light of the proposed acquisition by Nationwide.

 

On volumes, we continue to anticipate 5-10% growth across our target lending segments of business and unsecured in FY24, in line with our previous guidance. From an income perspective, we continue to expect FY24 NIM to be in the range of 190-195bps, but with H2 NIM expected to be lower than H1, given the impact of a lower expected contribution from cards EIR adjustments, along with ongoing competition and lower interest rates, partially offset by the reinvestment rate of the structural hedge. 

 

The adjusted cost: income ratio is expected to be higher in H2 as ongoing inflation and investment will only be partially mitigated by the cost savings programme, where given the proposed acquisition, we will now defer some activity that was due to take place later in the year, limiting the level of cost savings realised in H2. The Group also expects that transaction costs associated with the proposed acquisition will be significantly higher in the second half.

 

We continue to expect the cost of risk to be in the range of 30-35bps for FY24, as guided at FY23, incorporating the ongoing SICR review on the credit card portfolio and a modestly improving economic backdrop. Given the proposed acquisition by Nationwide, the Group does not intend to announce any further share buybacks or dividends, representing a headwind to returns, assuming the transaction proceeds to completion in line with the anticipated timetable set out in the Scheme document.

 

Given these anticipated headwinds over the remainder of the year, we expect the return on tangible equity to be lower in the second half of the year, relative to the first half.

 

Following Virgin Money shareholders' approval of the Scheme and related matters for the proposed acquisition of Virgin Money by Nationwide in May, the transaction continues to track in line with previously highlighted timescales, with completion currently expected in calendar Q4 2024. Completion remains subject to the satisfaction or waiver of all remaining conditions of the Scheme, including regulatory approvals and final approval by the Court, but looking forward, the proposed combination with Nationwide represents an exciting longer-term opportunity, creating the second largest mortgage and savings provider in the UK.

 

We have an attractive business that is well positioned to continue to deliver on its growth ambitions. Over the remainder of the year, we'll continue to invest in improving the customer experience and launching innovative and rewarding products, whilst maintaining a resilient balance sheet and investing further in our capabilities.

 

Finally, I would like to take this opportunity to thank all of the stakeholders who have supported us on our journey. Thank you to our customers for their loyalty, to our colleagues for their hard work, and to our investors for their continued support.

 

 

 

David Duffy, Chief Executive Officer - 12 June 2024

Business and financial review

Chief Financial Officer's review

Delivering strategic and financial momentum

 

"The Group delivered continued business momentum during H1, supported by ongoing strategic execution, with trading broadly as anticipated. The Group believes the acquisition of Virgin Money by Nationwide presents an exciting opportunity to build on our significant strategic progress by combining two complementary businesses that together can offer more great products and services to a larger customer base, while delivering value for our shareholders."

Clifford Abrahams, Group CFO

 

Financial Highlights

 

Statutory profit before tax £279m H1 2023: £236m		Profit before tax (excluding notable items) £345m H1 2023: £312m		Statutory RoTE 9.1% H1 2023: 6.1%
NIM 1.94% H1 2023: 1.91%		Adjusted cost: income ratio 52.3%(1) H1 2023: 51.1%		CoR 26bps H1 2023: 40bps
CET1 ratio 14.6% FY23: 14.7%		Capital distributions announced £26m H1 2023: £45m		Relationship deposit growth 2.5% H1 2023: 2.9%

 

LCR 151% FY23: 146%

NSFR 136% FY23: 136%

Dividend per share 2.0p FY23: 5.3p

 

(1)	Adjusted to exclude all notable items as shown in the tables on page 88 and the new BoE Levy recognised in 2024 of £10m.

 

Business and financial review

Chief Financial Officer's review

 

 

Momentum in delivering our strategy

The Group has delivered a good first half of the year, with ongoing strategic delivery and financial momentum. In line with our strategy, the Group has continued to grow active relationship accounts and delivered further growth in its target lending segments of business and unsecured, while broadly maintaining its deposit mix. This, alongside ongoing credit card EIR adjustments, reflecting strong customer activity and updated assumptions, supported 1% growth in total operating income relative to H1 2023. Operating and administrative expenses (excluding notable items) were higher year-on-year, reflecting inflation, including annual wage rises, and the new BoE Levy, which together more than offset savings in the period. Overall, this resulted in an adjusted cost: income ratio of 52% (H1 2023: 51%). Credit quality remained resilient in H1, with provision coverage stable when compared with FY 2023. The Group's balance sheet remains strong with a robust funding and liquidity position. CET1 finished the half at 14.6% (FY23: 14.7%), well in excess of regulatory requirements and the Group's target range of 13-13.5%.

 

Growing in target segments

The Group delivered further lending growth in its target areas during the first half of the year, while overall customer lending was stable at £72.7bn. Mortgage balances reduced 1.5% during the period to £56.6bn, as the rate environment and wider cost of living pressures tempered purchase activity, albeit with signs of improved market activity levels since January. Business lending increased 6.7% overall, as growth in BAU balances offset ongoing reductions in government-backed lending. Unsecured balances increased 3.2% during H1 to £6.7bn, driven by 5.3% growth in the credit card portfolio. We continued to attract new deposits during the first half of the year, supporting overall deposit growth of 2.4%, while the mix of deposits remained broadly stable.

 

Resilient financial performance

Statutory profit before tax in H1 2024 was £279m, which was 18% higher compared to last year (H1 2023: £236m), reflecting higher operating income and lower impairments, offsetting growth in operating and administrative expenses. Statutory RoTE of 9.1% in H1 was improved relative to last year (H1 2023: 6.1%), reflecting improved profitability, a lower tax charge, and a reduction in the cash flow hedge reserve. NIM of 1.94% (H1 2023: 1.91%) was higher year-on-year, as benefits from the reinvestment rate of the structural hedge and ongoing credit card EIR adjustments offset spread pressure in mortgages and ongoing deposit competition and migration. Non-interest income of £64m was 3% higher year-on-year, primarily reflecting lower hedge ineffectiveness. Overall, this resulted in total operating income that was 1% better compared to a year ago. Operating and administrative costs of £551m were 3% higher when compared to H1 2023 as gross cost savings from the restructuring programme were more than offset by inflation and the new BoE Levy. Operating and administrative costs included £49m of notable expenditure during H1, primarily relating to the financial crime prevention programme and ongoing restructuring activity. Credit impairments of £93m were significantly lower year-on-year, reflecting updated macroeconomic assumptions and the ongoing review of the application of SICR on the credit card portfolio, which reduced the ECL provision by £31m during the period.

As a result of the Group's performance and as previously highlighted as part of the terms of the proposed acquisition of Virgin Money by Nationwide, the Board has announced an FY 2024 dividend of 2.0p.

Robust balance sheet with strong capital, liquidity and funding position

The Group maintained a conservative balance sheet position, including robust funding and liquidity, a strong capital position and stable provision coverage. The Group's total credit provision as at H1 2024 was £617m (FY23: £617m) equivalent to a coverage ratio of 0.84% (FY23: 0.84%). Funding and liquidity remain strong, with the 12-month average LCR ratio increasing to 151% (FY23 12-month average: 146%) and 12-month average net stable funding ratio (NSFR) stable at 136% (FY23: 136%). The LDR reduced to 107% (FY23: 109%) as deposit balances increased 2.4% to £68.2bn, while lending volumes were broadly stable at £72.7bn. The CET1 ratio remains strong at 14.6% (FY23: 14.7%), as capital generation more than offset RWA growth in the period. The CET1 movement in H1 incorporated c.£63m returned to shareholders as part of the £150m buyback programme announced alongside FY23 results, prior to the cancellation of the programme, given the proposed acquisition of the Company by Nationwide.

 

Outlook

Following a strong H1, during the second half of the year, the Group expects downward pressure on NIM relative to H1, primarily reflecting a lower expected contribution from cards EIR adjustments, and ongoing competition. The Group also anticipates cost pressures from inflation and investment in the second half, which will only be partially mitigated by the ongoing cost savings programme, where certain restructuring activities have now been deferred in light of the proposed acquisition by Nationwide. In the medium term, the Group remains focussed on delivering growth in return accretive segments, continued cost-efficiency and ongoing balance sheet resilience and believes the proposed acquisition by Nationwide will support its strategic ambitions, leveraging Nationwide's scale and pace of investment, as well as Virgin Money's capabilities and strengths.

 

 

 

 

 

Business and financial review

Chief Financial Officer's review

 

Income

							6 months to	6 months to						6 months to
							31 Mar 2024	31 Mar 2023				Change		30 Sep 2023				Change
							£m			£m		%				£m			%
Net interest income (excluding notable items)							868			855		2				861			1
Acquisition accounting unwinds							(9)			(3)		200				(26)			(65)
Statutory net interest income							859			852		1				835			3
Non-interest income (excluding notable items)							72		78		(8)						79			(9)
Hedge ineffectiveness							(8)		(16)		(50)						-			n/a
Other							-		-		-						(1)			(100)
Statutory non-interest income							64		62		3						78			(18)
Total operating income (excluding notable items(1))							940			933		1				940			-
Statutory total operating income							923			914		1				913			1
(1)	Notable items are presented separately above, with full details included on page 88.

 

Overview

Statutory total operating income of £923m was 1% higher compared with H1 2023 and H2 2023, driven by growth in NII. NII (excluding notable items) improved 2% year-on-year as NIM increased 3bps to 1.94%, including a Q2 NIM of 1.99%. There were also £(9)m of acquisition accounting unwinds within NII during H1 (H1 2023: £(26)m), reflecting fair value accounting adjustments at the time of the CYBG and Virgin Money acquisition. Statutory non-interest income was 3% higher year-on-year.

 

NII and NIM

Asset yields increased 151bps compared to H1 2023 at an aggregate level. Within this, mortgage yields increased 83bps, given the higher rate environment, while average mortgage balances were 2% lower in H1 2024 year-on-year. Together, this resulted in mortgage interest income that was 31% higher year-on-year.

Unsecured average balances increased 6% relative to H1 2023, in line with the Group's strategy to target growth in higher-yielding lending. Average yields increased 293bps year-on-year and incorporated £72m of positive EIR adjustments in the credit cards portfolio in H1, equivalent to 16bps of NIM on an annualised basis, reflecting behavioural outperformance relative to more prudent assumptions, and the removal of the temporary macro-economic adjustments that were previously applied at 30 September 2023, partly offset by the Group reducing the expectation of future balances. Altogether, this drove a 53% year-on-year increase in interest income from unsecured lending.

In Business, a 179bps increase in the average yield was driven by a combination of the higher rate environment and a reduction in lower-yielding government-backed lending. This, alongside a growth in average balances, resulted in 40% higher interest income year-on-year.

Elsewhere, the average yield on the Group's liquid assets increased 189bps reflecting the higher rate environment.

In March, £262m of Cash Ratio Deposits that were with the BoE and classed as non-interest earning assets were returned to the Bank as part of the introduction of the new BoE Levy and are now classed as interest earning assets.

Liability rates on interest bearing liabilities increased 167bps relative to H1 2023, with increased average rates across all products, mainly due to the higher rate environment.

Current account average balances reduced during the period, reflecting deposit migration into higher rate products. Term deposit average balances increased year-on-year as the Group actively participated in this market for new funding. Savings account balances reduced in H1 2024 relative to H1 2023 due to the attrition or churn of existing balances. Wholesale funding average balances reduced during the period, primarily reflecting the repayment of TFSME.

 

 

Business and financial review

Chief Financial Officer's review

 

Net interest income

			6 months ended 31 March 2024				6 months ended 31 March 2023
			Average balance	Interest income/ (expense)	Average yield/ (rate)(1)		Average balance	Interest income/ (expense)	Average yield/ (rate)(1)
Average balance sheet			£m	£m	%		£m	£m	%
Interest earning assets:
Mortgages			57,193	942	3.30		58,315	719	2.47
Unsecured			6,885	333	9.66		6,492	218	6.73
Business(2)			8,997	356	7.91		8,359	255	6.12
Liquid assets			15,835	417	5.27		15,651	264	3.38
Due from other banks			698	16	4.47		748	5	1.25
Swap income/other			-	331	n/a		-	252	n/a
Other interest earning assets			3	-	n/a		3	-	n/a
Total average interest earning assets			89,611	2,395	5.34		89,568	1,713	3.83
Total average non-interest earning assets			2,296				2,556
Total average assets			91,907				92,124
Interest bearing liabilities:
Current accounts			14,876	(127)	(1.71)		16,123	(84)	(1.04)
Savings accounts			23,738	(329)	(2.77)		27,560	(179)	(1.30)
Term deposits			23,493	(530)	(4.51)		17,129	(206)	(2.41)
Wholesale funding			17,186	(539)	(6.28)		18,395	(387)	(4.22)
Other interest earning liabilities			190	(2)	n/a		152	(2)	n/a
Total average interest bearing liabilities			79,483	(1,527)	(3.84)		79,359	(858)	(2.17)
Total average non-interest bearing liabilities			6,848				6,890
Total average liabilities			86,331				86,249
Total average equity			5,576				5,875
Total average liabilities and average equity			91,907				92,124
Net interest income				868	1.94			855	1.91
(1)	Average yield is calculated by annualising the interest income/expense for the period.
(2)	Includes loans designated at fair value through profit or loss (FVTPL).

 

 

Non-interest income

Non-interest income (excluding notable items) was £6m lower relative to H1 2023 at £72m. The key driver for this movement was the reclassification of insurance costs incurred on packaged current accounts from April 2023 as non-interest income; these were previously recognised within operating and administrative expenses. Excluding this impact, performance was broadly stable year-on-year, reflecting resilient credit card activity and business fee income. There were a further £(8)m of notable items within non-interest income (H1 2023: £(16)m) arising from hedge volatility and rate volatility in the period.

 

Business and financial review

Chief Financial Officer's review

 

Costs

							6 months to	6 months to				6 months to
							31 Mar 2024	31 Mar 2023		Change		30 Sep 2023		Change
							£m		£m	%			£m	%
Staff costs							213		177	20			190	12
Property and infrastructure							20		19	5			21	(5)
Technology and communications							64		61	5			65	(2)
Corporate and professional services							75		87	(14)			86	(13)
Depreciation, amortisation and impairment							43		49	(12)			46	(7)
Other expenses							87		84	4			86	1
Operating and administrative expenses (excluding notable items)							502		477	5			494	2
Notable items:
Restructuring charges							33		53	(38)			78	(58)
Financial crime prevention programme							15		-	n/a			-	n/a
Legacy conduct							(4)		4	n/a			8	n/a
Other							5		-	n/a			59	(92)
Statutory operating and administrative expenses							551		534	3			639	(14)
Cost: income ratio							59.7%		58.5%	1.2%pts			70.0%	(10.3)%pts
Adjusted cost: income ratio (1)(2)							52.3%		51.1%	1.2%pts			52.6%	(0.3)%pts
(1)	Notable items are presented separately above. Full details of all notable items is included on page 88.
(2)	Adjusted to exclude all notable items shown above and the new BoE Levy recognised in 2024 of £10m.

 

Operating expenses (excluding notable items) increased 5% year-on-year to £502m, while the adjusted cost: income ratio increased 1.2%pts to 52.3%. The Group has continued to deliver its restructuring programme, which has driven further cost efficiencies, with annualised savings of c.£150m to date. Staff costs were £36m (20%) higher relative to H1 2023 due to wage inflation and a £11m lower defined benefit pension credit year-on-year, partly mitigated by restructuring benefits. The reduction in corporate and professional services costs year-on-year included the non-recurrence of complaints handling costs with service now improved. The Group also benefited from a lower depreciation charge in H1 2024, primarily due to the run-off of assets and the impact of store closures. Other expenses of £87m in H1 2024 were £3m higher year-on-year and included a £10m initial estimate of the costs related to the new BoE Levy (that replaced the BoE's Cash Ratio Deposit Scheme, with effect from 1 March 2024), partly offset by higher VAT recoveries. The BoE Levy is the means of funding the costs of the BoE's policy functions in pursuit of its Financial Stability and Monetary Policy objectives that is paid for by eligible institutions.

The Group incurred c.£49m of notable expenditure during the period, £8m lower than in H1 2023. Restructuring charges of £33m included spend related to ongoing digitisation, property changes and severance. During the period, the Group also incurred £15m related to the new financial crime prevention programme to support the upgrade of our financial crime prevention and cyber defence capabilities. There was a net £4m legacy conduct release during the period, reflecting the latest risk assessment of potential cases. Other notable expenditure of £5m included costs associated with the proposed acquisition of Virgin Money by Nationwide.

Impairments

As at 31 March 2024		Credit provisions £m	Gross lending £bn	Coverage ratio bps	Net CoR(1) bps	% of loans in Stage 2	% of loans in Stage 3
Mortgages		55	56.9	10	-	4.5	1.0
Unsecured:		425	7.1	635	242	18.5	2.0
of which credit cards		391	6.5	648	269	15.9	2.1
of which personal loans and overdrafts		34	0.6	520	1	44.9	0.9
Business		137	9.3	155(2)	30	16.9	4.9
Total		617	73.3	84	26	7.4	1.6
of which Stage 2		353	5.4	651
of which Stage 3		161	1.2	1,645
(1)	CoR is calculated on an annualised basis.
(2)	Government-guaranteed element of loan balances excluded for the purposes of calculating the Business and total coverage ratio.

 

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

Business and financial review

Chief Financial Officer's review

 

ECL provisions of £617m as at H1 2024 were stable relative to FY23 (£617m). Alongside stable customer lending, this resulted in coverage of 84bps, which was unchanged from FY23. The components of the total ECL provision includes £536m of modelled and individually assessed ECL (FY23: £540m) and £81m of management adjustments (MAs) (FY23: £76m). These factors resulted in a £93m impairment charge during the period, equivalent to an annualised CoR of 26bps.

The key macroeconomic assumptions used in the Group's IFRS 9 modelling were updated based on scenarios provided by our third-party provider Oxford Economics. The weightings applied to the scenarios were 10% to the Upside scenario, 55% to the Base scenario and 35% to the Downside scenario. The weighted macroeconomic scenario includes a 0.3% decline in GDP in 2024 before a modest recovery thereafter, peak unemployment of 4.8% in 2027 and a 3.4% contraction in the House Price Index (HPI) in 2024, followed by a steady recovery thereafter.

During the period, the Group finalised changes to the credit card SICR model that removed the requirement for a two-month probation before accounts could return to Stage 1 from Stage 2 for non-forborne exposures. Overall, this reduced the ECL by £31m during H1 2024. Excluding the impact of SICR changes, the increase in ECL primarily reflected growth in Unsecured and Business lending.

During the first half of the year, loans classified as Stage 2 reduced from 9% of the portfolio at FY23 to 7%, including the impact from SICR model changes in the credit cards portfolio. 96% of the Stage 2 lending balances remain <30 days past due (DPD). Stage 3 assets as a % of Group lending increased modestly to 1.6% (FY23: 1.5%).

Aggregate provision coverage of 84bps at H1 remained consistent during the period. In Mortgages, the coverage ratio of 10bps is considered appropriate for the conservative loan book that is weighted to low LTVs. The portfolio continues to evidence good underlying credit performance, despite a gradual increase in late-stage arrears over the period.

Our Unsecured book coverage ratio of 635bps includes 648bps of coverage for our credit card portfolio and 520bps of coverage for our smaller personal loans and overdrafts book. Credit card portfolio coverage was lower relative to FY23, incorporating the impact of SICR model changes and revised macroeconomic forecasts. Credit card arrears continued to increase gradually during the first half of the year, mainly reflecting the ongoing maturation and diversification of the portfolio. Despite this, 97% of balances in Stage 1 or Stage 2 remain not past due (FY23: 97%).

In Business, the coverage ratio of 155bps reflects a 5bps decrease in the period, driven mainly by the modestly improving economic conditions and customers migrating from Stage 2 into Stage 1. There continues to be no significant deterioration in asset quality metrics and no significant increase in specific provision recognition. The proportion of loans in Stage1 or 2 and not past due remains high at 95% (FY23: 95%).

 

Profitability

6 months to

31 Mar 2024

31 Mar 2023

30 Sep 2023

£m

£m

£m

Statutory profit on ordinary activities before tax

279

236

109

Tax expense

(43)

(56)

(43)

Statutory profit for the period

236

180

66

RoTE

9.1%

6.1%

1.6%

TNAV per share

361.2p

350.5p

359.8p

Basic earnings per share (EPS)

16.0p

11.0p

3.0p

 

Overview

The Group made a statutory profit before tax of £279m in H1 2024 (H1 2023: £236m), resulting in a statutory RoTE of 9.1% (H1 2023: 6.1%). TNAV per share increased 1.4p in H1 2024 relative to FY23 to 361.2p. The key drivers of the increase were 15.3p of retained earnings net of dividends and 8.7p from share buybacks, offset by (18.3)p from a reduction in the cash flow hedge reserve, (3.6)p from a lower overall actuarial pension surplus and (0.7)p of fair value through other comprehensive income (FVOCI) and other movements.

 

Taxation

There was a £43m tax charge in respect of £279m of statutory profit before tax, reflecting an effective tax rate of 15%. The lower effective tax rate during the period incorporates a reduction in the deferred tax liability in respect of the defined benefit pension surplus, following the enactment of changes to the authorised surplus payments charge from 35% to 25%.

During the full year to September 2023, the most recent period for which annual tax data is available, the Group paid cash tax totalling £170m to HMRC (principally corporation tax including banking surcharge and irrecoverable VAT), with a further £87m (largely payroll taxes and national insurance contributions) collected on HMRC's behalf.

 

 

Business and financial review

Chief Financial Officer's review

 

Balance sheet

										As at
										31 Mar 2024	30 Sep 2023
										£m			£m	Change
Mortgages										56,627			57,497	(2)%
Unsecured										6,727			6,519	3%
Business(1)										9,321		8,738		7%
Total customer lending										72,675			72,754	-%
Relationship deposits(2)										36,267			35,394	2%
Non-linked savings										10,759			9,741	10%
Term deposits										21,158			21,474	(1)%
Total customer deposits										68,184			66,609	2%
Wholesale funding										16,223		16,658		(3)%
of which TFSME										5,050		6,200		(19)%
LDR										107%			109%	(2)%pts
LCR										151%		146%		5%pts
(1)	Of which, £499m government lending (30 September 2023: £625m)
(2)	Current account and linked savings balances.

Overview

At an aggregate level, total customer lending remained stable at £72.7bn in H1 as growth in Unsecured and Business lending, in line with the Group's strategy, was offset by a reduction in Mortgages. Total customer deposits increased 2% to £68.2bn, resulting in a reduction in the LDR to 107% (FY23: 109%).

Mortgage balances reduced 2% in H1 2024 to £56.6bn, reflecting lower housing activity with mortgage rates positioned at higher levels and wider cost of living pressures.

Unsecured balances increased 3% in H1 2024 to £6.7bn, as 5% growth in credit card balances was offset by a reduction in personal loans. In cards, the Group has benefitted from resilient activity levels and further new account acquisition, supported by its digitally-led proposition. During the period, the Group has continued to observe customer behavioural activity outperforming its prudent assumptions across spend, repayment and retention, resulting in card EIR performance remaining persistently better than expected.

Business lending increased by 7% in H1 2024 to £9.3bn as a reduction in Government-scheme balances was more than offset by 9% growth in BAU balances in a subdued market. BAU performance reflected the strength of our national franchise and sector specialisms in resilient market segments. Government-scheme balances reduced 20% to £0.5bn, as borrowers made contractual repayments.

Customer deposits increased by 2% in the first half of the financial year to £68.2bn. The Group continued to execute against its strategy during the period, increasing relationship deposits by £0.9bn, supported by strong customer propositions and competitive rates. Non-linked savings increased by £1.0bn during H1 2024 as the Group prioritised this market for new funding. Term deposit balances reduced by £0.3bn during the period, given ongoing maturities and as the Group prioritised non-linked savings for new funding, given the better value opportunities available.

Wholesale funding and liquidity

The Group has a stable funding base with customer deposits representing c.81% of total funding. The Group's customer deposits are weighted towards retail customers (76%), with the balance being from business customers, predominantly small and medium-sized enterprises. Of the total customer deposit book, the significant majority is insured via the Financial Services Compensation Scheme and of the balances that are uninsured, a proportion are fixed term and/or would incur a charge if customers wanted to withdraw their money.

Business and financial review

Chief Financial Officer's review

 

The Group has a number of well-established wholesale funding programmes with proven markets access. During the period, the Group successfully issued €750m of MREL senior notes and £500m of RMBS publicly to investors, while at the same time repaying £1.15bn of its TFSME drawings (£5.05bn outstanding as at 31 March 2024), resulting in the Group having now repaid all of its TFSME maturities due in 2024. On an overall basis, wholesale funding reduced to £16.2bn as at H1 2024 (FY23: £16.7bn). Of our total debt securities in issue, only c.10% (£1.0bn) has less than 1-year to effective maturity, reflecting term issuance roll-downs (the Group has negligible short-term wholesale funding). The Group has £1.60bn of TFSME maturing in FY25 and £2.55bn maturing in FY26, with the remaining £0.90bn subject to term extension beyond FY26. Given the strong deposit performance in H1 and wholesale issuances during the period, the Group does not expect to issue any further secured issuance in FY24, subject to ongoing deposit flows and acquisition process.

The stability of the Group's funding sources is highlighted in its NSFR, which remains strong on a 12-month average basis at 136%. The Group's 12-month average LCR increased to 151% (30 September 2023: 146%), continuing to comfortably exceed both regulatory requirements and the Group's more prudent internal risk appetite metrics. The Group's c.£15.7bn liquid asset portfolio is primarily comprised of cash at the BoE (c.69%), UK Government securities (Gilts) (c.8%) and AAA rated listed securities (e.g. bonds issued by supra-nationals and corporate covered bonds) (c.23%). The liquid asset portfolio is fully hedged from an interest rate, inflation and FX risk perspective and any movements in fair value are recognised in CET1 via the Income Statement or FVOCI reserve. The Group also has unencumbered pre-positioned collateral at the BoE representing c.£7.7bn of secondary liquidity drawing capacity via the Bank's Sterling Monetary Framework, which does not form part of the liquid asset portfolio for LCR or internal stressed outflow purposes. Over time the stock of unencumbered pre-positioned collateral will increase as remaining TFSME drawings are repaid. In addition, the Group has a further c.£19.4bn of unencumbered assets eligible and readily available but not currently pre-positioned at the BoE.

 

 

 

Business and financial review

Chief Financial Officer's review

 

Capital										As at
										31 Mar 2024	30 Sep 2023		Change
CET1 ratio (IFRS 9 transitional)										14.6%		14.7%		(0.1)%pts
CET1 ratio (IFRS 9 fully loaded)										14.5%		14.3%		0.2%pts
Total capital ratio										20.9%		21.2%		(0.3)%pts
MREL ratio										33.9%		31.9%		2.0%pts
UK leverage ratio										5.3%		5.0%		0.3%pts
RWAs (£m)										25,581		25,176		1.6%
of which Mortgages (£m)										8,446		9,072		(6.9)%
of which Unsecured (£m)										4,969		4,819		3.1%
of which Business (£m)										7,903		6,990		13.1%
(1)	Unless where stated, data in the table shows the capital position on a Capital Requirements Directive (CRD) IV 'fully loaded' basis with IFRS 9 transitional adjustments applied.
(2)	The capital ratios include unverified profits.

 

Overview

The Group maintained a robust capital position with a CET1 ratio (IFRS 9 transitional basis) of 14.6% and a total capital ratio of 20.9%. The Group's CET1 ratio on an IFRS 9 fully loaded basis was 14.5%. The Group's latest Pillar 2A requirement has a CET1 element of 1.9%. Overall, the Group continues to maintain a significant surplus above its CRD IV minimum CET1 capital requirement (or MDA threshold) of 10.9%. The Group currently expects to receive PRA approval on the mortgage IRB models (including hybrid PD) later this year and will implement shortly thereafter. A model adjustment has been applied to increase RWAs and expected losses in advance of formal approval of models. The Group continues to expect some modest upside to our capital position from Basel 3.1 implementation on day 1 (1 July 2025), subject to regulatory approval.

CET1 capital

CET1 reduced by c.15bps in the period with the movements set out in the table below. The (25)bps impact of the share buyback includes £63m that was returned to shareholders, prior to the cancellation of the programme given the proposed acquisition of the Company by Nationwide.

 

CET1 Capital movements		6 months to 31 Mar 2024
		%/bps
Opening CET1 ratio		14.7%
Capital generated (bps)		82
RWA growth (bps)		(23)
AT1 distributions (bps)		(11)
Underlying capital generated (bps)		48
Restructuring charges (bps)		(10)
Acquisition accounting unwind (bps)		(4)
Financial crime prevention programme (bps)		(4)
Conduct (bps)		2
Hedge ineffectiveness (bps)		(2)
Foreseeable ordinary dividends (bps)		(10)
Share buyback (bps)		(25)
Other (bps)		(10)
Net capital absorbed (bps)		(15)
Closing CET1 ratio		14.6%

 

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

 

MREL

The Group's transitional MREL ratio at H1 2024 was at 33.9% (FY23: 31.9%) of RWAs, or 10.1% when expressed as a percentage of Leverage exposures (FY23: 9.3%). This provides prudent headroom of £1.7bn or 6.6% above the binding loss-absorbing capacity (LAC) requirement of 27.3% of RWAs, or 2.0% above the binding LAC requirement of 8.2% when expressed as a percentage of Leverage exposures. Given the surplus to LAC requirements and having refinanced its redemptions in FY24, the Group is not planning any MREL or capital issuance over the remainder of the year, subject to the acquisition process.

 

 

 

 

Business and financial review

Chief Financial Officer's review

 

Outlook and guidance

 

FY24 financial guidance

NIM 190-195bps range for FY24, with NIM lower in H2 vs. H1

Cost: income ratio Adjusted cost: income ratio expected to be higher in H2 vs. H1

CoR 30-35bps range

 

Consistent with our strategy to diversify the balance sheet, we continue to anticipate 5-10% growth across target lending segments of business and unsecured lending in FY24.

During the second half of the year, we expect NIM to be impacted by a lower expected contribution from cards EIR adjustments, ongoing competition and lower interest rates, partially mitigated by the reinvestment rate of the structural hedge. As a result of these factors, the Group continues to expect NIM to be in the range of 190-195bps for FY24, with NIM lower in H2 vs. H1.

The adjusted cost: income ratio is anticipated to be higher in H2 vs. H1, reflecting the latest outlook for income, inflation, ongoing investment and cost savings, where certain restructuring activities have now been deferred in light of the proposed acquisition by Nationwide. The Group also expects that transaction costs associated with the proposed acquisition will be significantly higher in the second half.

The Group continues to expect CoR to be in the range 30-35bps for FY24, incorporating the SICR review on the credit card portfolio and a modestly improving economic backdrop.

Given the proposed acquisition by Nationwide, the Group has cancelled its share buyback programme and does not intend to announce any further share buybacks or dividends, representing a headwind to returns, assuming the transaction proceeds to completion in line with the anticipated timetable set out in the Scheme Document.

As a result of these factors, statutory RoTE is expected to be lower in H2 vs. H1.

 

 

Clifford Abrahams, Chief Financial Officer - 12 June 2024

 

 

Risk management

Risk overview

 

 

 

Risk overview	20
Credit risk	22
Financial risk	46

 

 

 

Risk management

Risk overview

 

The objective of risk management is to keep the bank safe, to ensure resilience and to put the customer interests at the centre of our decision making. Effective risk management supports the delivery of our strategic objectives and fulfils our Purpose.

This report provides information on developments during the period relating to the Group's risk exposures, including how those risks are managed or mitigated. These risk disclosures support, and should be read in conjunction with, the Risk report in the Annual Report and Accounts 2023.

During H1, Risk have continued work to enhance risk management practices and reporting capabilities, with focus on determining risk and control libraries aligned to our recently launched risk taxonomy, to support reporting from our incoming Integrated Risk Management system. This investment will increase monitoring of controls testing and drive improvements to our capability to execute control effectiveness assessments, which will support more robust risk management and better outcomes for our stakeholders.

 

We have also remained committed to proactively supporting our customers through the higher-rate environment and cost of living pressures that continue to prevail, and which have the potential to affect customer resilience and debt affordability. Close portfolio monitoring and assessment of aggregate risks is in place to highlight any signs of portfolio deterioration or affordability stress.

 

Managing execution risk and delivering change sustainably has continued to be a priority for the Group and we have supported the launch of the financial crime prevention programme, to further improve risk controls and strengthen technology, striving to meet evolving regulatory obligations and aligning to our purpose. Fraud and scams continue to become more sophisticated and incidence rates continue to rise across the sector, this investment will bolster our fraud controls and cyber defences, providing customers with improving protections against criminal actors. Risk teams have continued to carry out detailed risk assessments, assurance and oversight activity to support the business in management of fraud and cyber risks. Activity to strengthen oversight of the technology and data risk profile has continued and will remain a focus area, as we work towards adoption of the BCBS 239 data standard.

 

Building on progress in FY23, we have remained committed to ensuring good customer outcomes, with focus on overseeing the effective implementation and embedding of the FCA's Consumer Duty across the Group, including compliance with the requirements for closed book review and reporting by 31 July 2024. Good customer outcomes are at the heart of our purpose and central to our culture, business objectives and strategy.

 

Principal risks

Principal risks are those which could result in events or circumstances that might threaten the Group's business model, future performance, solvency, liquidity or reputation. The Group's principal risks are listed below and remain as disclosed in the 2023 Annual Report and Accounts.

 

Principal risks	Definitions
Credit risk	The risk that a retail or business customer or counterparty fails to pay the interest or capital due on a loan or other financial instrument. Credit risk needs to be managed through the life cycle of each loan from origination to repayment, redemption, write-off or sale. It manifests in the products that the Group offers and in which it invests and can arise in respect of both on- and off-balance sheet exposures.
Financial risk	Financial risk includes capital risk, funding risk, liquidity risk, market risk and pension risk, all of which have the ability to impact the financial performance of the Group, if not managed correctly.
Model risk	The potential for adverse consequences from decisions based on incorrect or misused model outputs and reports.
Regulatory and compliance risk	The risk of failing to comply with relevant regulatory requirements and changes in the regulatory environment, or failing to manage a constructive relationship with our regulators, by not keeping them informed of relevant issues, not responding effectively to information requests or not meeting regulatory deadlines.
Conduct risk	The risk of undertaking business in a way which fails to deliver good customer outcomes in line with the FCA's Consumer Duty, and causes customer harm, and may result in regulatory censure, redress costs and/or reputational damage.
Operational risk	The risk of loss or customer harm resulting from inadequate or failed internal processes, people and systems or from external events, incorporating the inability to maintain critical services, recover quickly and learn from unexpected/adverse events. Operational risk includes: change risk; third-party risk; cyber and information security risk; physical and personal security risk; IT resilience risk; data management risk; payment creation, execution and settlement risk; and people risk.
Economic crime risk	The risk that the Group fails to detect and prevent its products and services from being used to facilitate economic crime, resulting in harm to customers, the Group and its reputation, or third parties. This includes money laundering, terrorist financing, sanctions, fraud, and bribery and corruption.
Strategic and enterprise risk	The risk of significant loss of earnings or damage from decisions or actions that impact the long-term interests of the Group's stakeholders; or from an inability to fund or manage required change projects, or adapt to external developments.
Climate risk	The risk of exposure to physical and transition risks arising from climate change.

Risk management

Risk overview

 

Emerging and evolving risks

Emerging and evolving risks are current or future risks arising from internal or external events, with a material unknown or unpredictable component, and the potential to significantly impact the future performance of the Group or prevent delivery of good outcomes for our customers. Emerging and evolving risks are continually assessed through a horizon scanning process, considering all internal and external factors, with escalation and reporting to the Board.

The emerging and evolving risk classifications reported in the Group's 2023 Annual Report and Accounts have been reviewed and remain broadly unchanged, noting the key developments outlined below. Areas of enhanced risk attention include the risks associated with the proposed acquisition by Nationwide Building Society and the continued development of Technology and Data Risks, with a streamlined and refocused emerging risk now defined.

 

Risks	Description
Deal risk associated to acquisition by Nationwide Building Society	While the Board has recommended the proposal to shareholders, there are a range of strategic & enterprise, financial and people risks should the deal not succeed, which could include:   Strategic & enterprise risk - There could be: impacts from adjustments to the pace of the Group's cost saving and change programmes; share price volatility and reputational damage, as the market reacts to the Group's revised positioning and strategic outlook; increased scrutiny on the Group's capabilities to execute on its strategic ambitions; and, impacts to FY24 guidance and targets from short term costs related to the transaction.   Financial risk - There would be impacts to the Group's funding and financial plans if the deal were not to proceed. Spreads for listed debt could widen due to market uncertainty and the outlook for the Group's credit ratings could change, with the potential for downside risk to reflect a lack of clarity on the Group's strategy in the short to medium term.   People risk - During the transition period, there are people risks associated to talent retention and attraction against the Group's shifting strategic outlook. Significant people risk challenges could affect operations, growth, costs and resilience.
Technology and Data Risks	The pace of technological change, in areas such as Generative AI and cloud solutions, continues to accelerate and risks and opportunities need to be fully understood. These technologies have broad and potentially growing applications, with supporting regulatory frameworks under continuous review. The Group's operations and strategy are increasingly dependent on the use of quality and timely data, within scalable and secure architecture, to support decision making and to underpin our digital capabilities. Stakeholder expectations in relation to the effective governance, management and protection of data continue to evolve. In turn, the landscape of security and cyber threats we face into continues to change and is becoming more sophisticated in terms of frequency, impact, and severity, with potential that AI-assisted tools such as voice and image generation create further risks. The Group is investing in capabilities to defend against cyber threats, with key initiatives in place to upgrade propositions across areas such as financial crime prevention and cyber defence.

 

 

 

Risk management

Credit risk

 

Section	Page	Tables	Page
Credit risk overview	23
Group credit risk exposures	23	Maximum exposure to credit risk on financial assets, contingent liabilities and credit-related commitments	24
Key credit metrics	24	Key credit metrics	24
		Gross loans and advances ECL and coverage	25
		Stage 2 balances	27
		Credit risk exposure and ECL, by internal probability of default (PD) rating, by IFRS 9 stage allocation	28
		IFRS 9 staging	29
Mortgage credit performance	30	Breakdown of Mortgage portfolio	30
Collateral	30	Mortgage portfolio interest rate breakdown	30
Forbearance	31	Average LTV of Mortgage portfolio by staging	31
IFRS 9 staging	32	IFRS 9 staging	32
Unsecured credit performance	33	Breakdown of Unsecured credit portfolio	33
Forbearance	34
IFRS 9 staging	34	IFRS 9 staging	34
Business credit performance	36	Breakdown of Business credit portfolio	36
Forbearance	37
IFRS 9 staging	38	IFRS 9 staging	38
Macroeconomic assumptions, scenarios, and weightings	39
Macroeconomic assumptions	39	Scenarios	39
		Key macroeconomic assumptions	40
		Five-year simple averages on unemployment, GDP and HPI	41
The use of estimates, judgements and sensitivity analysis	41
The use of estimates	41	Economic scenarios	41
The use of judgement	42	Impact of changes to significant increase in credit risk (SICR) thresholds on staging	42
		Impact of management adjustments (MAs) on the Group's ECL allowance and coverage ratio	43
		Macroeconomic assumptions	45