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| Name | Symbol | Market | Type |
|---|---|---|---|
| Ve Bionic Etf | LSE:CYBG | London | Exchange Traded Fund |
| Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -0.114 | -0.71% | 15.927 | 15.87 | 16.05 | 0 | 16:35:19 |
From Nov 2022 to Nov 2024
TIDMVMUK TIDM91XR
RNS Number : 9855G
Virgin Money UK PLC
21 November 2022
Virgin Money UK PLC
Full Year 2022
Financial Results
Announcement
Hot Features
Premium
BASIS OF PRESENTATION
Virgin Money UK PLC ('Virgin Money', 'VMUK' or 'the Company'), together
with its subsidiary undertakings (which together comprise 'the Group'),
operate under the Clydesdale Bank, Yorkshire Bank and Virgin Money brands.
This results announcement covers the results of the Group for the year
ended 30 September 2022.
Statutory basis
Statutory information is set out on page 16 and within the financial statements.
Underlying basis
Management exclude certain items from the Group's statutory position to
arrive at an underlying performance basis. A reconciliation from the underlying
results to the statutory basis is shown on page 16 to 17 and rationale
for the adjustments is shown on page 134.
Alternative performance measures (APMs)
The KPIs and performance metrics used in monitoring the Group's performance
and reflected throughout this results announcement are determined on a
combination of bases (including statutory, regulatory and alternative
performance measures), as detailed at 'Measuring the Group's performance'
on pages 124 to 133. APMs are closely scrutinised to ensure that they
provide genuine insights into the Group's progress; however statutory
measures are the key determinant of dividend paying capability.
Certain figures contained in this document, including financial information,
may have been subject to rounding adjustments and foreign exchange conversions.
Accordingly, in certain instances, the sum or percentage change of the
numbers contained in this document may not conform exactly to the total
figure given.
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, trends in its operating industry, changes to customer behaviours and covenant, macroeconomic and/or geo-political factors, the repercussions of the outbreak of coronaviruses (including but not limited to the COVID-19 outbreak), changes to its Board and/or employee composition, exposures to terrorist activity, IT system failures, cybercrime, fraud and pension scheme liabilities, changes to law and/or the policies and practices of the Bank of England (BoE), the Financial Conduct Authority (FCA) and/or other regulatory and governmental bodies, inflation, deflation, interest rates, exchange rates, tax and national insurance rates, changes in the liquidity, capital, funding and/or asset position and/or credit ratings of the Group, future capital expenditures and acquisitions, the repercussions of the UK's exit from the European Union (EU) (including any change to the UK's currency and the terms of any trade agreements (or lack thereof) between the UK and the EU), Eurozone instability, Russia's invasion of Ukraine, any referendum on Scottish independence, and any UK or global cost of living crisis or recession.
In light of these risks, uncertainties and assumptions, the events in the forward-looking statements may not occur. Forward-looking statements involve inherent risks and uncertainties. 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. While every effort has been made to ensure the accuracy of the information in this document, the Group and its directors, officers, employees, agents, advisers and affiliates do not take any responsibility for the information in this document or to update or revise it. They will not be liable for any loss or damages incurred through the reliance on or use of it. No representation or warranty, express or implied, as to the truth, fullness, fairness, merchantability, accuracy, sufficiency or completeness of the information in this document or the materials used in and/or discussed at, any presentation is given.
Certain industry, market and competitive position data contained in this document and the materials used in and/or discussed at, any presentation, comes from official or third-party sources. There is no guarantee of the accuracy or completeness of such data. While the Group reasonably believes that each of these publications, studies and surveys has been prepared by a reputable source, no member of the Group or their respective directors, officers, employees, agents, advisers or affiliates have independently verified the data.
In addition, certain industry, market and competitive position data contained in this document and the materials used in and/or discussed at, any presentation, comes from the Group's own internal research and estimates based on the knowledge and experience of the Group's management in the markets in which the Group operates. While the Group reasonably believes that such research and estimates are reasonable and reliable, they, and their underlying methodology and assumptions, have not been verified by any independent source for accuracy or completeness, and are subject to change. Accordingly, undue reliance should not be placed on any of the industry, market or competitive position data contained in this document and the materials used in and/or discussed at, any presentation.
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. The distribution of this document in certain jurisdictions may be restricted by law. Recipients are required by the Group to inform themselves about and to observe any such restrictions. No liability to any person is accepted in relation to the distribution or possession of this document in any jurisdiction. The information, statements and opinions contained in this document and the materials used in and/or discussed at, any presentation are subject to change.
Virgin Money UK PLC Full Year Results 2022
David Duffy, Chief Executive Officer:
"2022 has been a milestone year for Virgin Money. We have good momentum while delivering a strong performance and improved returns for our shareholders. We've changed the game in purpose-led flexible working to create an engaged, high-performing organisation that's cost-efficient and agile, which will underpin targeted growth through further digital innovation."
"While we have solid credit quality across our lending, we are aware that some customers will have to make difficult decisions in this environment, and we are proactively offering them help and support."
Summary financials
12 months 12 months
to to
30 Sep 30 Sep Change
2022 2021
GBPm GBPm %
Underlying net interest income (NII) 1,592 1,412 13
Underlying non-interest income 163 160 2
---------------------------------------------------------- --------- --------- --------
Total underlying operating income 1,755 1,572 12
Underlying operating and administrative expenses (914) (902) 1
Impairment (losses)/credit on credit exposures (52) 131 n.m.
---------------------------------------------------------- --------- --------- --------
Underlying profit on ordinary activities before
tax 789 801 (1)
Adjusting items (194) (384) (49)
---------------------------------------------------------- --------- --------- --------
Statutory profit on ordinary activities before
tax 595 417 43
---------------------------------------------------------- --------- --------- --------
Performance measures(1)
---------------------------------------------------------- --------- --------- --------
Total customer lending (GBPm) 72,565 71,996 0.8%
Net interest margin (NIM) 1.85% 1.62% 0.23%pts
Underlying cost: income ratio (CIR) 52% 57% (5)%pts Statutory return on tangible equity (RoTE) 10.3% 10.2% 0.1%pts Dividends and share buybacks announced (GBPm) 267 14 n.m. Common equity tier 1 (CET1) ratio (IFRS 9 transitional) 15.0% 14.9% 0.1%pts ---------------------------------------------------------- --------- --------- -------- (1) Refer to pages 124 to 133 for a range of metrics that are used to measure and track the Group's performance.
Strong financial performance in 2022
-- NIM expanded further to 1.85% (2021: 1.62%), supported by higher rates and further mix optimisation (Q4: 1.86%)
-- Underlying non-interest income up 2% YoY, reflecting higher activity levels offsetting fair value movements
-- Underlying costs of GBP914m were broadly stable YoY, in line with guidance, while CIR reduced 5%pts to 52%
-- Pre-Provision Operating Profit of GBP841m, up 26% on 2021, reflecting stronger income and well-controlled costs
-- Minor impairment charge of GBP52m (7bps cost of risk) reflecting updated macroeconomics, but with lower post model adjustments
-- Underlying profit 1% lower YoY given GBP131m impairment release in 2021
-- Statutory profit increased 43% YoY, reflecting higher income and lower adjusting items; statutory RoTE of 10.3% (2021: 10.2%)
-- Credit quality remains robust with low and stable arrears; provision coverage of 62bps above pre-pandemic levels
-- CET1 ratio remains strong at 15.0% (2021: 14.9%); announced further GBP50m buyback, taking 2022 buybacks to GBP125m; 7.5p final dividend (2022: 10p) means total 2022 shareholder distributions of GBP267m, equivalent to c.57% payout
Returning to net lending growth supported by continued strong relationship deposit inflows
-- Strong relationship deposits growth, increasing 13% YoY to GBP34.6bn; continue to optimise overall deposits, down 2.3% to GBP65.4bn
-- Overall lending growth (0.8%) in 2022 to GBP72.6bn; Unsecured +13.8% to GBP6.2bn driven by credit cards; Business lending (2.7%) to GBP8.2bn as lower Government lending offset 1.7% growth in BAU; Mortgages stable at GBP58.2bn but returned to growth in H2
-- AIEAs were GBP86.3bn in FY22; Sep-22 spot balances were cGBP90bn, expect higher liquidity-related AIEAs through FY23
Strong Purpose-led delivery in first year of our accelerated digital strategy
-- Launched cost of living hub to support customers with money saving suggestions, budgeting tools and links to external resources
-- Strong reception for new digital products with 7% YoY growth in current account sales; record new credit card origination of c.630k (+49% YoY); c.650k cashback users; launched new Business M-Track and Marketplace; c.40k waitlist for Slyce
-- A Life More Virgin supporting higher colleague engagement (+11%pt YoY); launched Agile change framework, increasing the speed of change at c.25% lower costs; property and branch footprint reduced c.50% YoY
-- Delivered c.GBP69m of annualised gross savings this year; further progress on digitisation with 43% of key customer journeys automated (2021: 27%); mobilising cloud migration and removing legacy applications
-- Delivering further propositions in 2023 including refreshed Wealth proposition, mortgage end-to-end digitisation and fully refreshed new digital home and travel insurance
-- Anticipating the initial launch of our digital wallet early in 2023 with additional functionality to be added through the year
Outlook upgraded
-- Expect NIM to be 185-190bps in FY23, based on current rate expectations, and including higher AIEAs; in the medium term, expect mix-driven NIM expansion and OOI to grow from digital proposition enhancements
-- Cost:income ratio expected to improve further to c.50% in FY23; continue to target less than 50% in FY24
-- Cost of risk anticipated to normalise around through the cycle level of 30-35bps in FY23
-- Targeting growth in Unsecured & BAU Business, moderating in 2023; maintain mortgage market share in the medium term
-- Will maintain CET1 above 14% in FY23 during period of macroeconomic uncertainty; expect to return to target 13-13.5% CET1 range by the end of FY24, after growth, distributions and RWA headwinds, including hybrid model implementation
-- In line with the Group's updated capital framework, shareholder distributions to reflect 30% full year dividend pay-out, supplemented by buybacks, subject to ongoing assessment of surplus capital, market conditions and regulatory approval
-- Expect c.11% statutory RoTE in FY24, consistent with target of greater than 10%
Contact details
For further information, please contact:
Investors and Analysts
Richard Smith +44 7483 399 303
Head of Investor Relations richard.smith@virginmoneyukplc.com
Amil Nathwani +44 7702 100 398
Senior Manager, Investor Relations amil.nathwani@virginmoneyukplc.com
Martin Pollard +44 7894 814 195
Senior Manager, Investor Relations martin.pollard@virginmoneyukplc.com
Media (UK)
Matt Magee +44 7411 299477
Head of Media Relations matthew.magee@virginmoneyukplc.com
Simon Hall +44 7855 257 081
Senior Media Relations Manager simon.hall@virginmoney.com
Press Office +44 800 066 5998
press.office@virginmoneyukplc.com
Media (Australia)
P&L Communications
Ian Pemberton +61 402 256 576
Sue Frost +61 409 718 572
Virgin Money UK PLC will today be hosting a presentation for analysts and investors covering the 2022 full year financial results starting at 08:30 GMT (19:30 AEDT) and this will be webcast live and is available at:
https://webcast.openbriefing.com/virgin-fy22/
A recording of the webcast and conference call will be made available on our website shortly after the meeting at:
https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/
A call for fixed income investors will be held at 09:00 GMT (20:00 AEDT) on Tuesday 22(nd) November 2022: Dial-in details: UK 0800 640 6441; All other locations: +44 20 3936 2999; Access code: 647668
Announcement authorised for release by Lorna McMillan, Group Company Secretary.
LEI: 213800ZK9VGCYYR6O495
Business and financial review
Chief Executive Officer's introduction
Delivering against our strategy
In 2022, the Group continued to deliver on its digital strategy, launching exciting new customer propositions
and laying the platform for profitable growth and sustainable returns through our digital investment.
David Duffy
Chief Executive Officer
We performed strongly in FY22, delivering higher statutory profit, positive financial momentum and increased capital returns, benefitting from higher rates in a more uncertain environment.
Dear stakeholder,
In the first year of delivering our accelerated digital strategy, I'm pleased with how the Group has performed. Virgin Money has made good strategic and financial progress as we drive towards our ambition of becoming the UK's best digital bank. I'd like to thank all our colleagues for their hard work, and customers for their loyalty, as we execute our Purpose-led strategy.
Since we set our targets a year ago, the economic backdrop has changed significantly, with a lower GDP outlook, higher unemployment expectations, and higher cost of living set to impact the economy, although higher interest rates have supported our financial performance. Despite the more difficult near-term backdrop for customers, our strategy remains the right one and I'm confident we are well placed to adapt to recent changes, while we continue to support customers and deliver for all our stakeholders.
Delivering for our stakeholders
While there remains more to deliver, FY22 saw a good start against the strategic agenda we set out a year ago. Our financial performance benefitted from stronger income and resilient asset quality given the higher interest rate trajectory and benign credit environment to date. Alongside this backdrop, the Group continued to execute against our strategic agenda, which combined with the environment, delivered robust returns as statutory RoTE remained stable at 10.3% (FY21: 10.2%). As a reflection of this performance, including high levels of capital generation, and after setting out our capital framework alongside our Interim results, the Board has announced the distribution of GBP267m of capital to shareholders through dividends and buybacks.
Our innovative propositions and rewards have been well received in our target segments of Unsecured and BAU Business lending (excluding Government scheme lending). The overall lending book returned to growth this year, with improved momentum in mortgages in H2 as we traded nimbly through a continuing competitive environment. I'm also particularly pleased with the continued growth in our low-cost relationship deposit base which is now 53% of total Group deposits, up from 33% at FY19.
Important digitisation initiatives, which will drive improvements in our customer service and complaints performance through automation of our core customer journeys, have been launched and will continue to deliver greater efficiency into FY23 and beyond. We continue to expand our loyalty and reward programmes, leveraging the unique potential of the Virgin brand and Virgin Red as we prepare to launch our new digital wallet.
We have continued to support colleagues at this more challenging time, with a GBP1,000 cost of living allowance provided to the majority of colleagues in August. Our A Life More Virgin flexible working model has also continued to be well received, attracting significant positive commentary, and supporting improved colleague engagement scores and a simplified office estate.
Our work to deliver a sustainable future took a significant step forward over the course of the year as we set net zero roadmaps and targets for Mortgages and priority Business sectors. We continue to embed climate and community considerations in everything we do, ensuring we support customers and wider society in the years ahead.
Strong financial momentum
The higher interest rate backdrop, continued benign credit conditions and the execution of our strategy, has seen statutory profit before tax for FY22 strengthen to GBP595m (FY21: GBP417m). This has benefited from increased pre-provision profit, continued low impairment charges and lower exceptional costs. Underlying income increased 12% with NIM expanding to 1.85% (FY21: 1.62%) supported by higher interest rates over the course of the year, and strategic actions to grow in higher-yielding product lines, while continuing to optimise our funding mix with higher relationship deposits. Underlying operating costs of GBP914m increased 1% on the prior year, reflecting inflationary pressures and higher investment, offset in part by efficiency savings.
While not directly exposed to Ukraine, we have seen second-order impacts on the broader UK economy from higher costs, higher interest rates and potential pressure on our customers and asset quality. At present, credit quality indicators remain benign but we remain cautious on the outlook, and stand ready to support customers further if needed. Against this backdrop, impairment charges were muted as provisions taken for COVID-19 impacts were unwound. Despite a modest reduction, we have retained above pre-COVID levels of coverage with a potentially challenging economic outlook in mind, and to reflect worsening macroeconomic forecasts.
Overall lending balances returned to growth in the year finishing up 1% at GBP72.6bn. We achieved strong growth in our target segments of Unsecured and BAU Business lending and returned the mortgage book to growth in the second half of the year. Deposit balances reduced 2% to GBP65.4bn but with relationship deposits increasing by 13%, as we continued to improve the mix of our deposit base and optimise our cost of funds.
Business and financial review
Chief Executive Officer's introduction
The capital generative financial performance of the business, and strong outcomes from our inaugural participation in the BoE's stress testing regime, allowed us to set out our capital framework alongside our Interim results in May. We committed to a sustainable 30% dividend payout level and are recommending a 10p total dividend in respect of FY22, subject to shareholder approval. We also committed to supplementing dividends with buybacks, subject to the Board's assessment of surplus capital, market conditions and regulatory approval.
It was pleasing therefore to commence our inaugural share buyback programme during the year, with a GBP75m buyback announced in June, which we are delighted to be adding to today, with a GBP50m extension. Our transitional CET1 ratio at FY22 remains robust at 15.0%, leaving the Group well placed as we enter FY23.
Delivering against our strategic pillars
At FY21 we announced plans to accelerate our digital strategy and have made a good start against this during FY22.
Pioneering Growth
Throughout FY22 we have launched important new propositions that will support our future growth ambitions. These include M-Track and Marketplace in Business, Slyce, new digital travel insurance, and improved cashback and reward offerings for personal customers.
As we continue to focus on digital-led growth in key target segments, we've reported growth in current accounts, underpinned by strong new account sales, record credit card sales and strong customer usage of cashback offers.
Digitally-enabled personal current account (PCA) sales were 131k (FY21: 134k) benefiting from a strong value proposition, with attractive interest rates on offer. Competitive switching propositions from peers impacted on our ability to attract switchers at the levels we had hoped, but we were still able to deliver book growth during the year. Business current account (BCA) sales reported a record year at 33k (FY21: 19k) benefitting from a new fee-free proposition and improved digital onboarding and servicing, along with the roll-out of our innovative M-Track and Marketplace propositions. These strong performances underpinned our 13% growth in relationship deposits.
Unsecured balances recorded strong growth of 14% as we maintained our existing competitive proposition, albeit with tighter underwriting to reflect potential customer affordability challenges from the higher cost of living. We also broadened our customer offerings, developing Slyce to challenge and innovate, with a responsible BNPL proposition aimed at Gen-Z customers. In Business, while we continued to see government scheme lending being repaid as expected, with very limited fraud, we also began to grow lending in our BAU franchise (up 2% year-on-year), without relaxing our rigorous underwriting standards.
Mortgage balances were broadly stable during the year, as competition has remained intense. Against this backdrop, we have continued with our strategy to optimise for long-term value, and maintain credit quality. We were pleased to increase our participation in the second half of the year, at improved margins, prior to the pricing volatility that took place towards the end of the financial year.
Delighting our customers and colleagues
For customers, we have seen expectations around service rise rapidly through the pandemic. During the last year, external factors have had an impact on our service levels, such as the changing rate environment, which has driven higher demand, with more customers requiring support. As a consequence, we recognise that there have been challenges impacting customer service this year, and our metrics for complaints and Smile scores aren't where we want them to be. In the second half of the year, the Group has taken action to address this, adding resources despite a tight labour market. We have a significant opportunity to improve service and we remain convinced that our strategy to invest in our digital model is the right one to deliver a lasting improvement for customers.
During the year the Group has continued to make progress in the end-to-end digitisation of customer journeys, including improved digital on-boarding and servicing experience across Personal and Business, to support better customer outcomes. Following delivery of a suite of chatbots earlier in the year, the Group has now surpassed 1m chatbot conversations with retail customers, with the year to date resolution rate within the chatbot at around two-thirds. As a result, the percentage of customer interactions through calls has reduced from c.70% at FY21 to c.50% as at the end of FY22.
We will further improve our service proposition in FY23, and seek to mitigate the impacts of digitisation on customers who prefer traditional banking channels. Significant investment is underway to enhance, modernise and digitise our customer service offering, which will support an improvement in customer experience and ultimately Smile scores. Furthermore, we have a comprehensive plan to deliver better outcomes for customers as we adopt the FCA's consumer duty.
For colleagues, the launch of our A Life More Virgin colleague proposition and our flexible working model has been very positively received, with colleague engagement scores improving to 79% at FY22 from 68% a year ago. The model has also removed geographical constraints on recruitment, enabling us to recruit more diverse talent. We have also repurposed some of our stores and offices during the year to create Collaboration Hubs which support the transition to a truly flexible approach to work.
Across the organisation we continue to focus on building an inclusive workforce and culture. The initiatives launched during the year are already having an impact as we focus on engaging with communities where we're currently under-represented to developing more diverse talent within Virgin Money. We have delivered improved diversity metrics but have ambitious targets to go further in the coming years.
Business and financial review
Chief Executive Officer's introduction
Targeting Super Straightforward Efficiency
Our investment continues to focus on driving our three-year transformation programme to deliver a scalable, more efficient digital growth platform. This features the deployment of Agile methodology and tools to increase the pace and delivery of change, at lower cost (see more on this on p.24). Our migration to Cloud-based infrastructure in partnership with Microsoft is set to commence in FY23, enabling us to begin exiting physical data centres. We are now starting to de-commission legacy applications, while building the new applications required to support the Cloud infrastructure. We are deploying Microsoft tools, such as AI and robotics, and rolling out Agile methodology across our new change programmes, launching new Agile tribes and training colleagues. This is delivering new functionality for customers at greater speed, and at an average of c.25% lower unit costs. As we continue to embed A Life More Virgin ways of working, we have continued to rationalise our property footprint, reducing it by 50% to c450k sq ft to align with the simpler needs of a digital bank.
Delivering Discipline and Sustainability
During the year, we have remained resolutely focused on asset quality and supporting our customers. Across key portfolios, there are currently limited signs of credit concerns and overall arrears remained low during the period.
However, the Group recognises the potential affordability issues that higher living costs will cause for households and is ready to continue to support customers, as was the case throughout the pandemic. The Group has tightened its affordability and underwriting criteria for new customers across all lending categories to account for higher levels of inflation.
Sustainability remained high on our agenda throughout FY22 and we've developed net-zero targets and roadmaps for our priority business sectors. We've continued to support our customers' decarbonisation journeys by providing information through the Sustainable Business Coach and supporting Carbon Audits, as well as providing greener finance through Sustainability-Linked Loans, Greener Mortgages and our new Agri E-Fund. We've received upgrades in ratings from both Sustainalytics and MSCI and have updated our TCFD disclosure in line with regulatory requirements. Our Community strategy has also continued to drive positive outcomes, including on the Poverty Premium where we've promoted the Turn2Us Benefits Calculator, our cost of living hub, and set up our Customer Care team who will proactively support our most vulnerable customers. Our partnership with the Macmillan cancer charity has also continued to provide practical support for customers in financial difficulty.
Developing our leadership for a digital world
I have continued to evolve and simplify the Group's Executive Leadership Team this year, ensuring we have the digital skills to deliver our strategy.
Syreeta Brown joined the Group from Citi in November 2021 as Group Chief People and Communications Officer and brings a wealth of experience in cultural transformation, talent development and in building a workforce that is fit for the future. Susan Poot joined the Group from ING bank in January 2022 as Group Chief Risk Officer. Susan has significant experience across a range of risk disciplines covering both retail and wholesale banking.
Finally, Sarah Wilkinson will join the Group in early 2023 from Thomson Reuters, where she is currently Chief Information Officer, and has recently held roles as Chief Executive Officer of NHS Digital and Chief Information Officer of the Home Office. Sarah brings global leadership experience and extensive expertise of delivering change, innovation and digital customer experience, with a strong track record of digital transformation and a prior background in financial services. I would like to take this opportunity to thank Kate Guthrie, Mark Thundercliffe, Helen Page, Fraser Ingram and Fergus Murphy for their contributions to my Leadership Team during their time with the Group, which spanned the acquisition of Virgin Money Holdings and the significant integration and rebrand activity that has laid the platform for our exciting future.
Outlook
Virgin Money is well positioned to deliver a digital-led future of profitable growth, greater cost-efficiency, improved customer service and sustainable shareholder returns as we target our ambition of becoming the UK's best digital bank. It is encouraging to see our strategy, and an improving rate environment, combining to drive stronger financial performance as we now target a c.11% statutory RoTE in FY24. Having set out our capital framework earlier in the year, we look forward to continuing deliver robust shareholder returns.
Looking forward, we will continue to focus our efforts on improving customer experience and driving digitisation through the Bank, as we embed an Agile approach. We are excited about the upcoming launch of our digital wallet, bringing together many of the elements we've worked on, which over time will also enable us to deliver a single, unified app. We have a unique brand, and access to a complementary set of partner companies in the Virgin Group. The potential to deepen the relationship with Virgin Red offers exciting possibilities for our customers to earn and spend Virgin points.
We will continue to develop our digital wallet during FY23, combining many of these unique features with instalment credit, loyalty and payment capabilities.
The macroeconomic outlook has become more uncertain over the course of the year. Following a positive recovery in expectations post-COVID, recent events have seen forecasts deteriorate. As we enter a more volatile environment, with higher inflation and rates, we are carefully monitoring for any impacts. We enter this phase with a prudently underwritten loan book, robust coverage, and a defensive asset mix. We are ready and able to continue supporting the customers, colleagues and communities we serve.
Overall, we have the right strategy and are executing on the key components that will underpin our delivery of improved returns and profitable growth over the coming years, as we fulfil our Purpose of Making you happier about money.
David Duffy
Chief Executive Officer
20 November 2022
Business and financial review
Chief Financial Officer's review
Building momentum in strategic and financial delivery
I'm pleased to report a positive operating performance in FY22 and ongoing strategic delivery, leaving us well placed to target profitable growth in an uncertain economic environment.
Clifford Abrahams
Chief Financial Officer
2022 has been an important year as we returned to balance sheet growth and delivered improved momentum in financial performance, aided by the higher interest rate environment.
Review of the year
The Group has made good progress during FY22 as we've launched new and innovative digital propositions and continued to digitise the Bank. A stronger rate environment and benign credit backdrop, combined with our strategic delivery has driven good financial momentum, enabling a statutory RoTE of 10.3%, in line with FY21.
The combination of our resilient balance sheet, digital transformation and customer propositions leave us well placed to drive profitable growth, despite the uncertain economic outlook.
Pre-provision profit was significantly stronger at GBP841m (2021: GBP670m), with a strong improvement in income and broadly stable costs. NIM improved to 1.85% (2021: 1.62%), supported by rising base rates and a strong deposit performance, while non-interest income improved 2% to GBP163m as improving underlying momentum offset adverse one-off and fair value movements. Taken together, total income improved 12% compared to a year ago. Underlying operating costs were 1% higher compared to FY21 reflecting ongoing cost reduction offset by digital development costs, inflation, as well as the one-off cost of living allowance paid during the year.
The Group recognised an impairment charge of GBP52m (2021: GBP131m credit) or 7bps for FY22, below through the cycle levels, driven by prudent IFRS 9 scenario weightings that incorporate a conservative economic outlook and updated PMAs. There are currently limited signs of credit concerns across our key portfolios and our arrears performance remains low and stable. We continue to monitor our customers closely for signs of financial difficulty and remain on hand to support customers.
During the second half of the year, we tightened affordability and underwriting criteria to account for the more uncertain economic outlook and rising living costs. Provision coverage levels remain robust at 62bps (2021: 70bps), above pre-pandemic levels.
Given the more normalised impairment charge during the year, underlying RoTE was down relative to last year at 13.5% (2021: 17.8%), while statutory RoTE was stable at 10.3% (2021: 10.2%) after adjusting for items including restructuring spend, relating to the Group's digital investment, and intangible asset write-offs.
We were pleased to deliver lending growth during the year, as overall customer lending finished c.1% higher relative to FY21 at GBP72.6bn. Unsecured balances performed strongly throughout the year growing 14% as the combination of the resilience of our book and strong digital propositions allowed us to continue to take market share. Mortgage balances were broadly stable during the period at GBP58.2bn as we continued to prioritise margin over volume. Business lending balances reduced c.3% overall, as growth in BAU balances was offset by expected reductions in government-backed lending.
Business and financial review
Chief Financial Officer's review
Financial highlights
---------------------------------------------------------------------------
Statutory profit before Underlying profit before Statutory RoTE
tax tax
GBP595m GBP789m 10.3%
2021: GBP417m 2021: GBP801m 2021: 10.2%
----------------------- ------------------------ --------------------
NIM Underlying CIR Cost of risk
1.85% 52% 7bps
2021: 1.62% 2021: 57% 2021: (18)bps
----------------------- ------------------------ --------------------
CET1 ratio Loan growth Relationship deposit
growth
15.0% 0.8% +13.2%
2021: 14.9% 2021: (0.6)% 2021: +19.2%
Deposit balances reduced c.2% to GBP65.4bn as we continued to focus on improving the mix of our deposit base. Over the course of FY22, there was a 13% increase in lower-cost relationship deposits, now comprising 53% of overall deposits (2021: 46%), helping to underpin the Group's NIM performance.
Capital remained strong in the period, with the transitional CET1 ratio of 15.0% (2021: 14.9%), with significant tangible net asset value (TNAV) accretion over the year, to 383p (2021: 290p). We were pleased to outline our capital framework alongside our Interim results following our strong performance in the SST.
In line with our capital framework, the Board has declared a 10p dividend for the year and has announced a GBP50m share buyback, adding to the GBP75m share buyback that commenced in June.
I am confident that we will continue to demonstrate strategic and financial momentum during FY23, following a strong performance this year. We recognise the economic environment is uncertain and the potential affordability issues that will cause for households and we will continue to prioritise our customers as we did during the pandemic.
Underlying income
2022 2021
GBPm GBPm Change
---------------------------------- ------ ------ ------
Underlying net interest income 1,592 1,412 13%
Underlying non-interest income 163 160 2%
---------------------------------- ------ ------ ------
Total underlying operating income 1,755 1,572 12%
---------------------------------- ------ ------ ------
NIM 1.85% 1.62% 23bps
Average interest-earning assets 86,275 86,947 (1)%
---------------------------------- ------ ------ ------
Business and financial review
Chief Financial Officer's review
NII and NIM
Net interest income (NII) increased by GBP180m or 13% relative to FY21, driven by an expansion of the Group's NIM as it continued to benefit from higher rates and optimisation of the deposit base. Asset yields increased 34bps compared to FY21 with higher swap income the primary contributor, reflecting the rising base rate environment through the year. Given the ongoing competitive pressure on new and retained mortgage spreads, average balances reduced over the course of the year, as the Group remained selective in terms of its participation, while the average yield also declined c.9bps; together, this contributed to lower mortgage interest income. In Business, interest income increased by GBP33m in the year, despite lower average balances, as the yield of the book improved, given the lower mix of lower-yielding government-backed lending. In Unsecured, interest income increased by GBP24m in the year, driven by significant growth in average balances, owing mainly to growth in the credit card book. Elsewhere, the average yield on the Group's liquid assets increased 70bps reflecting the higher rate environment across the financial year.
The balance of the Group's structural hedge was maintained at c.GBP32bn throughout the year. This represents an increase from c.GBP26bn at the end of FY21, following a review of deposit behaviour.
During the year, the Group generated GBP286m of total gross income from the structural hedge, benefitting from ongoing hedge re-investment at higher prevailing interest rates.
Liability rates increased at a slower rate than asset yields, increasing 14bps relative to FY21. During the year, the Group continued to optimise its mix of deposits, reducing traditionally more expensive term deposits and increasing current account balances. This growth was driven by a strong performance in new PCA sales through the Brighter Money Bundles campaign, the relaunch of our BCA, and further supported by higher average balances as customers saved more during the period of COVID-19 restrictions. Wholesale funding costs increased in the year, driven by an increase in average balances following issuance throughout the year.
Non-interest income
Non-interest income increased by GBP3m or 2% relative to FY21, to GBP163m, as growth in other operating income offset fair value and one-off movements. The key drivers of the improvement in other operating income included increased Unsecured and Business fee income from higher customer transaction levels following the removal of COVID-19 restrictions during the year. Mortgage fee income was broadly stable during the period. One-off movements in the year were driven by the non-repeat of equity valuation gains in the debt restructuring unit recognised in FY21 (GBP16m) and fair value volatility due to hedge ineffectiveness movements.
2022 2021
------------------------------------------ ------------------------------------ ------------------------------------
Interest Interest
Average income/ Average Average income/ Average
balance (expense) yield/(rate) balance (expense) yield/(rate)
Average balance sheet GBPm GBPm % GBPm GBPm %
------------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Interest earning assets
Mortgages 57,996 1,272 2.19 58,426 1,332 2.28
Unsecured lending 6,100 407 6.67 5,407 383 7.09
Business lending(1) 8,263 331 4.00 8,801 298 3.38
Liquid assets 13,059 117 0.90 12,827 26 0.20
Due from other banks 853 2 0.22 1,482 - (0.02)
Swap income/other - 104 n/a - (87) n/a
Other interest earning assets 4 - n/a 4 - n/a
------------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Total average interest earning assets 86,275 2,233 2.59 86,947 1,952 2.25
------------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Total average non-interest earning assets 3,229 3,590
------------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Total average assets 89,504 90,537
------------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Interest bearing liabilities
Current accounts 15,829 (46) (0.29) 14,516 (14) (0.09)
Savings accounts 30,895 (147) (0.48) 30,242 (123) (0.41)
Term deposits 12,894 (149) (1.16) 18,259 (223) (1.22)
Wholesale funding 16,169 (296) (1.83) 13,591 (176) (1.30)
Other interest bearing liabilities 145 (3) n/a 164 (4) n/a
------------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Total average interest bearing liabilities 75,932 (641) (0.84) 76,772 (540) (0.70)
Total average non-interest bearing
liabilities 7,903 8,414
------------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Total average liabilities 83,835 85,186
Total average equity 5,669 5,351
------------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Total average liabilities and average
equity 89,504 90,537
------------------------------------------ --------- ---------- ------------- --------- ---------- -------------
Net interest income 1,592 1.85 1,412 1.62
------------------------------------------ --------- ---------- ------------- --------- ---------- -------------
(1) Includes loans designated at fair value through profit or loss (FVTPL).
Business and financial review
Chief Financial Officer's review
Underlying costs
2022 2021
For the year ended 30 September GBPm GBPm Change
------------------------------------------------------- ----- ----- -------
Staff costs 375 348 8%
Property and infrastructure 42 43 (2)%
Technology and communications 116 113 3%
Corporate and professional services 114 101 13%
Depreciation, amortisation and impairment 116 155 (25)%
Other expenses 151 142 6%
------------------------------------------------------- ----- ----- -------
Total underlying operating and administrative expenses 914 902 1%
Underlying CIR 52% 57% (5)%pts
------------------------------------------------------- ----- ----- -------
Underlying operating expenses increased 1% relative to FY21 to GBP914m, while the underlying CIR improved 5%pts to 52%. This performance was driven by the continued delivery of savings from the Group's digitisation programme, which were more than offset by additional costs from higher inflation and targeted growth, ongoing digital development spend, and one-off costs relating to our colleague cost of living allowance, which was paid during the year.
Staff costs increased during the period by 8%, as the impact of wage increases, bonuses, the employee cost of living allowance and higher resources working on digital initiatives offset savings from a lower average headcount and a pension credit. Depreciation and amortisation reduced by 25% in the year, primarily as a result of changes to D&A practices made at the end of the last financial year, reflecting costs that are no longer capitalised and additional changes made in FY22 as the Group adopts Agile methodology. The increase in Corporate and professional services spend reflects the impact of higher change investment, while the increase in Other expenses primarily reflects higher digital development and growth related spend.
Impairments
% of % of
Net loans loans
Credit Gross Coverage cost in in
provisions lending ratio of risk Stage Stage
As at 30 September 2022 GBPm GBPbn bps bps 2 3
------------------------------------------ ----------- -------- -------- -------- ------ ------
Mortgages 56 58.5 9 (5) 5.3 1.0
Unsecured: 284 6.5 466 322 17.3 1.2
------------------------------------------ ----------- -------- -------- -------- ------ ------
of which credit cards 246 5.5 481 347 13.9 1.3
of which personal loans and overdrafts 38 1.0 388 161 34.9 0.9
------------------------------------------ ----------- -------- -------- -------- ------ ------
Business 117 8.1 159(1) (112) 18.7 4.6
------------------------------------------ ----------- -------- -------- -------- ------ ------
Total 457 73.1 62 7 7.8 1.4
------------------------------------------ ----------- -------- -------- -------- ------ ------
of which stage 2 268 5.7 472
of which stage 3 104 1.0 1,124
------------------------------------------ ----------- -------- -------- -------- ------ ------
(1) Government-guaranteed element of loan balances excluded for the purpose of calculating the Business and total coverage ratio.
% of % of
Net loans loans
Credit Gross Coverage cost in in
provisions lending ratio of risk Stage Stage
As at 30 September 2021 GBPm GBPbn bps bps 2 3
------------------------------------------ ----------- -------- -------- -------- ------ ------
Mortgages 87 58.5 15 (7) 12.3% 1.1%
Unsecured: 194 5.8 380 (64) 9.7% 1.2%
------------------------------------------ ----------- -------- -------- -------- ------ ------
of which credit cards 160 4.7 379 5 10.7% 1.3%
of which personal loans and overdrafts 34 1.1 386 (386) 5.0% 1.1%
------------------------------------------ ----------- -------- -------- -------- ------ ------
Business 223 8.3 306(1) (62) 29.2% 2.8%
------------------------------------------ ----------- -------- -------- -------- ------ ------
Total 504 72.6 70 (18) 14.1% 1.3%
------------------------------------------ ----------- -------- -------- -------- ------ ------
of which stage 2 302 10.2 302
of which stage 3 91 1.0 959
------------------------------------------ ----------- -------- -------- -------- ------ ------
(1) Government-guaranteed element of loan balances excluded for the purpose of calculating the Business and total coverage ratio.
During the year, the Group maintained robust credit quality across its portfolios, with very few significant provisions given low volume of borrowers flowing into default. Following an ECL credit in the income statement in 2021, there was a charge of GBP52m during the year, equivalent to a cost of risk of 7bps. Overall credit provisions remain robust at GBP457m (2021: GBP504m) with the aggregate coverage level at 62bps (2021: 70bps).
Business and financial review
Chief Financial Officer's review
During the fourth quarter of the financial year, the Group refreshed the macroeconomic scenarios used for IFRS 9 modelling, provided by Oxford Economics in early September, incorporating a weaker UK economic outlook. The weighted economic scenarios used at Q4 were prudently selected and incorporated a 10% weighting to the upside scenario, 55% to the base scenario and 35% to the downside scenario. The weighted economic scenario includes a contraction in GDP in 2023 of 1.5%, peak average unemployment of 5.3% in 2024 and a 7.4%/5.9% annual HPI contraction in 2023/2024, followed by a recovery in the outer years.
The Group applied expert credit risk judgement through PMAs to supplement the modelled provision to account for factors that the models cannot incorporate. The overall size of the PMAs at FY22 was GBP85m, reflecting a significant reduction from FY21 (GBP207m). The movement in PMAs during the year was primarily driven by the release of COVID-19 related judgemental PMAs across the portfolios, offset slightly by the introduction of a c.GBP27m cost of living PMA for Mortgage and Unsecured customers and a GBP30m economic resilience PMA for Business customers, recognising that the Business portfolio continues to face into an uncertain economic environment.
Credit quality has remained robust with loans classified as stage 2 reducing from 14% of the portfolio at FY21 to 8% at FY22, primarily as the removal of COVID-19-linked PMAs in the retail portfolio saw customers return to stage 1. In line with the overall reduction in provisions outlined above, the provision coverage level has reduced but remains appropriate for the underlying level of risk.
In Mortgages, the coverage ratio of 9bps (2021: 15bps) is deemed appropriate for the conservative loan book and remains ahead of pre-pandemic levels. Our Unsecured lending book coverage ratio of 466bps (2021: 380bps) includes 481bps of coverage for our high -- quality credit card portfolio and 388bps of coverage for our smaller personal loans and overdrafts book. Arrears levels remain modest across the portfolio, with c.99% in each of the personal loans and cards portfolios in either stage 1 or stage 2 not past due. The increase in the percentage of balances in stage 2 to 17.3% (2021: 9.7%) is primarily due to the movement of all personal loans made via the Salary Finance JV into Stage 2, following an increased number of customers entering into financial difficulty during the year.
In Business, the coverage ratio of 159bps (2021: 306bps) reflects a 147bps reduction in the year. There has been little evidence of deterioration in asset quality to date, with the level of specific provisions continuing to be low. Total balances in either stage 1 or stage 2 not past due represents c.95% of the portfolio. The reduction in the percentage of balances in stage 2 to 18.7% (2021: 29.2%) is primarily as a result of changes applied to the significant increase in credit risk (SICR) criteria, which resulted in these customers migrating back to stage 1.
Adjusting items and statutory profit
2022 2021
GBPm GBPm
---------------------------------------------------- ------ ------
Underlying profit on ordinary activities before tax 789 801
Adjusting items
- Restructuring charges (82) (146)
- Acquisition accounting unwinds (35) (88)
- Legacy conduct costs (8) (76)
- Other items (69) (74)
---------------------------------------------------- ------ ------
Statutory profit on ordinary activities before tax 595 417
Tax (expense)/credit (58) 57
---------------------------------------------------- ------ ------
Statutory profit for the year 537 474
---------------------------------------------------- ------ ------
Underlying RoTE 13.5% 17.8%
---------------------------------------------------- ------ ------
Statutory RoTE 10.3% 10.2%
---------------------------------------------------- ------ ------
TNAV per share 383.0p 289.8p
---------------------------------------------------- ------ ------
Overview
The Group made a statutory profit before tax of GBP595m after deducting GBP194m of adjusting items (2021: GBP384m).
TNAV per share increased 93.2p in FY22 to 383.0p. The key drivers of the increase were +38.3p of earnings and +47.7p of positive cash flow hedge reserve movements, given the rate environment.
Restructuring charges
Restructuring charges totalled GBP82m in the year, driven by charges related to the Group's digital investment. This included c.GBP60m related to the delivery of IT changes and c.GBP17m related to closure of stores, changes to the operating model and property footprint. The Group continues to expect to incur a total of c.GBP275m of restructuring costs to implement its digital strategy across FY22-24, with the majority now expected to be incurred in FY23.
Acquisition accounting unwinds
The Group recognised fair value accounting adjustments at the time of the Virgin Money acquisition that unwind through the income statement over the remaining life of the related assets and liabilities. GBP35m was reflected in FY22 and the Group expects a further c.GBP30m of total acquisition accounting unwind charges over the next three years.
Legacy conduct
Charges of GBP8m were incurred in FY22 relating to legal proceedings and legacy claims arising in the ordinary course of the Group's business.
Other items
Other items include a c.GBP60m charge recognised in the year following a reassessment of the Group's capitalisation practices, against the backdrop of the move to Agile project delivery and following the completion of the annual impairment review of intangible assets.
Business and financial review
Chief Financial Officer's review
Taxation
On a statutory basis, there was a GBP58m tax charge during the year. This included an overall deferred tax credit reflecting additional historical losses recognised in the year, which offset a deferred tax charge reflecting the impact of the enactment of the reduction in the banking surcharge from 8% to 3%, and the increase in the threshold below which it is not chargeable, to GBP100m (previously GBP25m).
Balance sheet
As at 30 September 2022 2021 Change ------------------------------- ------- ------ -------- Mortgages 58,155 58,104 0.1% Unsecured 6,163 5,415 13.8% Business(1) 8,247 8,477 (2.7)% ------------------------------- ------- ------ -------- Total customer lending 72,565 71,996 0.8% ------------------------------- ------- ------ -------- Relationship deposits(2) 34,649 30,596 13.2% Non-linked savings 17,048 21,285 (19.9)% Term deposits 13,663 14,989 (8.8)% ------------------------------- ------- ------ -------- Total customer deposits 65,360 66,870 (2.3)% ------------------------------- ------- ------ -------- Wholesale funding 17,012 13,596 25.1% ------------------------------- ------- ------ -------- of which TFS - 1,244 (100)% of which TFSME 7,200 4,650 54.8% ------------------------------- ------- ------ -------- Loan to deposit ratio (LDR) 111% 108% 3%pts Liquidity coverage ratio (LCR) 138% 151% (13)%pts ------------------------------- ------- ------ -------- (1) Of which, GBP963m government lending (2021: GBP1,318m). (2) Current account and linked savings balances.
Customer lending and deposits
At an aggregate level, Group lending increased by 0.8% to GBP72.6bn. The increase was primarily driven by growth in Unsecured and non -- government guaranteed Business lending, while Mortgage balances remained stable. Total customer deposits reduced by 2.3% to GBP65.4bn reflecting changes to the overall mix of customer and wholesale funding balances, with growth in PCA and Relationship deposits offset by lower non-linked term deposits and non-linked savings.
Mortgage balances were broadly stable at GBP58.2bn as the Group prioritised margin over volume growth in a competitive environment, in line with the longer-term strategy. Overall housing demand remained strong throughout the year, while pricing remained competitive. During the final quarter of the year, mortgage spreads had begun to recover as increases in customer rates outpaced changes in swap rates, however heightened volatility towards the end of the financial year resulted in further pressure on mortgage margins.
Business lending reduced overall by 2.7% during the year to GBP8.2bn. This was mainly driven by government-guaranteed lending, which reduced by c.27% to GBP1.0bn following the closure of the schemes last year and as businesses made repayments. Non-government business lending increased by c.2% in the year to GBP7.3bn, supported by a growing pipeline of new business through the year.
Unsecured balances grew by 13.8% in the year to GBP6.2bn, driven by a strong performance in the credit cards where balances increased by c.21% in the year to GBP5.2bn. This performance was supported by strong new credit card sales and a recovery in consumer spending, as the Group increased its market share of balances during the year by 0.9% to 8.3%. During the year, the Group observed customer behavioural activity outperforming assumptions, resulting in the card EIR asset performing as expected.
Personal loans and overdraft balances reduced c.14% during the year to GBP1.0bn in line with the Group's strategy to reduce its participation in this market.
The Group's strategy to optimise its overall funding mix drove a 2% reduction in customer deposits during the year to GBP65.4bn. The Group also continued to improve its mix of customer deposits, as relationship balances grew 13%, supported by strong customer propositions, while non-linked savings and non-linked term deposits reduced by 20% and 9% respectively.
Wholesale funding and liquidity
The Group maintains a robust funding and liquidity position. The Group's LDR increased 3%pts in the year to 111% (2021: 108%), primarily as a result of the continued reduction in more expensive term deposits. The Group's LCR of 138% (2021: 151%) continues to comfortably exceed both regulatory requirements and our more prudent internal risk appetite metrics, ensuring a substantial buffer in the event of any outflows.
The Group made further drawings of GBP2.6bn from the BoE's Term Funding Scheme with additional incentives for small or medium-sized enterprises (TFSME) early in the year ahead of its closure, taking the total outstanding amount to GBP7.2bn, while at the same time repaying its remaining GBP1.2bn of TFS drawings. The incremental TFSME drawings, along with successful residential mortgage-backed securities (RMBS) and Covered Bond transactions during the year, meant wholesale funding increased to GBP17.0bn (FY21: GBP13.6bn), offsetting the reduction in term deposits.
Business and financial review
Chief Financial Officer's review
Capital
2022 2021 Change
--------------------------------- ------ ------ ---------
CET1 ratio (IFRS 9 transitional) 15.0% 14.9% 0.1%pts
CET1 ratio (IFRS 9 fully loaded) 14.6% 14.4% 0.2%pts
Total capital ratio 22.0% 22.0% -%pts
MREL ratio 32.1% 31.9% 0.2%pts
UK leverage ratio 5.1% 5.2% (0.1)%pts
RWAs (GBPm) 24,148 24,232 (0.3)%
--------------------------------- ------ ------ ---------
of which Mortgages (GBPm) 9,155 10,010 (8.5)%
of which Unsecured (GBPm) 4,817 4,311 11.7%
of which Business (GBPm) 6,196 6,040 2.6%
--------------------------------- ------ ------ ---------
Unless where stated, data in the table shows the capital position on a Capital Requirements Directive (CRD) IV 'fully loaded' basis with International Financial Reporting Standard (IFRS) 9 transitional adjustments applied.
Overview
During 2022, the Group maintained a strong capital position with a CET1 ratio (IFRS 9 transitional basis) of 15.0% (2021: 14.9%) and a total capital ratio of 22.0% (2021: 22.0%). During the year, the Group announced its updated capital framework including a 30% full year dividend payout level, supplemented with buybacks subject to ongoing assessment of surplus capital, market conditions and regulatory approval. In line with the updated capital framework, the movement in the CET1 ratio during the year included a 58bps impact from the proposed full year dividend of 10p in line with the dividend policy and 31bps impact from the initial GBP75m share buyback. Excluding shareholder distributions, capital generation was underpinned by ongoing profitability and lower RWAs.
Capital requirements
As at 30 September 2022, the Group's Pillar 2A requirement had a CET1 element of 1.7%. Overall, the Group's CRD IV minimum CET1 capital requirement (or maximum distributable amount threshold) as at the end of FY22 was 8.7%. The Group's capital framework assumes the Countercyclical buffer returns to 2%.
CET1 capital
The Group's transitional CET1 ratio increased by 12bps over the year. Total underlying capital generation of 195bps was driven by 226bps of underlying profit, offset by 4bps from higher RWAs (excluding the impact to RWAs from intangible asset relief changes) and 27bps of AT1 distributions and related costs. Adjusting items consumed c.40bps while there was 58bps of accrual for expected dividends and 31bps from the GBP75m share buyback. The removal of the CRR II software benefit consumed a further 53bps. The announcement of an additional GBP50m share buyback will reduce CET1 resources in Q1 2023.
RWAs
Overall, RWAs reduced by 0.3% during FY22 to GBP24.1bn. To date, RWA pro-cyclicality has remained low, although the risk still remains, with the timing of any increase uncertain. In Mortgages, RWAs reduced by GBP0.9bn as probability of default (PD) recalibrations and stronger HPI more than offset growth in balances and other movements. In Business, RWAs increased by GBP0.2bn mainly as a result of higher customer balances, excluding government-backed balances that carry a 0% risk weight. In Unsecured, RWAs increased by GBP0.5bn in line with the increase in customer lending during the financial year. Non-credit RWAs were GBP3.1bn as at FY22 (2021: GBP2.7bn). In H1 2023, the Group expects a c.GBP1bn-GBP1.5bn increase from the implementation of hybrid model changes.
Robust capital position in the face of economic uncertainty
While credit provisions have reduced to GBP457m (2021: GBP504m) reflecting the robust credit performance and removal of COVID-19-related PMAs, the Group maintains a strong level of coverage to manage the impact of a weaker economy, and subsequent increase in credit losses. In addition, the Group also retained a significant CET1 management buffer of GBP1.5bn in excess of its CRD IV regulatory requirement as at FY22, providing further potential loss-absorbing capacity.
Business and financial review
Chief Financial Officer's review
MREL
The Group's Minimum Requirements for Own Funds and Eligible Liabilities (MREL) ratio increased from 31.9% to 32.1% during the year, comfortably exceeding its 2022 end-state MREL requirement of 24.9% of RWAs.
CET1 capital movements(1) 2022 ------------------------------------------ ----- Opening CET1 ratio 14.9% Capital generated (bps) 226 RWA growth (bps) (4) AT1 distributions (bps) (27) ------------------------------------------ ----- Underlying capital generated (bps) 195 ------------------------------------------ ----- Restructuring charges (bps) (25) Acquisition accounting unwind (bps) (10) Conduct (bps) (3) Foreseeable ordinary dividends (bps) (58) Share buyback (bps) (31) Other (bps) (3) Reversal of intangible asset relief (bps) (53) ------------------------------------------ ----- Net capital generated (bps) 12 ------------------------------------------ ----- Closing CET1 ratio 15.0% ------------------------------------------ -----
(1) This table shows the capital position on a CRD IV 'fully loaded' basis with IFRS 9 transitional adjustments applied.
FY23 outlook
In FY23, we anticipate full year NIM to be c.185-190bps, reflecting the benefit of the current rate environment, structural hedge reinvestment and deposit pricing, offset by ongoing competitive pricing pressures, particularly in Mortgages, higher wholesale funding costs and higher liquidity requirements, as a consequence of increased market volatility.
The Group now expects to deliver a CIR of around 50% in FY23. The Group continues to expect to incur c.GBP275m of restructuring charges between FY22-24, reflecting its ongoing digitisation programme, with the majority of the remaining c.GBP190m expected to be incurred in FY23.
The Group now expects its cost of risk for FY23 to normalise around its through the cycle average of c.30-35bps.
Consistent with our strategy to diversify the balance sheet, we anticipate growth in overall lending in FY23, with more moderate growth in Unsecured and Business (non-government) relative to FY22, and modest growth in Mortgages.
The Group expects to issue GBP1.5bn-GBP2.5bn of secured issuance in FY23 subject to deposit flows and relative cost, while MREL issuance is expected to be broadly limited to maintaining the current surplus to regulatory requirements.
During H122, the Group announced its long -- term CET1 target range of 13-13.5%. During FY23, the Group expects to operate above 14%, given the level of macroeconomic uncertainty. This includes the anticipated impact of implementing mortgage hybrid models, which is currently anticipated to increase RWAs by c.GBP1bn-GBP1.5bn in H123.
In line with the Company's capital framework and dividend policy, which was outlined alongside H122 results, the Board is today announcing a GBP50m extension of the Group's existing buyback programme. Given the timing of this year's stress test results, the Group does not expect to announce further buybacks until Q423.
Business and financial review
Chief Financial Officer's review
Guidance
FY23 outlook Medium-term outlook
-------------------------------- -------------------------------
NIM Statutory RoTE
185-190bps c.11% in FY24, consistent
with target of >10%
-------------------------------- -------------------------------
Underlying costs Growth
c.50% CIR Targeting growth in Unsecured
and Business (non-government),
maintaining Mortgage
market share
-------------------------------- -------------------------------
Cost of risk Income
Normalise around the Mix-driven NIM expansion
through-the-cycle level
of c.30-35bps
-------------------------------- -------------------------------
Restructuring costs Gross savings
c.GBP275m across FY22-FY24, Gross cost savings of
with the majority in c.GBP175m by FY24 generate
FY23 headroom to absorb inflation
and re-investment
-------------------------------- -------------------------------
Dividend Underlying costs
30% dividend payout supplemented Underlying CIR to be
with buybacks <50%
Business and financial review
Chief Financial Officer's review
Medium-term outlook
In the medium term the Group's digital acceleration will support the delivery of valuable and differentiated propositions to drive profitable growth. The Group will continue to target diversification on both sides of the balance sheet, delivering growth in Unsecured and Business lending, while maintaining our mortgage market share. We continue to target strong growth in new PCA and BCA customer numbers, improving the overall cost of funds.
We continue to expect our strategy to digitise the Bank to deliver around GBP175m of gross cost savings over the period FY22-24, generating headroom to absorb inflation and reinvestment. We have made good progress to date with savings driven by reductions in headcount and property, third party spend and savings from digitisation. Given the uncertain economic environment that has resulted in persistent high levels of inflation, alongside our strategy to grow the balance sheet, the Group continues to target a CIR rather than a nominal cost target and expects to achieve an underlying CIR of <50% by FY24.
Following the full recognition of historical losses, the Group expects its effective tax rate to be maintained in the mid 20%s from FY23 based on enacted legislation.
Overall, the Group now expects to deliver a c.11% statutory RoTE by FY24 and is well placed to deliver strong, profitable growth through the acceleration of our digital strategy.
In order to support its FY24 RoTE target, the Group anticipates returning to its 13-13.5% CET1 target range by FY24, assuming no material change in the economic outlook. The Group will target a 30% full year dividend payout level and will supplement dividends with buybacks, subject to an ongoing assessment of surplus capital, market conditions and regulatory approval.
Clifford Abrahams
Chief Financial Officer
20 November 2022
Business and financial review
Chief Financial Officer's review
Summary income statement - statutory basis
2022 2021
For the year ended 30 September GBPm GBPm
--------------------------------------------------- ------- -------
Net interest income 1,576 1,357
Non-interest income 140 132
--------------------------------------------------- ------- -------
Total operating income 1,716 1,489
Operating and administrative expenses (1,069) (1,203)
--------------------------------------------------- ------- -------
Operating profit before impairment losses 647 286
Impairment (losses)/credit on credit exposures (52) 131
--------------------------------------------------- ------- -------
Statutory profit on ordinary activities before tax 595 417
Tax (expense)/credit (58) 57
--------------------------------------------------- ------- -------
Statutory profit after tax 537 474
--------------------------------------------------- ------- -------
The Group has recognised a statutory profit before tax of GBP595m (2021: GBP417m). The increase in statutory profit is driven by higher income and lower statutory costs, offset slightly by our impairment performance, given the scale of the writeback recognised last year. The Group continues to expect that the difference between underlying and statutory profit will reduce over time as we deliver our strategy and the exceptional charges reduce.
Performance measures(1)
2022 2021 Change
------------------------------- ----- ----- --------
Profitability
RoTE 10.3% 10.2% 0.1%pts
CIR 62% 81% 19%pts
Return on assets 0.60% 0.52% 0.08%pts
Basic earnings per share (EPS) 32.4p 27.3p 5.1p
------------------------------- ----- ----- --------
(1) For a definition of each of the performance measures, refer to 'Measuring the Group's performance' on pages 124 to 133.
Reconciliation of statutory to underlying results
The statutory basis presented within this section reflects the Group's results as reported in the financial statements. The underlying basis reflects the Group's financial performance as presented to the CEO, Executive Leadership Team and Board and excludes certain items that are part of the statutory results. The table below reconciles the statutory results to the underlying results, and full details on the adjusted items to the underlying results are included on page 134.
Acquisition
Statutory Restructuring accounting Legacy Underlying
results charges unwinds conduct Other basis
2022 income statement GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------- ------------- ----------- -------- ------
Net interest income 1,576 - 16 - - 1,592
Non-interest income 140 - 16 - 7 163
-------------------------------------- --------- ------------- ----------- -------- ------ ----------
Total operating income 1,716 - 32 - 7 1,755
Total operating and administrative
expenses before impairment losses (1,069) 82 3 8 62 (914)
-------------------------------------- --------- ------------- ----------- -------- ------ ----------
Operating profit before impairment
losses 647 82 35 8 69 841
Impairment losses on credit exposures (52) - - - - (52)
-------------------------------------- --------- ------------- ----------- -------- ------ ----------
Profit on ordinary activities
before tax 595 82 35 8 69 789
-------------------------------------- --------- ------------- ----------- -------- ------ ----------
Financial performance measures
RoTE 10.3% 1.4% 0.6% 0.1% 1.1% 13.5%
CIR 62.3% (4.4)% (1.8)% (0.4)% (3.6)% 52.1%
Basic EPS 32.4p 4.2p 1.8p 0.4p 3.6p 42.4p
-------------------------------------- --------- ------------- ----------- -------- ------ ----------
Business and financial review
Chief Financial Officer's review
Acquisition
Statutory Restructuring accounting Legacy Underlying
results charges unwinds conduct Other basis
2021 income statement GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------- ------------- ----------- -------- ------
Net interest income 1,357 - 55 - - 1,412
Non-interest income 132 - 23 - 5 160
-------------------------------------- --------- ------------- ----------- -------- ------ ----------
Total operating income 1,489 - 78 - 5 1,572
Total operating and administrative
expenses before impairment losses (1,203) 146 10 76 69 (902)
-------------------------------------- --------- ------------- ----------- -------- ------ ----------
Operating profit before impairment
losses 286 146 88 76 74 670
Impairment credit on credit exposures 131 - - - - 131
-------------------------------------- --------- ------------- ----------- -------- ------ ----------
Profit on ordinary activities
before tax 417 146 88 76 74 801
-------------------------------------- --------- ------------- ----------- -------- ------ ----------
Financial performance measures
RoTE 10.2% 2.9% 1.7% 1.5% 1.5% 17.8%
CIR 80.8% (8.9)% (5.4)% (4.6)% (4.5)% 57.4%
Basic EPS 27.3p 7.8p 4.7p 4.1p 4.0p 47.9p
-------------------------------------- --------- ------------- ----------- -------- ------ ----------
Risk Management
Credit risk
At a time of ongoing challenge for the UK economy, our lending portfolios remain well positioned.
A disciplined approach to credit risk management supports the Group's operations and has underpinned its resilience in recently challenging times.
Credit risk is the risk that a 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 products that the Group offers, and in which it invests, and can arise in respect of both on- and off -- balance sheet exposures.
Close monitoring, clear policies and a disciplined approach to credit risk management support the Group's operations, and have underpinned its resilience in recently challenging times. The emergence of the significant inflationary headwinds and cost of living pressures have the potential to affect customer resilience and debt affordability. The Group has taken a number of steps to support customers through this period of heightened affordability pressure, and ensure that its credit risk framework and associated policies remain effective and appropriate.
Managing credit risk within our asset portfolios
Risk appetite
The Group controls its levels of credit risk by placing limits on the amount of risk it is willing to take in order to achieve its strategic objectives. This approach involves a defined set of qualitative and quantitative limits in relation to its credit risk concentrations to one borrower, or group of borrowers, and to geographical, product and industry segments. The management of credit risk within the Group is achieved through ongoing approval and monitoring of individual transactions, timely changes to application scorecards and credit strategies, regular asset quality reviews and the independent oversight of credit decisions and portfolios.
The Group maintained a controlled approach to portfolio management and appetite for new lending origination as it continued to recognise some of the delayed impacts of COVID 19, with updates to underwriting criteria to reflect the uncertain economic environment and emerging inflationary headwinds. The FY23 RAS continues to consider the impact of those inflationary headwinds and cost of living pressures, and is focussed on supporting customers through this challenging period. Climate risk is an increasingly important component of the broader RMF and we have recognised this risk through the inclusion of climate-related risk factors within the FY22 RAS. The framework has been updated to embed climate risk considerations across various aspects of customer lending and credit risk management practices.
Measurement
The Group uses a range of statistical models, supported by both internal and external data, to measure credit risk exposures. These models underpin the IRB capital calculation for the Mortgage and Business portfolios, and account management activity for all portfolios. Further information on the measurement and calculation of ECL and the Group's approach to the impairment of financial assets can be found on page 20.
Political and economic risk is an emerging risk for the Group and includes the future impact on macroeconomic variables, which are used in the calculation of the Group's modelled ECL output. Further detail on the Group's use of macroeconomic variables in the year can be found on pages 39 to 41.
Mitigation
The Group maintains a dynamic approach to credit management and takes appropriate steps if individual issues are identified, or if credit performance has, or is expected to, deteriorate due to borrower, economic or sector-specific weaknesses.
The mitigation of credit risk within the Group is achieved through approval and monitoring of automated credit strategies, individual transactions, asset quality, analysis of the performance of the various credit portfolios, and oversight of credit portfolios across the Group. Portfolio monitoring techniques include product, industry, geographic concentrations and delinquency trends, as well as considering layered risks where customers may have more than one higher risk characteristic.
There is regular analysis of borrower ability to meet interest and capital repayment obligations, with early support and mitigating steps taken where required. The Group has taken additional steps to update affordability assessments in response to the inflationary and cost of living pressures facing customers. Credit risk mitigation is also supported, in part, by obtaining collateral, and corporate and personal guarantees where appropriate.
The key mitigating measures are described below.
Credit assessment and mitigation
Credit risk is managed in accordance with lending policies, the Group's risk appetite and the RMF. Lending policies and performance against risk appetite are reviewed regularly.
The Group uses a variety of lending criteria when assessing applications for Mortgage and Unsecured customers. The approval process uses credit scorecards, credit strategies and affordability assessments, and involves a review of an applicant's previous credit history using information held by credit reference agencies. Manual underwriting assessments are also used as and when required. The Group also utilises quantitative thresholds, for example debt to income ratios, as well as the ratio of borrowing to collateral. Some of these limits relate to internal approval levels and others are hard limits above which the Group will reject the application.
For residential mortgages, the Group's policy is to accept only standard applications within Board approved risk appetite limits. Included within these is the maximum percentage LTV limit that is offered subject to loan size and customer income. Product availability may be altered depending on market conditions and outlook. Product types such as BTL and residential interest-only mortgages are controlled by transactional limits covering both LTV and value.
Risk Management
Credit risk
For business customers, credit risk is further mitigated by focusing on business sectors where the Group has specific expertise, and through limiting exposures on higher value loans and to certain sectors. When making credit decisions for business customers the Group will routinely assess the primary source of repayment, most typically the cash generated by the customer through its normal trading cycle. Secondary sources of repayment are also considered and while not the focus of the lending decision, collateral will be taken when appropriate. The Group seeks to obtain security cover and, where relevant, guarantees from borrowers.
Specialist expertise
Credit quality is managed and monitored by skilled teams including, where required, specialists that provide dedicated support for vulnerable customers experiencing financial or other types of difficulties. These specialists act within agreed delegated authority levels set in accordance with experience and capabilities.
Credit strategy and policy
Credit risks associated with lending are managed through the application of detailed lending policies and standards that outline the approach to lending, underwriting criteria, credit mandates, concentration limits and product terms.
Significant credit risk strategies and policies are reviewed and approved annually by the Credit Risk Committee. For complex credit products and services, the Chief Credit Officer and Credit Risk Committee provide a policy framework that identifies, quantifies and mitigates risks. These policies and frameworks are delegated to, and disseminated under, the guidance and control of the Board and senior management, with appropriate oversight through governance committees.
Specialist credit teams provide oversight of credit portfolio performance as well as adherence to credit risk policies and standards. Activities include targeted risk-based reviews, providing an assessment of the effectiveness of internal controls and risk management practices. Bespoke assignments are also undertaken in response to emerging risks and regulatory requirements. Independent assurance reviews are regularly undertaken by Internal Audit.
Portfolio oversight
The Group's credit portfolios, and the key benchmarks, behaviours and characteristics that are used to manage portfolios, are regularly monitored, with portfolio monitoring reports provided for review by senior management.
Controls over rating systems
The Group has a Model Risk Oversight team that sets common minimum standards for risk models and associated rating systems to ensure these are developed and monitored consistently, and are of sufficient quality to support business decisions and meet regulatory requirements. The Group performs an annual self-assessment of its rating systems to ensure ongoing CRR compliance.
The Group also utilises other instruments and techniques across its wider balance sheet. These are summarised below:
Derivatives
The Group maintains control limits on net open derivative positions. At any one time, the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Group (i.e. assets where the fair value is positive) and in relation to derivatives, may only be a small fraction of the contract, or notional values associated with instruments outstanding. This credit risk is managed as part of the customer's overall exposure together with potential exposures from market movements.
Master netting agreements
The Group further restricts its exposure to credit losses by entering into master netting arrangements with counterparties whom it undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross basis. However, credit risk associated with the favourable contracts is reduced by a master netting arrangement to the extent that, if any counterparty failed to meet its obligations in accordance with the agreed terms, all amounts with the counterparty are terminated and settled on a net basis. Derivative financial instrument contracts are typically subject to the International Swaps and Derivatives Association (ISDA) master netting agreements, as well as Credit Support Annexes, where relevant, around collateral arrangements attached to those ISDA agreements. Derivative exchange or clearing counterparty agreements exist where contracts are settled via an exchange or clearing house.
Collateral
The Group evaluates each customer's creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Group upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held as security, and other credit enhancements includes the following:
Residential mortgages
Residential property is the Group's main source of collateral on mortgage lending, and means of mitigating loss in the event of the default risk inherent in its residential mortgage portfolios. All lending activities are supported by an appropriate form of valuation. This valuation is applied using either a physical valuation, or another method that is not reliant on a physical inspection, but utilises data and modelled information, such as desktop, automated valuation model or indexed valuations (subject to policy rules and confidence levels).
It is the Group's policy to dispose of repossessed properties, with the proceeds used to reduce or repay the outstanding balance. The Group does not occupy repossessed properties for its own business use.
Commercial property
Commercial property is a source of collateral on business lending, and means of mitigating loss in the event of default (within the Stage 3 Business balance of GBP376m, GBP106m is collateralised on property), (2021: Stage 3 Business balance of GBP235m, with GBP117m collateralised on property). For commercial loans, collateral comprises first legal charges over freehold, or long leasehold property (including formal Companies House registration where appropriate). All commercial property collateral is subject to an independent, professional valuation when taken and thereafter subject to periodic review in accordance with policy requirements.
Risk Management
Credit risk
Non-property related collateral
In addition to residential and commercial property based security, the Group also takes other forms of collateral when lending. This collateral can involve obtaining security against the underlying loan through the use of cash collateral and/or netting agreements, both of which reduce the original exposure by the amount of collateral held, subject to volatility and maturity adjustments where applicable. It can also include specific or interlocking guarantees, and loan agreements, which include affirmative and negative covenants and, in some instances, guarantees of counterparty obligations.
The Group also provides asset-backed lending in the form of asset and invoice finance. Security for these exposures is held in the form of direct recourse to the underlying asset financed.
Generally, the Group does not take possession of collateral it holds as security, or call on other credit enhancements, that would result in recognition of an asset on its balance sheet.
Monitoring
Credit policies and procedures, which are subject to ongoing review, are documented and disseminated in a form that supports the credit operations of the Group.
-- Credit Risk Committee: The Credit Risk Committee ensures that the credit RMF and associated policies remain effective. The Committee has oversight of the quality, composition and concentrations of the credit risk portfolio. It also determines and approves strategies to adjust the portfolio for changes in market conditions.
-- RAS measures: Measures are reported monthly to ensure adherence to appetite. A formal annual review is carried out to ensure that the measures accurately reflect the Group's risk appetite, strategy and concerns relative to the wider macro environment. All measures are subject to extensive engagement with the Executive Leadership Team and the Board, and are subject to endorsement from executive governance committees prior to Board approval. Regulatory engagement is also scheduled as appropriate.
-- Risk concentration: Concentration of risk is managed by counterparty, product, geographical region and industry sector. In addition, single name exposure limits exist to control exposures to a single counterparty. Concentrations are also considered through the RAS process, focusing particularly on the external environment, outlook and comparison against market benchmarks, as well as considering layered risks where customers may have more than one higher risk characteristic.
-- Single large exposure excesses: Excesses on exposures under the delegated commitment authority of the Transactional Credit Committee are reported to the committee when above defined limits. All excess reports include a proposed route to remediation. Exposures are also managed in accordance with the large exposure reporting requirements of the CRR.
-- Portfolio Monitoring: Continuous monitoring of the portfolio composition and performance is undertaken through weekly and monthly reviews.
Forbearance
Forbearance is considered to exist where customers are experiencing, or about to experience, financial difficulty and the Group grants a concession on a non-commercial basis. The Group's forbearance policies and definitions comply with the guidance established by the EBA for financial reporting. Forbearance concessions include the granting of more favourable terms and conditions than those provided at drawdown of the facility, or conditions that would not ordinarily be available to other customers with a similar risk profile. Forbearance parameters are regularly reviewed and refined as necessary to ensure they are consistent with the latest industry guidance and prevailing practice, as well as ensuring that any assessment adequately captures and reflects the most recent customer behaviours and market conditions.
Measuring credit risk within asset portfolios
At each reporting date, the Group assesses financial assets measured at amortised cost, as well as loan commitments and financial guarantees, for impairment. The impairment loss allowance is calculated using an ECL methodology and reflects: (i) an unbiased and probability weighted amount; (ii) the time value of money, which discounts the impairment loss; and (iii) reasonable and supportable information that is available without undue cost or effort about past events, current conditions and forecasts of future economic conditions.
The Group adopts two approaches in the measurement of credit risk under IFRS 9:
Individually assessed
A charge is taken to the income statement when an individually assessed provision (IA) has been recognised, or a direct write-off has been applied to an asset balance. These will be classified as Stage 3.
Collectively assessed
The Group uses a combination of strategies and statistical models that utilise internal and external data to measure the exposure to credit risk within the portfolios, and to calculate the level of ECL. This approach is supplemented by management judgement in the form of PMAs where necessary.
ECL methodology
ECL methodology is based upon the combination of probability of default (PD), loss given default (LGD) and exposure at default (EAD) estimates that consider a range of factors that impact on credit risk and the level of impairment loss provisioning. The Group uses reasonable and supportable forecasts of future economic conditions in estimating the ECL allowance. The methodology and assumptions used in the ECL calculation are reviewed regularly and updated as necessary.
Risk Management
Credit risk
The calculated model ECL is determined using the following classifications:
ECL calculation
Classification period Description
-------------- --------------- ---------------------------------------
Stage 12 months An exposure that is not credit-impaired
1 on initial recognition and has
not experienced a SICR since initial
recognition.
-------------- --------------- ---------------------------------------
Stage Lifetime An exposure that has experienced
2 a SICR since initial recognition,
but is not yet deemed to be credit
impaired.
-------------- --------------- ---------------------------------------
Stage Lifetime An exposure that is credit-impaired.
3
-------------- --------------- ---------------------------------------
In addition, purchased or originated credit-impaired (POCI) financial assets are those that are assessed as being credit-impaired upon initial recognition. Once a financial asset is classified as POCI, it remains there until derecognition irrespective of any changes to its credit quality. POCI financial assets are included in Stage 3 with corresponding values disclosed by way of footnote to the relevant tables. The Group regards the date of acquisition as the origination date for purchased portfolios.
A Stage 2 ECL is required where a SICR has been identified, such as a deterioration in the PD since origination. Absent any specific SICR factors, the Group operates a 30 DPD backstop for classification as Stage 2, and 90 DPD for Stage 3. Forborne exposures can be classed as either Stage 2 or Stage 3 depending on the type of forbearance programme that has been applied to the customer.
The SICR criteria and triggers are parameters within the ECL calculation process and, as such, are considered under the same governance pathway as the Group's IFRS 9 models. This approach means that any changes to the triggers are initially submitted to and endorsed by the Credit Model Technical Forum, with formal approval provided by the MGC.
During the year, refinements were made to the SICR criteria within the Group's Business portfolio to more closely reflect the level of credit risk. On adoption of IFRS 9 from 1 October 2018, the Group had selected eCRS based SICR triggers as one of the tools for monitoring the credit risk on Business customers. The effectiveness of all triggers were reviewed during the year, including overlaps with other causes of stage migration, and the Group concluded that its hard triggers based on internal credit risk rating were ineffective when used in conjunction with the PD deterioration threshold. In addition, the threshold definition has been simplified and is now set at a 50% increase in the annualised PD since origination, subject to a 100bps floor in the movement. The overall impact of this refinement has resulted in more of the Business portfolio remaining in Stage 1 in the current year. As this change represents a revision to model parameters rather than a change of policy, comparatives have not been restated.
The Credit Risk Committee provides oversight on the adequacy of ECL provisioning with reviews and robust challenge of the calculation and management judgement recommendations. This includes the rationale behind the inclusion of PMAs, the basis on which these are calculated and the proposed timeline for their release.
The Boards' Audit Committee provides oversight to the ECL calculation and measurement of ECL, with reviews and robust challenge of all calculated outcomes and management judgements.
Further detail on the accounting policy applied to ECLs can be found in note 3.2 to the financial statements.
Accounting and regulatory credit loss frameworks
The approach to calculating credit losses differs between the accounting and regulatory frameworks applicable to the Group, with the most significant difference being that the concept of SICR, which moves exposures from a 12-month to a lifetime ECL calculation in the accounting framework, does not exist under the regulatory framework. The approach to staging under IFRS 9 is also not applicable under regulatory credit loss reporting.
Both frameworks calculate credit losses under a PD x LGD x EAD approach, with the regulatory IRB approach assessing these in the next 12 months, whereas the accounting framework under IFRS 9 requires these losses assessed on a forward-looking view, with a lifetime loss calculated where appropriate. Credit losses are supplemented by management judgements in the form of PMAs, where required, under the accounting framework.
Both the accounting and regulatory definitions of default are materially aligned, with default being triggered at 90 DPD, with the exception of the heritage Virgin Money mortgage models, that apply a 180 DPD regulatory default trigger under existing approved permissions. The definition of default will be fully aligned to 90 DPD when the regulatory models are updated in line with the hybrid model adoption, which is anticipated in 2023.
Cure periods
The Group aligns the regulatory cure periods for forborne exposures in its IFRS 9 staging criteria at a minimum period of either 24, or 36 months, depending on the forbearance programme utilised. Where exposures are classified as Stages 2 or 3 as a result of not being in a forbearance programme, these can cure when the relevant staging trigger is removed and no longer applicable.
Risk Management
Credit risk
Group credit risk exposures
The Group is exposed to credit risk across all of its financial asset classes, however, its principal exposure to credit risk arises on customer lending balances. Given the relative significance of customer lending exposures to the Group's overall credit risk position, the disclosures that follow are focused principally on customer lending.
The Group is also exposed to credit risk on its other banking and treasury-related activities, and holds GBP12.2bn (2021: GBP9.7bn) of cash and balances with central banks and GBP0.7bn (2021: GBP0.8bn) due from other banks at amortised cost, with a further GBP5.1bn (2021: GBP4.4bn) of financial assets at fair value through other comprehensive income (FVOCI). Additionally GBP11.0bn of cash is held with the BoE (2021: GBP8.3bn), and balances with other banks and financial assets at FVOCI are primarily held with senior investment grade counterparties. All other banking and treasury related financial assets are classed as Stage 1 with no material ECL provision held.
Maximum exposure to credit risk on financial assets and credit-related commitments
The following tables show the levels of concentration of the Group's financial assets and credit-related commitments:
2022 2021
-------------------------------- ------------------------------------ -----------------------------------
Gross Gross
loans loans
and and
advances advances
to Credit-related to Credit-related
customers commitments Total customers commitments Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ---------- -------------- -------- ---------- -------------- -------
Mortgages 58,464 4,200 62,664 58,441 2,845 61,286
Unsecured 6,513 11,057 17,570 5,770 10,507 16,277
Business 8,169 4,102 12,271 8,340 3,769 12,109
-------------------------------- ---------- -------------- -------- ---------- -------------- -------
Total 73,146 19,359 92,505 72,551 17,121 89,672
Impairment provisions on credit
exposures(1) (454) (3) (457) (496) (8) (504)
Fair value hedge adjustment (941) - (941) (179) - (179)
-------------------------------- ---------- -------------- -------- ---------- -------------- -------
Maximum credit risk exposure
on lending assets 71,751 19,356 91,107 71,876 17,113 88,989
Cash and balances with central
banks 12,221 9,711
Financial instruments at FVOCI 5,064 4,352
Due from other banks 656 800
Other financial assets at
fair value 78 153
Derivative financial assets 342 140
-------------------------------- ---------- -------------- -------- ---------- -------------- -------
Maximum credit risk exposure
on all financial assets(2) 109,468 104,145
-------------------------------- ---------- -------------- -------- ---------- -------------- -------
(1) The total ECL provision covers both on and off-balance sheet exposures, which are reflected in notes 3.2 and 3.13 respectively. All tables and ratios that follow are calculated using the combined on- and off-balance sheet ECL, which is consistent for all periods reported.
(2) Unless otherwise noted, the amount that best represents the maximum credit exposure at the reporting date is the carrying value of the financial asset.
Group credit highlights
In addition to the balance sheet position above, key metrics of relevance are as follows:
2022 2021
Group credit highlights GBPm GBPm
------------------------------------------------------------- ------ -------
Impairment charge/(credit) on credit exposures
Mortgage lending (30) (44)
Unsecured lending 178 (32)
Business lending (96) (55)
------------------------------------------------------------- ------ -------
Total Group impairment (credit)/charge 52 (131)
------------------------------------------------------------- ------ -------
Underlying impairment (credit)/charge(1) to average customer
loans (cost of risk) 0.07% (0.18%)
------------------------------------------------------------- ------ -------
Key asset quality ratios
% Loans in Stage 2 7.76% 14.09%
Loans in Stage 3 1.41% 1.32%
Total book coverage(2) 0.62% 0.70%
Stage 2 coverage(2) 4.72% 3.02%
Stage 3 coverage(2) 11.24% 9.59%
------------------------------------------------------------- ------ -------
(1) Inclusive of gains/losses on assets held at fair value and elements of fraud loss.
(2) Excludes the guaranteed element of government-backed loan schemes.
Risk Management
Credit risk
The Group has continued to maintain a stable lending book, with gross lending to customers of GBP73.1bn at 30 September 2022 (2021: GBP72.6bn). While the Mortgage book remained relatively stable, a small 1.2% reduction in Business lending was more than offset by 12.9% growth in the Unsecured lending book, mainly driven by credit card growth of GBP0.9bn in FY22 despite having tightened underwriting criteria in the second half of the year in response to rising living costs.
Asset quality was robust in the period and most of the key asset quality ratios remained broadly stable. However, other significant economic and geopolitical factors have the potential to impact the short to medium term performance of the portfolio, with the most significant of these anticipated to be cost of living pressures. The Group continues to support customers through this challenging period, with a controlled risk appetite and focus on responsible lending decisions.
The selection of appropriate PMAs is a major component in determining the Group's ECL, with the following considered to be key factors for the Group's portfolio at that date:
-- All PMAs relating to the COVID-19 pandemic, including the move of balances to Stage 2 for customers taking a payment holiday, have been fully released from Stages 1 and 2 as the risk of potential default within the portfolio is no longer considered to be directly attributable to specifically pandemic effects.
-- Application of a GBP27m adjustment for the cost of living crisis and the impact it may have on customers' ability to absorb higher day-to-day costs within available finances. This adjustment impacts both the Mortgage (GBP6m) and Unsecured (GBP21m) portfolios and is held in Stage 1.
-- Recognising that the Business portfolio continues to face an uncertain economic environment, with an economic resilience PMA of GBP30m being recognised and is primarily held in Stage 2.
As such, the Group has recorded a total impairment provision of GBP457m at 30 September 2022, reflecting a 9% reduction from GBP504m at 30 September 2021, and a corresponding reduction in coverage from 70bps to 62bps. Within this, the modelled and IA provision has increased to GBP372m (2021: GBP297m) driven by the updated macroeconomic inputs and growth in Unsecured lending. PMAs have reduced in the period to GBP85m (2021: GBP207m).
The net reduction in provision has been offset by the individually assessed impairment charge of GBP106m in the year (2021: GBP79m), resulting in a net charge to the income statement of GBP52m (2021: net credit of GBP131m), and an associated cost of risk of 7bps (2021: (18)bps).
Gross loans and advances(1) ECL and coverage
2022 Unsecured
---------------- ------ ----- ------
Loans and
Mortgages Cards Overdrafts Combined Business(2) Total(4)
---------------- -------------- ------------- ------------- ------------- ------------- --------------
GBPm % GBPm % GBPm % GBPm % GBPm % GBPm %
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Stage 1 54,791 93.7% 4,712 84.8% 612 64.1% 5,324 81.8% 6,270 76.7% 66,385 90.8%
Stage 2 - total 3,090 5.3% 774 13.9% 335 35.1% 1,109 17.0% 1,526 18.7% 5,725 7.8%
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Stage 2: 0
DPD 2,763 4.7% 723 13.0% 327 34.3% 1,050 16.1% 1,499 18.4% 5,312 7.2%
Stage 2: <
30 DPD 158 0.3% 27 0.5% 3 0.3% 30 0.5% 9 0.1% 197 0.3%
Stage 2: >
30 DPD 169 0.3% 24 0.4% 5 0.5% 29 0.4% 18 0.2% 216 0.3%
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Stage 3(3) 583 1.0% 72 1.3% 8 0.8% 80 1.2% 373 4.6% 1,036 1.4%
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
58,464 100.0% 5,558 100.0% 955 100.0% 6,513 100.0% 8,169 100.0% 73,146 100.0%
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
ECLs
Stage 1 10 17.9% 57 23.2% 6 15.8% 63 22.2% 12 10.3% 85 18.6%
Stage 2 - total 32 57.1% 156 63.4% 25 65.8% 181 63.7% 55 47.0% 268 58.6%
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Stage 2: 0
DPD 28 49.9% 129 52.4% 22 57.9% 151 53.1% 55 47.0% 234 51.2%
Stage 2: <
30 DPD 2 3.6% 14 5.7% 1 2.6% 15 5.3% - 0.0% 17 3.7%
Stage 2: >
30 DPD 2 3.6% 13 5.3% 2 5.3% 15 5.3% - 0.0% 17 3.7%
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Stage 3(3) 14 25.0% 33 13.4% 7 18.4% 40 14.1% 50 42.7% 104 22.8%
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
56 100.0% 246 100.0% 38 100.0% 284 100.0% 117 100.0% 457 100.0%
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Coverage
Stage 1 0.02% 1.29% 1.06% 1.26% 0.22% 0.13%
Stage 2 - total 1.02% 21.94% 7.29% 17.22% 3.75% 4.72%
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Stage 2: 0
DPD 1.02% 19.41% 6.41% 15.09% 3.76% 4.43%
Stage 2: <
30 DPD 0.81% 57.37% 33.67% 54.48% 3.57% 8.53%
Stage 2: >
30 DPD 1.25% 59.03% 52.92% 58.01% 1.47% 8.57%
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Stage 3(3) 2.28% 50.96% 73.14% 53.51% 19.96% 11.24%
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
0.09% 4.81% 3.88% 4.66% 1.59% 0.62%
---------------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
(1) Excludes loans designated at FVTPL, balances due from customers on acceptances, accrued interest and deferred and unamortised fee income.
(2) Business and total coverage ratio excludes the guaranteed element of government-backed loans.
(3) Stage 3 includes POCI for gross loans and advances of GBP56m for Mortgages and GBP1m for Unsecured (2021: GBP67m and GBP2m respectively); and ECL of (GBP1m) for Mortgages and (GBP2m) for Unsecured (2021: GBPNil and (GBP2m) respectively).
(4) The COVID related PMAs held in 2021 were allocated across Stages 1 and 2 and have now been fully released. The cost of living PMAs are held in Stage 1 and the economic resilience PMA is primarily held in Stage 2.
Risk Management
Credit risk
Unsecured
---------- ------ ----- ------
Loans and
Mortgages Cards Overdrafts Combined Business(2) Total(4)
-------------- ------------- ------------- ------------- ------------- --------------
2021 GBPm% GBPm % GBPm% GBPm % GBPm% GBPm %
---------- ------ ----- ------ ----- ----- ----- ------ ----- ----- ------ ------
Stage 1 50,596 86.6% 4,100 88.1% 1,048 94.0% 5,148 89.2% 5,672 68.0% 61,416 84.7%
Stage 2 -
total 7,192 12.3% 497 10.7% 56 5.0% 553 9.6% 2,433 29.2% 10,178 14.0%
---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Stage 2:
0 DPD 6,918 11.9% 466 10.1% 46 4.2% 512 8.9% 2,390 28.7% 9,820 13.5%
Stage 2:
< 30 DPD 128 0.2% 16 0.3% 5 0.4% 21 0.4% 25 0.3% 174 0.2%
Stage 2:
> 30 DPD 146 0.2% 15 0.3% 5 0.4% 20 0.3% 18 0.2% 184 0.3%
---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Stage 3(3) 653 1.1% 58 1.2% 11 1.0% 69 1.2% 235 2.8% 957 1.3%
---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
58,441 100.0% 4,655 100.0% 1,115 100.0% 5,770 100.0% 8,340 100.0% 72,551 100.0%
---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
ECLs
Stage 1 4 4.6% 32 20.0% 9 26.5% 41 21.1% 66 29.6% 111 22.0%
Stage 2 -
total 64 73.6% 99 61.9% 19 55.9% 118 60.9% 120 53.8% 302 59.9%
---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Stage 2:
0 DPD 61 70.2% 82 51.3% 13 38.2% 95 49.0% 120 53.8% 276 54.8%
Stage 2:
< 30 DPD 1 1.1% 8 5.0% 2 5.9% 10 5.2% -- 11 2.1%
Stage 2:
> 30 DPD 2 2.3% 9 5.6% 4 11.8% 13 6.7% -- 15 3.0%
---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ----- ------ ------
Stage 3(3) 19 21.8% 29 18.1% 6 17.6% 35 18.0% 37 16.6% 91 18.1%
---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
87 100.0% 160 100.0% 34 100.0% 194 100.0% 223 100.0% 504 100.0%
---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Coverage
Stage 1 0.01% 0.85% 1.13% 0.91% 1.35% 0.18%
Stage 2 -
total 0.88% 22.12% 42.01% 23.92% 5.43% 3.02%
---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Stage 2:
0 DPD 0.87% 19.51% 33.66% 20.64% 5.48% 2.84%
Stage 2:
< 30 DPD 0.85% 58.36% 52.88% 57.27% 1.51% 6.90%
Stage 2:
> 30 DPD 1.36% 64.46% 99.65% 73.48% 2.85% 8.99%
---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
Stage 3(3) 2.81% 54.13% 64.02% 55.65% 17.31% 9.59%
---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
0.15% 3.79% 3.86% 3.80% 3.06% 0.70%
---------- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ ------ ------
(1) Excludes loans designated at FVTPL, balances due from customers on acceptances, accrued interest and deferred and unamortised fee income.
(2) Business and total coverage ratio excludes the guaranteed element of government-backed loans.
(3) Stage 3 includes POCI for gross loans and advances of GBP56m for Mortgages and GBP1m for Unsecured (2021: GBP67m and GBP2m respectively); and ECL of (GBP1m) for Mortgages and (GBP2m) for Unsecured (2021: GBPNil and (GBP2m) respectively).
(4) The COVID related PMAs held in 2021 were allocated across Stages 1 and 2 and have now been fully released. The cost of living PMAs are held in Stage 1 and the economic resilience PMA is primarily held in Stage 2.
Risk Management
Credit risk
Stage 2 balances
There can be a number of reasons that require a financial asset to be subject to a Stage 2 lifetime ECL calculation other than reaching the 30 DPD backstop. The following table highlights the relevant trigger point leading to a financial asset being classed as Stage 2:
Personal
---------------- ------ ------ ------
Loans and
Mortgages Cards Overdrafts Combined Business Total (3)
------------ ---------- ------------- ------------ ------------ ------------
2022 GBPm% GBPm % GBPm% GBPm % GBPm% GBPm %
---------------- ------ ---- ---- ------ ---- ------ ---- ------ --- ------ ----
PD deterioration 2,084 69% 401 52% 329 99% 730 66% 826 55% 3,640 64%
Forbearance 106 3% 9 1% 1 0% 10 1% 235 15% 351 6%
AFD or Watch
List(1) 6 0% - 0% - 0% - 0% 447 29% 453 8%
> 30 DPD 169 5% 24 3% 5 1% 29 3% 18 1% 216 4%
Other(2) 725 23% 340 44% - 0% 340 30% - 0% 1,065 18%
---------------- ------ ---- ---- ---- ------ ----- ------ ---- ------ ---- ------ ----
3,090 100% 774 100% 335 100% 1,109 100% 1,526 100% 5,725 100%
---------------- ------ ---- ---- ---- ------ ----- ------ ---- ------ ---- ------ ----
ECLs
PD deterioration 18 55% 73 47% 23 92% 96 53% 26 47% 140 53%
Forbearance 5 16% 3 2% - 0% 3 2% 12 22% 20 7%
AFD or Watch
List(1) - 0% - 0% - 0% - 0% 17 31% 17 6%
> 30 DPD 2 6% 13 8% 2 8% 15 8% - 0% 17 6%
Other(2) 7 23% 67 43% - 0% 67 37% - 0% 74 28%
---------------- ------ ---- ---- ---- ------ ----- ------ ---- ------ ---- ------ ----
32 100% 156 100% 25 100% 181 100% 55 100% 268 100%
---------------- ------ ---- ---- ---- ------ ----- ------ ---- ------ ---- ------ ----
Personal
---------------- ----- ----- ------
Loans and
Mortgages Cards Overdrafts Combined Business Total (3)
----------- ---------- ------------- ---------- ----------- ------------
2021 GBPm% GBPm % GBPm% GBPm % GBPm% GBPm %
---------------- ----- ---- ---- ------ ---- ---- ---- ----- --- ------ ----
PD deterioration 6,100 85% 300 60% 48 86% 348 63% 1,445 59% 7,893 78%
Forbearance 176 2% 11 2% 3 5% 14 3% 374 15% 564 6%
AFD or Watch
List(1) 11- - - -- - - 584 24% 595 6%
> 30 DPD 146 2% 15 3% 5 9% 20 4% 18 1% 184 2%
Other(2) 759 11% 171 35% -- 171 30% 12 1% 942 8%
---------------- ----- ---- ---- ---- ------ ---- ---- ---- ----- ---- ------ ----
7,192 100% 497 100% 56 100% 553 100% 2,433 100% 10,178 100%
---------------- ----- ---- ---- ---- ------ ----- ---- ---- ----- ---- ------ ----
ECLs
PD deterioration 43 67% 51 52% 14 74% 65 55% 52 43% 160 53%
Forbearance 4 6% 2 2% 1 5% 3 3% 24 20% 31 10%
AFD or Watch
List(1) -- - - -- - - 32 27% 32 11%
> 30 DPD 2 3% 9 9% 4 21% 13 11% -- 15 5%
Other(2) 15 24% 37 37% -- 37 31% 12 10% 64 21%
---------------- ----- ---- ---- ---- ------ ---- ---- ---- ----- ---- ------ ----
64 100% 99 100% 19 100% 118 100% 120 100% 302 100%
---------------- ----- ---- ---- ---- ------ ----- ---- ---- ----- ---- ------ ----
(1) Approaching Financial Difficulty (AFD) and Watch markers are early warning indicators of Business customers who may be approaching financial difficulties. If these indicators are not reversed, they may lead to a requirement for more proactive management by the Group.
(2) Other includes high indebtedness, county court judgments and previous arrears, as well as a number of smaller value drivers.
(3) The COVID related PMAs held in 2021 were allocated to Stage 2 have now been fully released. The economic resilience PMA is primarily held in Stage 2.
Risk Management
Credit risk
Credit risk exposure and ECL, by internal PD rating, by IFRS 9 stage allocation
The distribution of the Group's credit exposures and ECL by internal PD rating is analysed below:
Stage 1 Stage 2 Stage 3(1) Total(2)
------------- -------------- -------------- -------------- --------------
Lending ECL Lending ECL Lending ECL Lending ECL
2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ------- ----- ------- ----- ------- ----- ------- -----
Mortgages PD range
Strong 0 - 0.74 52,184 6 1,864 10 - - 54,048 16
0.75 -
Good 2.49 2,302 2 641 5 - - 2,943 7
2.50 -
Satisfactory 99.99 305 2 585 17 - - 890 19
Default 100 - - - - 583 14 583 14
------------- -------- ------- ----- ------- ----- ------- ----- ------- -----
Total 54,791 10 3,090 32 583 14 58,464 56
------------- -------- ------- ----- ------- ----- ------- ----- ------- -----
Unsecured
Strong 0 - 2.49 4,795 42 413 26 - - 5,208 68
2.50 -
Good 9.99 524 20 459 72 - - 983 92
10.00
Satisfactory - 99.99 5 1 237 83 - - 242 84
Default 100 - - - - 80 40 80 40
------------- -------- ------- ----- ------- ----- ------- ----- ------- -----
Total 5,324 63 1,109 181 80 40 6,513 284
------------- -------- ------- ----- ------- ----- ------- ----- ------- -----
Business
Strong 0 - 0.74 4,808 5 719 17 - - 5,527 22
0.75 -
Good 9.99 1,455 7 751 31 - - 2,206 38
10.00
Satisfactory - 99.99 7 - 56 7 - - 63 7
Default 100 - - - - 373 50 373 50
------------- -------- ------- ----- ------- ----- ------- ----- ------- -----
Total 6,270 12 1,526 55 373 50 8,169 117
------------- -------- ------- ----- ------- ----- ------- ----- ------- -----
Stage 1 Stage 2 Stage 3(1) Total(2)
------------- -------------- -------------- -------------- --------------
Lending ECL Lending ECL Lending ECL Lending ECL
2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- ------- ----- ------- ----- ------- ----- ------- -----
Mortgages PD range
Strong 0 - 0.74 46,984 3 4,555 19 - - 51,539 22
0.75
Good - 2.49 3,313 1 1,888 21 - - 5,201 22
2.50
Satisfactory - 99.99 299 - 749 24 - - 1,048 24
Default 100 - - - - 653 19 653 19
------------- -------- ------- ----- ------- ----- ------- ----- ------- -----
Total 50,596 4 7,192 64 653 19 58,441 87
------------- -------- ------- ----- ------- ----- ------- ----- ------- -----
Unsecured
Strong 0 - 2.49 4,730 28 85 9 - - 4,815 37
2.50
Good - 9.99 411 12 325 54 - - 736 66
10.00
Satisfactory - 99.99 7 1 143 55 - - 150 56
Default 100 - - - - 69 35 69 35
------------- -------- ------- ----- ------- ----- ------- ----- ------- -----
Total 5,148 41 553 118 69 35 5,770 194
Business
Strong 0 - 0.74 3,298 13 505 53 - - 3,803 66
0.75
Good - 9.99 2,374 53 1,823 40 - - 4,197 93
10.00
Satisfactory - 99.99 - - 105 27 - - 105 27
Default 100 - - - - 235 37 235 37
------------- -------- ------- ----- ------- ----- ------- ----- ------- -----
Total 5,672 66 2,433 120 235 37 8,340 223
------------- -------- ------- ----- ------- ----- ------- ----- ------- -----
(1) Stage 3 includes POCI for gross loans and advances of GBP56m for Mortgages and GBP1m for Unsecured (2021: GBP67m and GBP2m respectively); and ECL of (GBP1m) for Mortgages and (GBP2m) for Unsecured (2021: GBPNil and (GBP2m) respectively).
(2) The COVID related PMAs held in 2021 were allocated across Stages 1 and 2 and have now been fully released. The cost of living PMAs are held in Stage 1 and the economic resilience PMA is primarily held in Stage 2.
Risk Management
Credit risk
In terms of credit quality, 97% (2021: 97%) of the loan commitments and financial guarantee contracts were classed as either 'Good' or 'Strong' under the Group's internal PD rating scale.
Movement in gross lending balances and impairment loss allowance
The following table shows the changes in the loss allowance and gross carrying value of the portfolios. Values are calculated using the individual customer account balances, and the stage allocation is taken as at the end of each month. The monthly position of each account is aggregated to report a net closing position for the period, thereby incorporating all movements an account has made during the year.
Stage 1 Stage 2 Stage 3(1)
-------------------------------------- --------------- --------------- ------------- -------- --------------
Gross ECL Gross ECL Gross ECL Total
loans GBPm loans GBPm loans GBPm gross Total
GBPm GBPm GBPm loans provisions(4)
2022 GBPm GBPm
-------------------------------------- -------- ----- -------- ----- ------ ----- -------- --------------
Opening balance at 1 October
2021 61,416 111 10,178 302 957 91 72,551 504
Transfers from Stage 1 to Stage
2 (8,287) (45) 8,227 294 - - (60) 249
Transfers from Stage 2 to Stage
1 10,218 27 (10,282) (145) - - (64) (118)
Transfers to Stage 3 (91) - (562) (84) 650 101 (3) 17
Transfers from Stage 3 42 - 137 8 (187) (12) (8) (4)
-------------------------------------- -------- ----- -------- ----- ------ ----- -------- --------------
Changes to model methodology 443 1 (442) (8) - - 1 (7)
New assets originated or purchased(2) 22,162 187 2,055 159 187 32 24,404 378
Repayments and other movements(3) (3,434) (42) (155) (65) 56 (15) (3,533) (122)
Repaid or derecognised(3) (16,084) (154) (3,431) (193) (498) (101) (20,013) (448)
-------------------------------------- -------- ----- -------- ----- ------ ----- -------- --------------
Write-offs - - - - (129) (129) (129) (129)
Recoveries - - - - - 30 - 30
Individually assessed impairment
charge - - - - - 107 - 107
-------------------------------------- -------- ----- -------- ----- ------ ----- -------- --------------
Closing balance at 30 September
2022 66,385 85 5,725 268 1,036 104 73,146 457
-------------------------------------- -------- ----- -------- ----- ------ ----- -------- --------------
Stage 1 Stage 2 Stage 3(1)
-------------------------------------- --------------- --------------- ------------- -------- --------------
Gross ECL Gross ECL Gross ECL Total
loans GBPm loans GBPm loans GBPm gross Total
GBPm GBPm GBPm loans provisions(4)
2021 GBPm GBPm
-------------------------------------- -------- ----- -------- ----- ------ ----- -------- --------------
Opening balance at 1 October
2020 59,219 136 12,844 465 862 134 72,925 735
Transfers from Stage 1 to Stage
2 (11,131) (62) 11,076 389 - - (55) 327
Transfers from Stage 2 to Stage
1 10,397 58 (10,484) (284) - - (87) (226)
Transfers to Stage 3 (115) (1) (623) (91) 734 108 (4) 16
Transfers from Stage 3 33 - 217 23 (253) (25) (3) (2)
-------------------------------------- -------- ----- -------- ----- ------ ----- -------- --------------
Changes to model methodology - - - - - - - -
New assets originated or purchased(2) 19,276 206 1,621 158 132 22 21,029 386
Repayments and other movements(3) (2,955) (59) (933) (140) (16) (72) (3,904) (271)
Repaid or derecognised(3) (13,308) (167) (3,540) (218) (376) (55) (17,224) (440)
-------------------------------------- -------- ----- -------- ----- ------ ----- -------- --------------
Write-offs - - - - (126) (126) (126) (126)
Recoveries - - - - - 26 - 26
Individually assessed impairment
charge - - - - - 79 - 79
-------------------------------------- -------- ----- -------- ----- ------ ----- -------- --------------
Closing balance at 30 September
2021 61,416 111 10,178 302 957 91 72,551 504
-------------------------------------- -------- ----- -------- ----- ------ ----- -------- --------------
(1) Stage 3 includes POCI for gross loans and advances of GBP56m for Mortgages and GBP1m for Unsecured (2021: GBP67m and GBP2m respectively), and ECL of (GBP1m) for Mortgages and (GBP2m) for Unsecured (2021: GBPNil and (GBP2m) respectively). Nil for Business in both periods.
(2) Includes assets where the term has ended, and a new facility has been provided.
(3) 'Repayments' comprises payments made on customer lending which are not yet fully paid at the reporting date and the customer arrangement remains live at that date. 'Repaid' refers to payments made on customer lending which is either fully repaid or derecognised by the reporting date and the customer arrangement is therefore closed at that date.
(4) The COVID related PMAs held in 2021 were allocated across Stages 1 and 2 and have now been fully released. The cost of living PMAs are held in Stage 1 and the economic resilience PMA is primarily held in Stage 2.
In addition to the above on-balance sheet position, the Group also has GBP19,359m of loan commitments and financial guarantee contracts (2021: GBP17,121m) of which GBP18,454m (95.3%) are held under Stage 1, GBP865m in Stage 2 and GBP40m in Stage 3 (2021: GBP16,001m (93.5%) held under Stage 1, GBP1,090m in Stage 2 and GBP30m in Stage 3). ECLs of GBP3m (2021: GBP8m) are included in the table above, of which GBP1m (2021: GBP2m) is held under Stage 1 and GBP2m (2021: GBP6m) under Stage 2.
Risk Management
Credit risk
Against the backdrop of a deteriorating UK economy, credit quality has remained solid throughout the year, with the overall portfolio performing well and no significant individually assessed provisions raised.
During the second half of 2022, refinements to the staging criteria in the Business portfolio were implemented to further enhance the calculation and align it more closely to the underlying level of credit risk inherent within the Business portfolio. The impact moved c. GBP443m of loans from Stage 2 to Stage 1, leading to a modelled ECL release of c. GBP7m, and an approx. 22% reduction in the balance of business loans in Stage 2.
The contractual amount outstanding on loans and advances that were written off during the reporting period, or still subject to enforcement activity was GBP4.3m (2021: GBP2.6m). The Group has not purchased any lending assets in the year (2021: none). Further information on staging profile is provided at a portfolio level in the respective portfolio performance section on the following pages.
Mortgage credit performance
The table below presents key information on the asset quality of the Group's Mortgage portfolio and should be read in conjunction with the supplementary data presented in the following pages of this section.
Breakdown of Mortgage portfolio
Gross Modelled Total Average
lending & IA ECL PMA ECL Net lending Coverage LTV
2022 GBPm GBPm GBPm GBPm GBPm % %
------------------------ -------- --------- ----- ----- ----------- -------- -------
Residential - capital
repayment 36,417 13 5 18 36,399 0.05% 54.2%
Residential - interest
only 7,041 3 1 4 7,037 0.05% 45.4%
BTL 15,006 6 28 34 14,972 0.22% 52.4%
------------------------ -------- --------- ----- ----- ----------- -------- -------
Total Mortgage portfolio 58,464 22 34 56 58,408 0.09% 52.7%
------------------------ -------- --------- ----- ----- ----------- -------- -------
2021
Residential - capital
repayment 35,192 19 21 40 35,152 0.10% 57.2%
Residential - interest
only 8,341 6 2 8 8,333 0.10% 47.2%
BTL 14,908 8 31 39 14,869 0.24% 54.8% ------------------------ -------- --------- ----- ----- ----------- -------- ------- Total Mortgage portfolio 58,441 33 54 87 58,354 0.15% 55.3% ------------------------ -------- --------- ----- ----- ----------- -------- -------
Mortgage lending has remained flat on a net basis at GBP58.5bn (2021: GBP58.4bn) as the Group continued to prioritise margin in an increasingly competitive environment.
The portfolio continues to evidence solid underlying credit performance, with the majority (98%) of lending not yet past due at the balance sheet date (2021: 98%), and 94% of loans held in Stage 1 (2021: 87%). The successful return to normal payment patterns of customers taking advantage of COVID-19 payment holiday arrangements last year, drove the migration in balances from Stage 2 to Stage 1. A significant proportion of the portfolio is rated Strong at the balance sheet date (92% compared to 88% at 30 September 2021), and the volume and value of loans in forbearance has reduced to 4,636/GBP640m from 6,743/GBP830m, primarily due to customers successfully completing the forbearance reporting probation period and returning to fully performing status.
Stage 3 balances have remained low at 1.0% (2021: 1.1%) and 93% of the portfolio has an LTV of less than 75% (2021: 87%), with the weighted average LTV further reducing in the year to 52.7% (2021: 55.3%). All of these key metrics evidence a high quality mortgage portfolio, with relatively low risk of default, driven by sound lending decisions and underwriting criteria. Further detail on LTV bandings and forbearance measures is provided on the following pages.
The stability in the Mortgage portfolio metrics together with the improvement in the economic assumptions, such as house prices, have contributed to a release of GBP9m in the modelled ECL, taking the total modelled and IA ECL provision to GBP22m (2021: GBP33m). Total PMAs have similarly reduced in the period, as detailed below, from GBP54m to GBP34m. The total Mortgage portfolio impairment provision is GBP56m (2021: GBP87m).
The Group had previously introduced a PMA for payment holidays in 2020 at the outset of the COVID-19 pandemic; this PMA, which was GBP22m at 30 September 2021, has now been fully released as customers have successfully exited payment holiday arrangements and returned to normal repayment patterns. Due to the uncertain macroeconomic environment, however, a new PMA of GBP6m has been introduced in response to the cost of living crisis, to reflect the potential impact on debt affordability from rising base rates and other inflationary impacts. The PMA reflects the potential impact on ECL in the event of a monthly payment shock to household finances, applied to customers in Stage 1 that are not currently, or otherwise showing signs of financial difficulty.
Asset quality metrics for the BTL mortgage book remain robust, but the Group continues to hold a prudent level of provisioning for this customer cohort, with the related PMA held broadly stable at GBP25m (2021: GBP28m). Other small PMAs totalling GBP4m (2021: GBP4m) have been retained, taking total PMA's held to GBP34m, down from GBP54m at 30 September 2021.
The release of modelled provisions and PMAs has resulted in an impairment credit of GBP30m in the income statement (2021: credit of GBP44m) and associated cost of risk of (4)bps (2021: (7)bps). While the total book coverage has reduced in the year to 9bps, it remains higher than the pre-pandemic level of 7bps.
Risk Management
Credit risk
Collateral
The quality of the Group's Mortgage portfolio can be considered in terms of the average LTV of the portfolio and the staging of the portfolio, as set out in the following tables:
Average LTV of Mortgage portfolio by staging
Stage 1 Stage 2 Stage 3(2) Total(3)
-------
2022 Loans ECL Loans ECL Loans ECL Loans ECL
LTV(1) GBPm % GBPm GBPm % GBPm GBPm % GBPm GBPm % GBPm
------- ------- ---- ------ ---- ----- ----- ---- ----- ------- ---- -----
Less
than
50% 23,069 43% 2 1,659 54% 3 288 49% 2 25,016 43% 7
50% to
75% 27,452 50% 5 1,270 41% 19 242 42% 2 28,964 50% 26
76% to
80% 2,412 4% 1 103 3% 3 17 3% 1 2,532 4% 5
81% to
85% 1,108 2% 1 26 1% 1 11 2% 1 1,145 2% 3
86% to
90% 547 1% 1 25 1% 1 6 1% - 578 1% 2
91% to
95% 154 - - 4 - 1 8 1% 1 166 - 2
96% to
100% 16 - - - - - 3 1% - 19 - -
Greater
than
100% 33 - - 3 - 4 8 1% 7 44 - 11
------- ------- ---- ----- ------ ---- ----- ----- ---- ----- ------- ---- -----
54,791 100% 10 3,090 100% 32 583 100% 14 58,464 100% 56
------- ------- ---- ----- ------ ---- ----- ----- ---- ----- ------- ---- -----
2021 Stage 1 Stage 2 Stage 3(2) Total(3)
LTV(1)
-------
Loans % ECL Loans % ECL Loans % ECL Loans % ECL
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------- ------ ---- ----- ---- ----- ----- ---- ----- ------ ---- -----
Less
than
50% 19,907 39% 1 2,268 32% 6 274 41% 2 22,449 38% 9
50% to
75% 24,383 49% 1 3,648 51% 37 256 39% 3 28,287 49% 41
76% to
80% 3,123 6% 1 729 10% 9 49 8% 1 3,901 7% 11
81% to
85% 2,346 5% 1 426 6% 6 30 5% 1 2,802 5% 8
86% to
90% 715 1% - 102 1% 3 17 3% 1 834 1% 4
91% to
95% 79 - - 7 - - 8 1% 1 94 - 1
96% to
100% 8 - - 2 - - 5 1% - 15 - -
Greater
than
100% 35 - - 10 - 3 14 2% 10 59 - 13
------- ------ ---- ----- ----- ---- ----- ----- ---- ----- ------ ---- -----
50,596 100% 4 7,192 100% 64 653 100% 19 58,441 100% 87
------- ------ ---- ----- ----- ---- ----- ----- ---- ----- ------ ---- -----
(1) LTV of the Mortgage portfolio is defined as Mortgage portfolio weighted by balance. The portfolio is indexed using the MIAC Acadametrics indices at a given date.
(2) Stage 3 includes GBP56m (2021: GBP67m) of POCI gross loans and advances and (GBP1m) ECL (2021: GBPNil).
(3) The payment holiday PMA held in 2021 was allocated to Stage 2 and has now been fully released. The cost of living PMA is held in Stage 1.
The Mortgage portfolio remains highly secured with 92.3% of mortgages, by loan value, having an indexed LTV of less than 75% (2021: 86.8%), and an average portfolio LTV of 52.7% (2021: 55.3%). New lending has increased the value of loans in Stage 1 with an LTV between 91% to 95%.
Forbearance
A key indicator of underlying Mortgage portfolio health is the level of loans subject to forbearance measures. Forbearance can occur when a customer experiences longer-term financial difficulty. In such circumstances, the Group considers the customer's individual circumstances, uses judgement in assessing whether there has been a SICR, or if an impairment or default event has occurred, and then applies tailored forbearance measures in order to support the customer in a route to stability. Customers may potentially be subject to more than one forbearance strategy at any one time where this is considered to be the most appropriate course of action.
Risk Management
Credit risk
The table below summarises the level of forbearance in respect of the Group's Mortgage portfolio at each balance sheet date. All balances subject to forbearance are classed as either Stage 2 or Stage 3 for ECL purposes.
Impairment allowance
Total loans and advances on loans and advances
subject subject to forbearance
to forbearance measures measures
-------------------------- -------------------------------- -------------------------
Gross
carrying Impairment
Number amount % of total allowance Coverage
2022 of loans GBPm portfolio GBPm %
-------------------------- --------- --------- ---------- ------------- ----------
Formal arrangements 1,145 137 0.23% 8.6 6.23%
Temporary arrangements 518 82 0.14% 4.4 5.38%
Payment arrangement 1,211 133 0.23% 0.6 0.49%
Payment holiday 381 47 0.08% 0.1 0.27%
Interest only conversion 1,193 225 0.39% 0.8 0.35%
Term extension 66 5 0.01% - 0.45%
Other 14 1 - - 0.92%
Legal 108 10 0.02% 0.3 2.42%
-------------------------- --------- --------- ---------- ------------- ----------
Total mortgage forbearance 4,636 640 1.10% 14.8 2.31% -------------------------- --------- --------- ---------- ------------- ---------- 2021 Formal arrangements 1,115 133 0.23 4.9 3.66 Temporary arrangements 675 100 0.17 6.8 6.81 Payment arrangement 1,865 176 0.30 2.3 1.30 Payment holiday 1,436 123 0.21 0.5 0.41 Interest only conversion 1,390 273 0.47 1.3 0.47 Term extension 127 12 0.02 0.1 0.57 Other 19 2 0.01 - 0.68 Legal 116 11 0.02 0.3 3.09 -------------------------- --------- --------- ---------- ------------- ---------- Total mortgage forbearance 6,743 830 1.43 16.2 1.95 -------------------------- --------- --------- ---------- ------------- ----------
As at 30 September 2022, forbearance totalled GBP640m (4,636 customers), a decrease from the 30 September 2021 position of GBP830m (6,743 customers). This level represents 1.10% of total mortgage balances (2021: 1.43%), with the decrease primarily driven by customers successfully completing the forbearance reporting probation period and returning to fully performing status.
When all other avenues of resolution, including forbearance, have been explored, the Group will take steps to repossess and sell underlying collateral. In 2022, there were 73 repossessions of which 7 were voluntary (2021: 33 including 13 voluntary). The number of repossessions has increased as court proceedings resume following the suspension during the COVID-19 pandemic. The Group remains committed to supporting the customer, and places the right outcome for them at the centre of this strategy.
Risk Management
Credit risk
IFRS 9 staging
The Group closely monitors the staging profile of the Mortgage portfolio over time, which can be indicative of general trends in book health. Movements in the staging profile of the portfolio are presented in the tables below.
Stage 1 Stage 2 Stage 3(1)
---------------------------------- -------------- -------------- ------------- ------- --------------
Gross ECL Gross ECL Gross ECL Total
loans GBPm loans GBPm loans GBPm gross Total
GBPm GBPm GBPm loans provisions(4)
2022 GBPm GBPm
---------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Opening balance at 1
October 2021 50,596 4 7,192 64 653 19 58,441 87
Transfers from Stage 1
to Stage 2 (5,854) (1) 5,821 55 - - (33) 54
Transfers from Stage 2
to Stage 1 8,820 3 (8,851) (55) - - (31) (52)
Transfers to Stage 3 (49) - (191) (5) 238 4 (2) (1)
Transfers from Stage 3 29 - 108 5 (140) (3) (3) 2
---------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Changes to model methodology - - - - - - - -
New assets originated
or purchased(2) 9,971 1 7 - 1 - 9,979 1
Repayments and other movements(3) (2,484) 4 (154) (23) (26) (3) (2,664) (22)
Repaid or derecognised(3) (6,238) (1) (842) (9) (142) (2) (7,222) (12)
---------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Write-offs - - - - (1) (1) (1) (1)
Recoveries - - - - - - - -
Individually assessed - - - - - - - -
impairment charge
---------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Closing balance at 30
September 2022 54,791 10 3,090 32 583 14 58,464 56
---------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Stage 1 Stage 2 Stage 3(1)
---------------------------------- -------------- -------------- ------------- ------- --------------
Total
Gross Gross Gross gross Total
loans ECL loans ECL loans ECL loans provisions(4)
2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Opening balance at 1
October 2020 49,970 14 8,166 95 516 22 58,652 131
Transfers from Stage 1
to Stage 2 (8,172) (4) 8,140 113 - - (32) 109
Transfers from Stage 2
to Stage 1 7,479 5 (7,522) (101) - - (43) (96)
Transfers to Stage 3 (64) - (367) (9) 429 7 (2) (2)
Transfers from Stage 3 24 - 108 13 (137) (4) (5) 9
---------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Changes to model methodology - - - - - - - -
New assets originated
or purchased(2) 9,662 2 76 2 2 - 9,740 4
Repayments and other movements(3) (2,141) (11) (405) (36) (38) (3) (2,584) (50)
Repaid or derecognised(3) (6,162) (2) (1,004) (13) (118) (2) (7,284) (17)
---------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Write-offs - - - - (1) (1) (1) (1)
Recoveries - - - - - 1 - 1
Individually assessed
impairment charge - - - - - (1) - (1)
---------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Closing balance at 30
September 2021 50,596 4 7,192 64 653 19 58,441 87
---------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
(1) Stage 3 includes POCI for gross loans and advances of GBP56m (2021: GBP67m) and ECL of (GBP1m) (2021: GBPNil).
(2) Includes assets where the term has ended, and a new facility has been provided.
(3) 'Repayments' comprises payments made on customer lending that are not yet fully paid at the reporting date and the customer arrangement remains live at that date. 'Repaid' refers to payments made on customer lending, which is either fully repaid or derecognised by the reporting date and the customer arrangement is therefore closed at that date.
(4) The payment holiday PMA held in 2021 was allocated to Stage 2 and has now been fully released. The cost of living PMA is held in Stage 1.
Despite economic uncertainty, the Mortgage portfolio continues to evidence strong performance and has benefited from positive house price movements. Coupled with the successful exit from payment holiday arrangements for those customers that took advantage of those measures during the pandemic, there has been a shift in balances from Stage 2 to Stage 1. The level of mortgage lending classed as Stage 1 increased from 86.6% in 2021 to 93.7%, with a corresponding decrease of assets in Stage 2 from 12.3% to 5.3%. Within the Stage 2 category, 4.7% of balances are not yet past due at the balance sheet date (2021: 11.9%), but falls within the Stage 2 classification predominantly due to PD deterioration. The proportion of mortgages classified as Stage 3 remains modest at 1.0% (2021: 1.1%).
These conditions have also contributed to an increase in assets classed as 'Strong' from 88% at 30 September 2021 to 92.4% at 30 September 2022, with over 97% (2021: 97%) of the Mortgage portfolio classed as 'Good' or 'Strong'.
The sustained quality in the internal PD ratings and high quality of collateral underpinning the book are key factors supporting the lower level of provision coverage.
Risk Management
Credit risk
Unsecured credit performance
The table below presents key information important for understanding the asset quality of the Group's Unsecured lending portfolio and should be read in conjunction with the supplementary data presented in the following pages of this section.
Breakdown of Unsecured credit portfolio
Gross Modelled Total Net
lending ECL PMA ECL lending Coverage
2022 GBPm GBPm GBPm GBPm GBPm %
--------------------------------- -------- -------- ----- ----- -------- --------
Credit cards 5,558 216 30 246 5,312 4.81%
Personal loans 925 32 2 34 891 3.57%
Overdrafts 30 4 - 4 26 12.57%
--------------------------------- -------- -------- ----- ----- -------- --------
Total Unsecured lending portfolio 6,513 252 32 284 6,229 4.66%
--------------------------------- -------- -------- ----- ----- -------- --------
2021
Credit cards 4,655 142 18 160 4,495 3.79%
Personal loans 1,082 14 17 31 1,051 3.57%
Overdrafts 33 3 - 3 30 11.14%
--------------------------------- -------- -------- ----- ----- -------- --------
Total Unsecured lending portfolio 5,770 159 35 194 5,576 3.80%
--------------------------------- -------- -------- ----- ----- -------- --------
Unsecured gross lending balances increased to GBP6.5bn (2021: GBP5.8bn) predominantly due to growth in credit card portfolio, while the personal loan portfolio continued to contract. The credit quality of the Unsecured portfolio remains high overall, with 97.9% of the portfolio in Stage 1 or Stage 2 not past due (2021: 98.1%) and a 1.2% in Stage 3 (2021: 1.2%). The level of customers in forbearance similarly remains low at 1.12% of the portfolio (2021: 1.30%).
Credit cards
Growth in the number of credit card accounts in the year of 20% has driven an increase in the lending balance of GBP0.9bn (21%). Average balances have remained fairly static throughout the year, as has the average level of facility utilisation. The credit quality of the cards portfolio remains high with 97.8% (2021: 98.2%) in stage 1 and stage 2 not past due, and a modest 1.3% in Stage 3 (2021: 1.2%).
While there has been minimal evidence of a deterioration in credit quality across the portfolio, as evidenced by these key metrics, the downturn in the broader UK economy has been reflected through the economic scenarios, resulting in an increase of GBP74m in the modelled ECL. Coverage of 481bps is consequently up 102bps from FY21, and is 139bps higher than pre-pandemic levels of 342bps.
The payment holiday PMAs introduced in response to COVID-19, which amounted to GBP4m for the cards book at 30 September 2021, have now been fully released. A new PMA has been established for cost-of-living shocks that are not yet fully observed and incorporated in the modelled ECL. This has been applied to a cohort of credit card customers who are susceptible to a payment shock, and has resulted in a GBP20m PMA. This has been allocated to Stage 1. A small number of previously held PMAs totalling GBP10m (2021: GBP14m) have also been retained.
Personal loans
While the personal loan portfolio represents only a small portion of our Unsecured and total Group portfolio, staging has shifted during the year with a reduction in Stage 1 balances from 94.0% to 64.1%, and a corresponding increase in Stage 2 not past due balances from 5.0% to 35.1%. This movement has had an impact on the staging profile for the whole Unsecured portfolio. This movement relates to personal lending made via the Group's JV arrangement with Salary Finance which has a cohort of customers who can be more susceptible to being impacted earlier, and harder, by cost of living shocks. During the year, the JV experienced an increased number of customers not maintaining scheduled loan repayments. Consequently, the Group has assessed the credit risk for this specific cohort of customers, and has now classified all lending with the JV (GBP318m) in Stage 2 (2021: GBP223m within Stage 1), together with an associated ECL of GBP19m (2021: GBPNil).
Loan payment holiday PMAs, which were GBP8m at 30 September 2021, were fully released in the year. A new PMA of GBP1m has been established for cost-of-living shocks. Other PMAs have fallen from GBP9m in the prior year to GBP1m at the balance sheet date.
Taking the modelled provisions and PMAs together for the full Unsecured portfolio, the total ECL provision increased to GBP284m at 30 September 2022 (2021: GBP194m), resulting in a charge to the income statement in the year of GBP178m (2021: credit of GBP32m) and an increase in coverage ratio of 86bps to 466bps (2021: 380bps).
Risk Management
Credit risk
Forbearance
The table below summarises the level of forbearance in respect of the Group's Unsecured lending portfolios at each balance sheet date. All balances subject to forbearance are classed as either Stage 2 or Stage 3 for ECL purposes.
Impairment
allowance on
loans and advances
Total loans and subject to
advances subject forbearance
to forbearance measures measures
----------------------------------- -------------------------------- ---------------------
Gross
carrying Impairment
Number amount % of total allowance Coverage
2022 of loans GBPm portfolio GBPm %
----------------------------------- --------- --------- ---------- ----------- --------
Credit card arrangements 15,872 62 1.19% 24.3 39.47%
Personal loan arrangements 638 3 0.56% 1.4 40.33%
Overdraft arrangements 56 - 0.04% - 30.76%
----------------------------------- --------- --------- ---------- ----------- --------
Total Unsecured lending forbearance 16,566 65 1.12% 25.7 39.51%
----------------------------------- --------- --------- ---------- ----------- --------
2021
Credit card arrangements 14,151 60 1.39% 23.9 39.88%
Personal loan arrangements 1,174 6 0.78% 3.3 49.61%
Overdraft arrangements 280 1 2.55% 0.4 51.89%
----------------------------------- --------- --------- ---------- ----------- --------
Total Unsecured lending forbearance 15,605 67 1.30% 27.6 40.98%
----------------------------------- --------- --------- ---------- ----------- --------
At 30 September 2022, credit cards forbearance totalled GBP62m (15,872 accounts), an increase from the 30 September 2021 position of GBP60m (14,151 accounts). This represents 1.19% of total credit cards balances (2021: 1.39%). The level of impairment coverage on forborne credit cards is stable at 39.5% (2021: 39.9%). Limited forbearance is exercised in relation to personal loans and overdrafts, with a reduction to GBP3m (0.54%) in the personal loans and overdrafts portfolio from GBP7m (0.85%) at 30 September 2021.
Risk Management
Credit risk
IFRS 9 staging
The Group closely monitors the staging profile of its Unsecured lending portfolio over time, which can be indicative of general trends in book health. Movements in the staging profile of the portfolio are presented in the tables below.
Stage 1 Stage 2 Stage 3(1)
---------------------------------------- -------------- ------------- ------------- ------ --------------
Total
Gross Gross Gross gross Total
loans ECL loans ECL loans ECL loans provisions(4)
2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ------- ----- ------ ----- ------ ----- ------ --------------
Opening balance at 1 October 2021 5,148 41 553 118 69 35 5,770 194
Transfers from Stage 1 to Stage 2 (1,051) (31) 1,059 210 - - 8 179
Transfers from Stage 2 to Stage 1 504 16 (523) (62) - - (19) (46)
Transfers to Stage 3 (19) - (116) (69) 139 83 4 14
Transfers from Stage 3 1 - 2 1 (8) (7) (5) (6)
---------------------------------------- ------- ----- ------ ----- ------ ----- ------ --------------
Changes to model methodology - - - - - - - -
New assets originated or purchased(2) 1,708 20 11 4 7 5 1,726 29
Repayments and other movements(3) (508) 26 166 (8) 104 (4) (238) 14
Repaid or derecognised(3) (459) (9) (43) (13) (117) (72) (619) (94)
---------------------------------------- ------- ----- ------ ----- ------ ----- ------ --------------
Write-offs - - - - (114) (114) (114) (114)
Recoveries - - - - - 26 - 26
Individually assessed impairment charge - - - - - 88 - 88
---------------------------------------- ------- ----- ------ ----- ------ ----- ------ --------------
Closing balance at 30 September 2022 5,324 63 1,109 181 80 40 6,513 284
---------------------------------------- ------- ----- ------ ----- ------ ----- ------ --------------
Stage 1 Stage 2 Stage 3(1)
---------------------------------------- ------------- ------------- ------------- ------ --------------
Total
Gross Gross Gross gross Total
loans ECL loans ECL loans ECL loans provisions(4)
2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ------ ----- ------ ----- ------ ----- ------ --------------
Opening balance at 1 October 2020 4,660 70 823 194 67 37 5,550 301
Transfers from Stage 1 to Stage 2 (954) (32) 951 209 - - (3) 177
Transfers from Stage 2 to Stage 1 859 21 (890) (113) - - (31) (92)
Transfers to Stage 3 (19) (1) (100) (68) 119 80 - 11
Transfers from Stage 3 2 - 3 2 (5) (5) - (3)
---------------------------------------- ------ ----- ------ ----- ------ ----- ------ --------------
Changes to model methodology - - - - - - - -
New assets originated or purchased(2) 1,319 17 38 6 1 - 1,358 23
Repayments and other movements(3) (493) (28) (217) (98) 15 (52) (695) (178)
Repaid or derecognised(3) (226) (6) (55) (14) (29) (25) (310) (45)
---------------------------------------- ------ ----- ------ ----- ------ ----- ------ --------------
Write-offs - - - - (99) (99) (99) (99)
Recoveries - - - - - 24 - 24
Individually assessed impairment charge - - - - - 75 - 75
---------------------------------------- ------ ----- ------ ----- ------ ----- ------ --------------
Closing balance at 30 September 2021 5,148 41 553 118 69 35 5,770 194
---------------------------------------- ------ ----- ------ ----- ------ ----- ------ --------------
(1) Stage 3 includes POCI for gross loans and advances of GBP1m (2021: GBP2m) and ECL of (GBP2m) (2021: (GBP2m).
(2) Includes assets where the term has ended, and a new facility has been provided.
(3) 'Repayments' comprises payments made on customer lending, which are not yet fully paid at the reporting date and the customer arrangement remains live at that date. 'Repaid' refers to payments made on customer lending, which is either fully repaid or derecognised by the reporting date and the customer arrangement is therefore closed at that date.
(4) The payment holiday PMA held in 2021 was allocated to Stage 2 and has now been fully released. The cost of living PMA is held in Stage 1.
The balance of unsecured lending in Stage 2 increased by 7.4% to 17.0% (2021: 9.6%), driven primarily by the observed deterioration of the Salary Finance lending. Of the Stage 2 category, 16.1% is not yet past due at the balance sheet date, but falls into the Stage 2 classification predominantly due to PD deterioration.
There has been a corresponding reduction in Stage 1 from 89.1% to 81.7%, while Stage 3 remains stable at 1.2% (2021: 1.2%).
Risk Management
Credit risk
Business credit performance
The table below presents key information on the asset quality of the Group's Business lending portfolio and should be read in conjunction with the supplementary data presented in the following pages of this section.
Breakdown of Business credit portfolio
Modelled
Gross Total & IA Total Net
lending Government(1) gross ECL PMA ECL lending Coverage(2)
2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
-------------------------------- -------- ------------- ------ -------- ----- ----- -------- -----------
Agriculture 1,392 66 1,458 5 1 6 1,452 0.45%
Business services 980 286 1,266 22 4 26 1,240 2.53%
Commercial Real Estate 597 10 607 3 - 3 604 0.54%
Government, health and education 1,008 54 1,062 8 2 10 1,052 0.95%
Hospitality 652 78 730 4 1 5 725 0.80%
Manufacturing 640 109 749 23 3 26 723 3.96%
Resources 133 8 141 3 1 4 137 2.37%
Retail and wholesale trade 330 128 458 7 1 8 450 2.51%
Transport and storage 291 56 347 4 1 5 342 1.44%
Other 1,089 262 1,351 20 4 24 1,327 2.11%
-------------------------------- -------- ------------- ------ -------- ----- ----- -------- -----------
Total Business portfolio 7,112 1,057 8,169 99 18 117 8,052 1.59%
-------------------------------- -------- ------------- ------ -------- ----- ----- -------- -----------
2021
-------------------------------- -------- ------------- ------ -------- ----- ----- -------- -----------
Agriculture 1,361 80 1,441 7 5 12 1,429 0.89%
Business services 943 337 1,280 21 27 48 1,232 4.82%
Commercial Real Estate 667 13 680 4 3 7 673 1.00%
Government, health and education 1,031 73 1,104 7 10 17 1,087 1.62%
Hospitality 563 105 668 6 7 13 655 2.29%
Manufacturing 556 144 700 22 21 43 657 6.93%
Resources 95 8 103 3 4 7 96 6.85%
Retail and wholesale trade 623 248 871 14 14 28 843 4.13%
Transport and storage 300 80 380 4 4 8 372 2.50%
Other 883 230 1,113 17 23 40 1,073 4.42%
-------------------------------- -------- ------------- ------ -------- ----- ----- -------- -----------
Total Business portfolio 7,022 1,318 8,340 105 118 223 8,117 3.06%
-------------------------------- -------- ------------- ------ -------- ----- ----- -------- -----------
(1) Government includes all lending provided to business customers under UK Government schemes including Bounce back loan scheme, Coronavirus business interruption loan scheme, Coronavirus large business interruption loan scheme and Recovery loan scheme (RLS). This excludes GBP66m (2021: GBPNil) of guarantee claim funds received from British Business Bank.
(2) Coverage ratio excludes the guaranteed element of government-backed loan schemes.
Gross Business lending reduced to GBP8.1bn (2021: GBP8.3bn) driven by reductions in government-guaranteed lending schemes as borrowers continued to repay balances, which more than offset underlying portfolio growth in the year. Excluding the government lending, core lending balances grew slightly as business activity, which had been generally subdued during the pandemic, grew in line with broader economic activity and improved business confidence. Growth is targeted to sectors and sub sectors where the Group has a well established expertise. Book mix remained fairly constant year on year as sector focused strategy was maintained, with lending to the agriculture, business services and government, health and education sectors continuing to account for almost half of the total book, at 46% in both years.
Business lending credit performance remained resilient, with balances in Stage 1 and Stage 2 not past due representing 95.1% of the portfolio (2021: 96.7%). The percentage of loans in Stage 1 increased to 76.8% (2021: 68.0%) largely due to changes applied to the SICR criteria (outlined on page 21) which, resulted in these customers migrating back to Stage 1. Across the portfolio 95% of lending was rated 'Strong' or 'Good' (2021: 96%). The previous Government interventions, including the ongoing loan schemes, continue to result in fewer customers entering forbearance; low levels were maintained with only 5.16% of the total portfolio being forborne at 30 September 2022 (2021: 5.82%).
Notwithstanding the strength of the portfolio, ongoing economic and political upheaval creates uncertainty over the potential for default occurring in the future. Key asset quality metrics continue to be monitored closely and a cautious approach to provisioning is being maintained. Stage 3 loans have increased to 4.6% driven primarily by bounce back loans (2021: 2.8%).
Despite these uncertainties, the refreshed macroeconomic scenarios have resulted in a small reduction of GBP6m in the modelled and IA provisions to GBP99m. At 30 September 2021, the Group recognised PMAs for sector stress (GBP80m) and PD neutralisation (GBP34m) together with other minor factors (GBP4m); each of these PMAs has been reviewed in the current year. While the removal of all COVID-19 restrictions is seen as a move away from the downside impact of the pandemic and is a rationale for a reduction in some sector stress, more recent geopolitical events in Ukraine and the cost of living crisis in the UK contribute to ongoing uncertainty over the impact that these broader economic conditions could have on UK businesses.
Risk Management
Credit risk
The models used to estimate ECL have been built and tested on the past two recessions, neither of which included the combination of historically high price inflation nor the significant shock to primary commodities and energy which are leading to economic stagnation at a time of modest interest rates and unemployment. Therefore, a new economic resilience PMA of GBP30m has been introduced. A small negative PMA of GBP12m is also held pending introduction of the Business LGD model which will be implemented in the coming year and other technical adjustments.
The above results in an overall provision of GBP117m (2021: GBP223m) and an impairment credit in the income statement of GBP96m for the year (2021: credit of GBP55m). Portfolio coverage has reduced to 159bps (2021: 306bps), reflecting the quality of the portfolio and little evidence of deterioration in asset quality to date.
Forbearance
Forbearance is considered to exist where customers are experiencing, or are about to experience financial difficulty, and the Group grants a concession on a non-commercial basis. The Group reports business forbearance at a customer level and at a value which incorporates all facilities and the related impairment allowance, irrespective of whether each individual facility is subject to forbearance. Authority to grant forbearance measures for business customers is held by the Group's Strategic Business Services unit and is exercised, where appropriate, based on detailed consideration of the customer's financial position and prospects.
Where a customer is part of a larger group, forbearance is exercised and reported across the Group at the individual entity level. Where modification of the terms and conditions of an exposure meeting the criteria for classification as forbearance results in derecognition of loans and advances from the balance sheet and the recognition of a new exposure, the new exposure shall be treated as forborne.
The tables below summarise the total number of arrangements in place and the loan balances and impairment provisions associated with those arrangements. All balances subject to forbearance are classed as either Stage 2 or Stage 3 for ECL purposes.
Impairment
allowance on
loans and advances
Total loans and subject to
advances subject forbearance
to forbearance measures measures
------------------------------------- -------------------------------- ---------------------
Gross
carrying Impairment
Number amount % of total allowance Coverage
2022 of loans GBPm portfolio GBPm %
------------------------------------- --------- --------- ---------- ----------- --------
Term extension 154 118 1.36% 4.9 4.18%
Payment holiday(1) 81 193 2.23% 32.6 16.86%
Reduction in contracted interest rate 2 1 0.01% 0.0 1.33%
Alternative forms of payment 0 0 0.00% 0.0 0.00%
Debt forgiveness 2 1 0.01% 0.5 97.05%
Refinancing 9 2 0.02% 0.1 5.14%
Covenant breach/reset/waiver 41 133 1.53% 5.4 4.03%
------------------------------------- --------- --------- ---------- ----------- --------
Total Business forbearance 289 448 5.16% 43.5 9.71%
------------------------------------- --------- --------- ---------- ----------- --------
2021
Term extension 188 196 2.27% 10.2 5.19%
Payment holiday(1) 86 130 1.51% 17.6 13.48%
Reduction in contracted interest rate 1 1 0.01% - 0.02%
Alternative forms of payment 1 13 0.15% 5.6 43.14%
Debt forgiveness 2 4 0.04% - 0.67%
Refinancing 10 3 0.04% 0.2 7.21%
Covenant breach/reset/waiver 44 155 1.80% 8.2 5.27%
------------------------------------- --------- --------- ---------- ----------- --------
Total Business forbearance 332 502 5.82% 41.8 8.31%
------------------------------------- --------- --------- ---------- ----------- --------
(1) In the prior year, payment holidays granted in line with regulation were not classified as forbearance due to the extenuating circumstances arising from COVID-19. The standard approach of classifying payment holidays as forbearance resumed in August 2021.
Business portfolio forbearance has reduced from GBP502m (332 customers) at 30 September 2021 to GBP448m (289 customers) at 30 September 2022. Forbearance remains an important metric, reflecting the volume and value of concessions granted to customers on a non-commercial basis. Changes to forbearance levels reflect the proportion of business customers requiring support on non-standard terms and evidencing financial difficulty. As a percentage of the Business portfolio, forborne balances have reduced to 5.16% (2021: 5.82%) with impairment coverage slightly increasing to 9.71% (2021: 8.31%). Most forbearance arrangements relate to term extensions allowing customers a longer term to repay obligations in full than initially contracted.
Customers within the forbearance portfolio have received GBP26m of COVID-19 related support loans: GBP13m CBIL, GBP4m BBL and GBP9m RLS.
The table includes a portfolio of financial assets at fair value. The gross value of fair value loans subject to forbearance as at 30 September 2022 is GBP4.7m (2021: GBP5.3m), representing 0.05% of the total business portfolio (2021: 0.06%). The credit risk adjustment on these amounts totalled GBP0.1m (2021: GBP0.1m). Coverage is 2.99% (2021: 2.32%).
Risk Management
Credit risk
IFRS 9 staging
The Group closely monitors the staging profile of its Business lending portfolio over time, which can be indicative of general trends in book health. Movements in the staging profile of the portfolio in the current and prior year are presented in the tables below.
Stage 1 Stage 2 Stage 3(3)
---------------------------------------- -------------- -------------- ------------- -------- --------------
Total
Gross Gross Gross gross Total
loans ECL loans ECL loans ECL loans provisions(4)
2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ------- ----- ------- ----- ------ ----- -------- --------------
Opening balance at 1 October 2021 5,672 66 2,433 120 235 37 8,340 223
Transfers from Stage 1 to Stage 2 (1,382) (13) 1,347 29 - - (35) 16
Transfers from Stage 2 to Stage 1 894 8 (908) (28) - - (14) (20)
Transfers to Stage 3 (23) - (255) (10) 273 14 (5) 4
Transfers from Stage 3 12 - 28 2 (39) (2) 1 -
---------------------------------------- ------- ----- ------- ----- ------ ----- -------- --------------
Changes to model methodology 443 1 (443) (8) - - - (7)
New assets originated or purchased(1) 10,483 166 2,037 155 179 27 12,699 348
Repayments and other movements(2) (442) (72) (167) (34) (22) (8) (631) (114)
Repaid or derecognised(2) (9,387) (144) (2,546) (171) (239) (27) (12,172) (342)
---------------------------------------- ------- ----- ------- ----- ------ ----- -------- --------------
Write-offs - - - - (14) (14) (14) (14)
Recoveries - - - - - 4 - 4
Individually assessed impairment charge - - - - - 19 - 19
---------------------------------------- ------- ----- ------- ----- ------ ----- -------- --------------
Closing balance at 30 September 2022 6,270 12 1,526 55 373 50 8,169 117
---------------------------------------- ------- ----- ------- ----- ------ ----- -------- --------------
Stage 1 Stage 2 Stage 3
---------------------------------------- -------------- -------------- ------------- ------- --------------
Total
Gross Gross Gross gross Total
loans ECL loans ECL loans ECL loans provisions(4)
2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Opening balance at 1 October 2020 4,589 52 3,855 176 279 75 8,723 303
Transfers from Stage 1 to Stage 2 (2,005) (26) 1,985 67 - - (20) 41
Transfers from Stage 2 to Stage 1 2,059 32 (2,072) (70) - - (13) (38)
Transfers to Stage 3 (32) - (156) (14) 186 21 (2) 7
Transfers from Stage 3 7 - 106 8 (111) (16) 2 (8)
---------------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Changes to model methodology - - - - - - - -
New assets originated or purchased(1) 8,295 187 1,507 150 129 22 9,931 359
Repayments and other movements(2) (321) (20) (311) (6) 7 (17) (625) (43)
Repaid or derecognised(2) (6,920) (159) (2,481) (191) (229) (28) (9,630) (378)
---------------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Write-offs - - - - (26) (26) (26) (26)
Recoveries - - - - - 1 - 1
Individually assessed impairment charge - - - - - 5 - 5
---------------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
Closing balance at 30 September 2021 5,672 66 2,433 120 235 37 8,340 223
---------------------------------------- ------- ----- ------- ----- ------ ----- ------- --------------
(1) Includes assets where the term has ended, and a new facility has been provided.
(2) 'Repayments' comprises payments made on customer lending which are not yet fully paid at the reporting date and the customer arrangement remains live at that date. 'Repaid' refers to payments made on customer lending which is either fully repaid or derecognised by the reporting date and the customer arrangement is therefore closed at that date.
(3) This excludes GBP66m (2021: GBPNil) of guarantee claim funds received from British Business Bank.
(4) The COVID related PMAs held in 2021 were allocated across Stages 1 and 2 and have now been fully released, the remaining Business PMAs are predominantly held in Stage 2.
The level of Business lending classed as Stage 1 has increased to 76.8% (2021: 68.0%), with a corresponding decrease of 10.5% in Stage 2 to 18.7% (2021: 29.2%), primarily driven by the revisions to the SICR triggers.
The majority (98%) of the portfolio in Stage 2 is not past due and is primarily in Stage 2 due to PD deterioration, in addition to proactive management measures such as early intervention, heightened monitoring and forbearance concessions. Stage 3 loans have increased to 4.6% driven primarily by bounce back loans (2021: 2.8%).
The proportion of assets classed as 'Strong' has increased to 68% (2021: 46%), with assets classed as 'Strong' or 'Good' now 95% (2021: 96%).
Risk Management
Credit risk
Other credit risks
Non-property related collateral
The following table shows the total non-property collateral held at 30 September 2022 in terms of cash, guarantees (guarantees are predominantly in relation to government-backed COVID-19 loans) and netting. The exposure amount shown below is the total gross exposure (net of credit provisions) for arrangements that have some form of associated collateral and is not the total exposure for each asset class, as this balance is disclosed elsewhere in this section.
Other
physical
Cash Guarantee Netting Debt securities collateral Receivables Total Exposure
2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ----- --------- ------- --------------- ----------- ----------- ------ --------
Financial assets at amortised
cost
Loans and advances to
customers
Business 7 970 237 - 464 501 2,179 2,397
Cash and balances with central
banks - - - - - - - -
Due from other banks - - - - - - - -
------------------------------ ----- --------- ------- --------------- ----------- ----------- ------ --------
Total 7 970 237 - 464 501 2,179 2,397
------------------------------ ----- --------- ------- --------------- ----------- ----------- ------ --------
Of which: Stage 3
Loans and advances to
customers
Business - 127 - - 1 11 139 140
------------------------------ ----- --------- ------- --------------- ----------- ----------- ------ --------
Other
physical
Cash Guarantee Netting Debt securities collateral Receivables Total Exposure
2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------- ----- --------- ------- --------------- ----------- ----------- ----- --------
Financial assets at amortised
cost
Loans and advances to customers
Business 9 1,235 202 - 442 507 2,395 2,621
Cash and balances with central
banks 5,894 - - - - - 5,894 8,093
Due from other banks - - - 287 - - 287 331
------------------------------- ----- --------- ------- --------------- ----------- ----------- ----- --------
Total 5,903 1,235 202 287 442 507 8,576 11,045
------------------------------- ----- --------- ------- --------------- ----------- ----------- ----- --------
Of which: Stage 3
Loans and advances to customers
Business - 34 - - 4 9 47 46
------------------------------- ----- --------- ------- --------------- ----------- ----------- ----- --------
The removal of cash collateral reflected within central governments or central banks is due to a change in reporting following CRR II implementation, where the Term Funding Scheme is now reported under CCR rules. The debt securities collateral previously reported within due from other banks was in relation to a sale and repurchase agreement (repo) which is no longer held by the Group.
Lending backed by government guarantees in response to COVID-19 are detailed within the Guarantee column.
Following PRA approval in 2020, the Group moved to recognise asset finance and invoice finance collateral, being other physical collateral and receivables respectively, as eligible collateral from a credit risk mitigation perspective in relation to the foundation internal ratings based (FIRB) approach.
Corporates is the largest sector utilising other risk mitigation techniques, with all five methods utilised dependent on credit quality. The extent to which these will be used is dependent on the specific circumstances of the customer.
The Group is exposed to credit risk on its other banking and Treasury-related activities, which are subject to mitigation and monitoring. No material ECL provisions are held for these exposures.
Risk Management
Credit risk
Offsetting of financial assets and liabilities
The Group reduces exposure to credit risk through central clearing for eligible derivatives, and daily posting of cash collateral on such transactions as detailed in note 3.6 to the financial statements. The amounts offset on the balance sheet, as shown below, represent derivatives and variation margin collateral with central clearing houses, which meet the criteria for offsetting under IAS 32. The table excludes financial instruments not subject to offset and that are formally subject to collateral arrangements (e.g. loans and advances).
The Group enters into derivatives and repurchase agreements with various counterparties, which are governed by industry-standard master netting agreements. The Group holds and provides collateral in respect of transactions covered by these agreements. The right to offset balances under these master netting agreements only arises in the event of non-payment or default and, as a result, these arrangements do not qualify for offsetting under IAS 32.
The net amounts presented in the table are not intended to represent the Group's exposure to credit risk, as the Group will use a wide range of strategies to mitigate credit risk in addition to netting and collateral.
Net amounts
not offset
on balance
sheet
------------------------------------- -------- --------- ----------- --------------------------------- ----------
Gross
amounts Net amounts Subject
offset presented to
on on master
Gross balance balance netting Cash collateral Net amount
amounts sheet(1) sheet agreements pledged/received(2) (3)
2022 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------- -------- --------- ----------- ----------- -------------------- ----------
Assets
Derivative financial instruments(4) 3,340 (2,998) 342 (46) (182) 114
Liabilities
Derivative financial instruments(4) 1,797 (1,469) 328 (46) (32) 250
Securities sold under repurchase
agreement 703 - 703 (703) - -
------------------------------------- -------- --------- ----------- ----------- -------------------- ----------
2021
------------------------------------- -------- --------- ----------- ----------- -------------------- ----------
Assets
Derivative financial instruments(4) 413 (273) 140 (76) (1) 63
Liabilities
Derivative financial instruments(4) 678 (469) 209 (76) (50) 83
------------------------------------- -------- --------- ----------- ----------- -------------------- ----------
(1) The net balance of GBP1,529m (2021: GBP196m) relates to variation margin offset under IAS 32 and reflected on other balance sheet lines.
(2) Cash collateral amounts not offset under IAS 32 in respect of derivatives with other banks are included within due from and due to other banks. Cash collateral amounts not offset under IAS 32 in respect of derivative with central clearing houses is included within other assets and other liabilities.
(3) Cash collateral amounts are limited to the net balance sheet exposure in order to exclude any over collateralisation. In addition to cash collateral, the Group has pledged securities collateral in respect of derivative transactions subject to master netting agreements of GBP594m (2021: GBP274m). This is not offset under IAS 32 or presented as collateral on the balance sheet.
(4) Derivative financial instruments comprise both trading and hedging derivative assets and liabilities.
Macroeconomic assumptions, scenarios, and weightings
The Group's ECL allowance at 30 September 2022 was GBP457m (2021: GBP504m).
Macroeconomic assumptions
The Group engages Oxford Economics to provide a wide range of future macroeconomic assumptions, which are used in the scenarios over the five-year forecast period, reflecting the best estimate of future conditions under each scenario outcome. The macroeconomic assumptions were provided by Oxford Economics on 1 September 2022 and changes in macroeconomic assumptions between 1 September 2022 and 30 September 2022 have been considered as part of the PMAs. The Group has identified the following key macroeconomic drivers as the most significant inputs for IFRS 9 modelling purposes: UK GDP growth, inflation, house prices, base rates, and unemployment rates. The external data provided is assessed and reviewed on a quarterly basis to ensure appropriateness and relevance to the ECL calculation, with more frequent updates provided as and when the circumstances require them. Further adjustments supplement the modelled output when it is considered that not all the risks identified in a product segment have been accurately reflected within the models, or for other situations where it is not possible to provide a modelled outcome.
As the UK economy gradually recovered from the impact of COVID-19, the outlook continues to be as uncertain than it was at this point in 2021. Recent (and further anticipated) bank base rate rises, concerns over rising energy prices (despite recent UK Government announcements on the assistance it will provide customers), the increase in national insurance contributions, and the headwinds from higher inflation have all had an impact on household incomes in 2022. The potential impact on the UK economy of the Russian invasion of Ukraine remains uncertain, but as the Group has no direct lending in that region, it is hoped that any impact will be modest and short term. Against this fast moving and evolving environment, the Group has continued to assess the possible IFRS 9 economic scenarios to select appropriate forecasts and weightings. The selection of scenarios and the appropriate weighting to apply are considered and debated by an internal review panel quarterly with final proposed recommendations for use in the IFRS 9 models made to ALCO for formal approval. The three scenarios selected, together with the weightings applied, have been updated to reflect the current economic environment and are:
30 Sept 30 Sept
2022 2021
Scenario (%) (%)
---------- ------- -------
Upside 10 15
Base 55 50
Downside 35 35
---------- ------- -------
Risk Management
Credit risk
The Group continue to select three scenarios, with the largest weighting applied to the base scenario. In the current year, there is a 5% shift in the weightings from the Upside scenario towards the Base scenario, reflecting a lesser degree of confidence in the Upside scenario over the short to medium term as a result of the updated macroeconomic assumptions. The Group's current weighting applied to the Downside scenario is appropriate when considered in the context of the overall scenario weightings applied and remains unchanged from the previous year.
Upside (10%)(1)
-- GDP increased sharply by 8.7% in the first quarter of 2022 (Q1 2022 v Q1 2021), before slowing down to a c.2.0%-3.0% increase in each of the remaining quarters in 2022 against the 2021 positions. Overall year-on-year growth in 2022 is forecast at 3.9%, with a slight decrease to 2.8% in 2023, before rising slightly in 2024 and 2025 and reverting to a more modest increase in 2026.
-- Inflation rises steeply and peaks at 12.9% in Q4 2022 (and lasting into Q1 2023) from a low base of 0.6% at Q1 2021. Inflation reverts back but remains high for the remainder of 2023, falling to 2.0% in Q2 2024 and sub 2.0% from the following quarter for the remaining forecast period.
-- BoE base rate rises are anticipated throughout 2022 and are expected to continue into 2023, peaking at 3.0% in Q2 2023 and remaining there for the rest of 2023. Slight declines are expected throughout 2024, reaching 2.3% in Q4 2024 and continue at that rate for the remainder of the forecast period.
-- HPI Q4 annual growth of 8.3% in 2022, declining to (2.3%) in 2023, before rising again over the next three years finishing in 2026 with a year on year growth of 6.5%.
-- Unemployment peaks in Q3 2023, at 4.3%, and drops gradually to 3.8% by Q4 2024. From then, there is no significant movement over the remaining forecast period, reaching 3.6% in Q1 2026 where it remains until the end of 2026.
(1) The time periods referenced in this section relate to calendar years unless otherwise stated.
Base (55%)
-- GDP increased sharply by 8.7% in the first quarter of 2022 (Q1 2022 v Q1 2021) before contracting in Q2 2022, with overall year-on-year growth in 2022 forecast at 3.6%, and falling to 0.3% in 2023. GDP recovers over the remaining forecast period at between 2.1% and 2.7%.
-- Inflation peaks at 12.7% in Q4 2022 before recovering and reverting to under 1% by Q1 2024. Inflation rises slightly but remains under 2% from Q1 2026 for the remaining forecast period.
-- BoE base rate hits a high of 2.5% in Q1 2023 and steadily declines over the forecast period reaching 1.8% in Q4 2023 and remaining there until the end of 2025. A further reduction to 1.7% is anticipated in Q1 2026 and remains at that level for the remainder of the year.
-- HPI steadily rises to Q4 2022 before modestly reverting from then until Q4 2024 when it rebounds slowly each quarter thereafter until the end of the forecast period. Overall, HPI Q4 2022 annual growth of 6.8%, which regresses to (4.6%) in 2023 and remains negative into 2024, before reverting to positive growth in 2025 and finishing 2026 back up at 6.7%.
-- Unemployment peaks at 4.7% in Q3 2023 and drops to 4.1% by Q4 2024. From then, there is no significant movement with unemployment averaging just under 4% in 2025, and steadily declining and reaching 3.7% for the final two quarters of 2026.
Downside (35%)
-- GDP increased sharply to 8.7% (Q1 2022 v Q1 2021) before turning negative for the final quarter of 2022 to (2.8%) (Q4 2022 v Q4 2021), and remains sluggish over the remaining forecast period. The overall year-on-year growth is 2.6% in 2022, falling to (8.9%) in 2023, before reverting to sluggish growth of 0.8% in 2024, rising to 2.1% for the remaining forecast period.
-- Inflation hits 11.9% in Q4 2022 before declining and turning negative by Q4 2023, and remains negative for the first three quarters of 2024. From there, inflation rises steadily each quarter reaching 1.7% in Q3 2026 and remains at this level for Q4 2026.
-- The BoE base rate reaches 2.3% in Q4 2022 before steadily falling back to 0.5% by Q3 2024 where it stays for the remaining forecast period.
-- HPI falls steadily and deeply from Q4 2022 to Q3 2025, but then experiences modest increases in each quarter until the end of the forecast period, but finishes well below the levels experienced in 2021. Overall, HPI in Q4 2023 is forecast decline annually (13.3%), with a slight improvement to (11.6%) in 2024, and not turning positive until 2026.
-- Unemployment rises steadily and peaks at 7.4% in Q3 2025 and improves slightly over remainder of the forecast period. Overall, unemployment averages at 4.0% in 2022, rising to 7.3% by 2025, before improving modestly to finish at 7.1% in 2026.
Base case-2022 v 2021(1)
The following table shows how the Group's base case assumptions in the current year have changed from those used at 30 September 2021:
2021 2022 2023 2024 2025 2026
Year Assumption % % % % % %
------------- ------------- ---- ----- ----- ----- ---- ----
30 September
2022 Base rate 1.4 2.2 1.8 1.8 1.7
-------------
Unemployment 3.9 4.6 4.4 3.8 3.8
GDP 3.6 0.3 2.1 2.7 2.1
Inflation 9.4 7.5 0.6 0.7 1.5
HPI 6.8 (4.6) (3.0) 4.4 6.7
--------------------------- ---- ----- ----- ----- ---- ----
30 September
2021 Base rate 0.1 0.1 0.1 0.3 0.5
-------------
Unemployment 4.8 4.6 4.3 4.0 3.9
GDP 7.3 6.7 2.1 1.5 1.5
Inflation 2.1 2.7 1.9 1.8 1.8
HPI 5.0 (1.6) 0.6 2.7 3.9
--------------------------- ---- ----- ----- ----- ---- ----
(1) Macroeconomic assumptions provided by Oxford Economics on 1 September 2022 and reported on a calendar year basis unless otherwise stated. The changes in macroeconomic assumptions between 1 September 2022 and 30 September 2022 have been considered as part of the PMAs.
Risk Management
Credit risk
The base case macroeconomic estimates and assumptions used at 30 September 2021 reflected the forward-looking view at that time, which recognised the impact of the further lockdown measures introduced in Q4 2020, together with the successful vaccine roll-out programme which resulted in much more positive base case assumptions. The headwinds of inflation and cost of living crisis, and the resultant actions of the BoE to curb inflation dominated much of 2022 and resulted in the significant changes to assumptions over the relatively short term.
Five-year simple averages for the most sensitive inputs of unemployment, GDP and HPI
Unemployment GDP HPI
2022 % % %
-------- ------------ --- -----
Upside 3.9 3.1 3.3
Base 4.1 2.1 2.0
Downside 6.3 0.4 (3.4)
-------- ------------ --- -----
2021
-------- ------------ --- -----
Upside 3.9 4.6 4.6
Base 4.3 3.8 2.1
Downside 6.5 2.1 (5.8)
-------- ------------ --- -----
Graphical illustrations of the above key inputs over the five-year forecast period are:
Unemployment - simple average HPI - year-on-year movement
GDP - year-on-year movement While there are inflationary pressures
at present that are impacting the
Group's ECL calculations, the following
graph demonstrates the expected relatively
short-term nature of these over the
forecast period (year-on-year movement):
The full range of the key macroeconomic assumptions is included in the table on page 45.
Risk Management
Credit risk
The use of estimates, judgements and sensitivity analysis
The following are the main areas where estimates and judgements are applied to the ECL calculation:
The use of estimates
Asset lifetimes
The calculation of the ECL allowance is dependent on the expected life of the Group's portfolios. The Group assumes the remaining contract term as the maximum period to consider credit losses wherever possible. For the Group's credit card and overdraft portfolios, behavioural factors such as observed retention rates and other portfolio level assumptions are taken into consideration in determining the estimated asset life.
Economic scenarios
The calculation of the Group's impairment provision is sensitive to changes in the chosen weightings as highlighted above. The effect on the closing modelled provision of each portfolio as a result of applying a 100% weighting to each of the selected scenarios is shown below:
Probability
Weighted(1) Upside Base Downside
2022 GBPm GBPm GBPm GBPm
---------------------- ------------ ------ ----- ---------
Mortgages 15 12 13 23
Unsecured of which: 251 236 237 279
---------------------- ------------ ------ ----- ---------
Cards 216 209(4) 208 233
Personal loans and
overdrafts (3) 35 27 29 46
---------------------- ------------ ------ ----- ---------
Business (2) 53 39 43 97
---------------------- ------------ ------ ----- ---------
Total 319 287 293 399
---------------------- ------------ ------ ----- ---------
(1) In addition to the probability weighted modelled provision shown in the table, the Group holds GBP85m relative to PMAs (2021: GBP207m) and GBP38m of individually assessed provision (2021: GBP31m).
(2) Business and total ECLs in the above table have been calculated using the new LGD model and while not fully implemented in the year, the impact of this was incorporated into the total Business ECLs via the use of PMAs. Consequently, the probability weighted Business and total ECLs reported in the above table are GBP15m lower than the actual figures for the year.
(3) Salary Finance contributes more that 50% of the combined Personal Loans and overdrafts ECL.
(4) Due to a minor model interaction effect, the 100% ECL for Upside is marginally higher than the Base case.
Probability
Weighted Upside Base Downside
2021 GBPm GBPm GBPm GBPm
---------------------- ----------- ------ ----- ---------
Mortgages 24 16 19 37
Unsecured of which: 159 155 155 167
---------------------- ----------- ------ ----- ---------
Cards 142 139 139 147
Personal loans and
overdrafts 17 16 16 20
---------------------- ----------- ------ ----- ---------
Business 83 47 61 127
---------------------- ----------- ------ ----- ---------
Total 266 218 235 331
---------------------- ----------- ------ ----- ---------
One of the criteria for moving exposures between stages is the lifetime PD which incorporates macroeconomic factors. As a result, the stage allocation will be different in each scenario and so the probability weighted ECL cannot be recalculated using the scenario ECL provided and the scenario weightings.
Certain asset classes are less sensitive to specific macroeconomic factors, showing lower relative levels of sensitivity. To ensure appropriate levels of ECL, the relative lack of sensitivity is compensated for through the application of PMAs, further detail of which can be found on page 44.
Within each portfolio, the following are the macroeconomic inputs that are more sensitive, and therefore more likely to drive the move from Stage 1 to Stage 2 under a stress scenario:
Mortgages: Unemployment and HPI
Unsecured: Unemployment
Business: Unemployment and HPI
In addition to assessing the ECL impact of applying a 100% weighting to each of the three chosen scenarios, the Group has also considered the effect changes to key economic inputs would make to the modelled ECL output.
The Group considers the unemployment rate and HPI as the inputs that would have the most significant impact on ECL, and has assessed how these metrics would change ECL across the relevant portfolios, with the reported output assessed against the base case. All changes have been implemented as immediate effects within the first year of the base case scenario, persisting throughout the scenario.
Risk Management
Credit risk
The following table discloses the ECL impact of HPI changes on the Group's Mortgage and Business lending:
2022 2021
GBPm GBPm
--------------- ----- -----
Mortgages +10% (1) (2)
Business +10% (1) (2)
Mortgages -10% 2 3
Business -10% 2 3
--------------- ----- -----
Unemployment is a key input that affects all of the Group's lending categories and the following table highlights the ECL impact of a one percent change in the unemployment rate:
2022 2021
GBPm GBPm
-------------- ----- -----
Mortgages +1% 1 1
Unsecured +1% 15 4
Business +1% 4 6
-------------- ----- -----
Mortgages -1% (1) (1)
Unsecured -1% (15) (4)
Business -1% (3) (4)
-------------- ----- -----
While the above sensitivities provide a view of how the ECL would be impacted based on these single changes, such changes would not ordinarily occur in isolation and the economic inputs used are linked within each chosen scenario.
The use of judgement
SICR
Judgement is required in determining the point at which a SICR has occurred, as it is the point at which a 12-month ECL is replaced by a lifetime ECL. The Group has developed a series of triggers that indicate where a SICR has occurred when assessing exposures for the risk of default occurring at each reporting date compared to the risk at origination. There is no single factor that influences this decision, rather a combination of different criteria that enables the Group to make an assessment based on the quantitative and qualitative information available. This assessment includes the impact of forward-looking macroeconomic factors, but excludes the existence of any collateral implications.
Indicators of a SICR include, deterioration of the residual lifetime PD by set thresholds that are unique to each product portfolio, non-default forbearance programmes, and watch list status. The Group adopts the backstop position that a SICR will have taken place when the financial asset reaches 30 DPD.
Refinements were made to the application of SICR on the Group's Business portfolio in the year. Please refer to pages 21 and 35 for further detail.
The Group does not have a set absolute threshold by which the PD would have to increase by in establishing that a SICR has occurred, and has implemented an approach with the required SICR threshold trigger varying on a portfolio and product basis according to the origination PD.
The table below illustrates this approach with reference to the Group's Mortgage, Unsecured (credit cards) and Business portfolios. In each case the illustration is of the PD threshold based on a 5-year full lifetime PD (not the annualised equivalent). The business example reflects the thresholds appropriate for term lending.
Origination
PD SICR Trigger
------------------ -------------------------- ----------- ------------
Low origination lifetime
Mortgages PD 2.00% 5.69%
High origination lifetime
PD 10.00% 17.69%
--------------------------------------------- ----------- ------------
Unsecured (credit Low origination lifetime
cards) PD 2.00% 22.34%
High origination lifetime
PD 10.00% 25.52%
--------------------------------------------- ----------- ------------
Low origination lifetime
Business PD 2.00% 6.03%
High origination lifetime
PD 10.00% 16.70%
--------------------------------------------- ----------- ------------
Risk Management
Credit risk
Changes to the overall SICR thresholds can also impact staging, driving accounts into higher stages with the resultant impact on the ECL allowance:
2022 2021
GBPm GBPm
---------------------------------------------------- ----- -----
A 10% movement in the mortgage portfolio from Stage
1 to Stage 2(1) +9 +6
A 10% movement in the credit card portfolio from
Stage 1 to Stage 2(1) +87 +69
A 10% movement in the business portfolio from Stage
1 to Stage 2(1) +18 +13
A PD stress which increases PDs upwards by 20% for
all portfolios +106 +94
---------------------------------------------------- ----- -----
(1) The comparative has been restated in line with the current year presentation.
Definition of default
The PD of a credit exposure is a key input to the measurement of the ECL allowance. Default under Stage 3 occurs when there is evidence that a customer is experiencing significant financial difficulty, which is likely to affect the ability to repay amounts due. The Group utilises the 90 DPD backstop for default purposes.
PMAs
PMAs were GBP85m in 2022 (2021: GBP207m) and are included within the total ECL provision of GBP457m (2021: GBP504m).
These are management judgements that impact the ECL provision by increasing (or decreasing) the collectively assessed modelled output, where not all the known risks identified in a particular product segment have been necessarily reflected within the models. This also takes into account any time lag between the date the macroeconomic assumptions were received and the reporting date. Key PMAs described below:
Mortgages: the Group continue to monitor the level of ECL held on BTL mortgages due to uncertainty of the impact on landlords and tenants and have maintained the PMA for this cohort of customers. A new PMA was introduced to reflect an impact on debt affordability as a result of rising energy prices and other inflationary effects.
Unsecured: a new PMA was introduced for debt affordability as a reaction to the reduction in customers' reduced disposable incomes. Other PMAs are also held with the most material being GBP10m for the potential impact on the sale or future recovery value of Unsecured written-off debt, which can fluctuate in the current environment.
Business: the current uncertain economic environment is also impacting the Business portfolio, where higher prices, wage inflation pressure and rising interest rates are all headwinds faced by customers. The Group has recognised these pressures and introduced an economic resilience PMA accordingly.
The impact of PMAs on the Group's ECL allowance and coverage ratios is as follows:
Mortgages Unsecured Business Total
-------------------- --------- --------- -------- -------
GBP33m
2022 GBP34m (1) GBP18m GBP85m
% of total ECL 70% 11% 21% 20%
Coverage - total 0.09% 4.66% 1.59% 0.62%
Coverage - total ex
PMAs 0.02% 4.13% 0.93% 0.45%
-------------------- --------- --------- -------- -------
2021 GBP54m GBP35m GBP118m GBP207m
% of total ECL 62% 18% 53% 41%
Coverage - total 0.15% 3.80% 3.06% 0.70%
Coverage - total ex
PMAs 0.06% 3.11% 1.44% 0.41%
-------------------- --------- --------- -------- -------
(1) The actual value GBP32.47m has been rounded up to ensure the table casts.
The reduction in PMAs in the year of GBP122m predominantly reflects the removal of (i) sector specific PMAs in the Business portfolio (GBP80m) that were necessary as the UK economy continued to feel the effects of Covid-19 and the outlook for businesses remained uncertain, and (ii) the impact of payment holidays on the Mortgage portfolio (GBP20m) as Covid-19 related support was withdrawn.
PMAs are primarily held in Stages 1 and 2 and are discussed in more detail in the divisional commentary on pages 28 to 37.
The Group assesses and reviews the need for and quantification of PMAs on a quarterly basis, with the CFO recommending the level of PMAs on a portfolio basis to the Board Audit Committee twice a year at each external reporting period. The Group has strengthened the governance around PMAs in the year, with the Model Risk Oversight and Group Credit Oversight teams reviewing the methodology supporting material PMAs and presenting their findings to the Board Audit Committee.
In the absence of significant events that might impact ECLs going forward, the Group expects the current level of PMAs to materially reduce over the next 18-24 months.
Risk Management
Credit risk
Macroeconomic assumptions
Annual macroeconomic assumptions used over the five-year forecast period in the scenarios and their weighted averages are as follows:(1)
2022
2022 2023 2024 2025 2026
Economic
Scenario VMUK weighting measure(2) % % % % %
--------- -------------- ------------ ---- ------ ------ ----- ----
Upside 10% Base rate 1.4 3.0 2.5 2.3 2.3
--------- --------------
Unemployment 3.8 4.2 4.0 3.7 3.6
--------- --------------
GDP 3.9 2.8 3.2 3.4 2.1
Inflation 9.5 8.5 1.8 0.7 1.3
HPI 8.3 (2.3) (1.8) 5.7 6.5
--------- -------------- ------------ ---- ------ ------ ----- ----
Base 55% Base rate 1.4 2.2 1.8 1.8 1.7
--------- --------------
Unemployment 3.9 4.6 4.4 3.8 3.8
--------- --------------
GDP 3.6 0.3 2.1 2.7 2.1
Inflation 9.4 7.5 0.6 0.7 1.5
HPI 6.8 (4.6) (3.0) 4.4 6.7
--------- -------------- ------------ ---- ------ ------ ----- ----
Downside 35% Base rate 1.3 1.7 0.6 0.5 0.5
--------- --------------
Unemployment 4.0 6.0 7.1 7.3 7.1
--------- --------------
GDP 2.6 (5.6) 0.8 2.1 2.1
Inflation 9.3 5.0 (1.0) 0.7 1.5
HPI 3.5 (13.3) (11.6) (2.7) 7.4
--------- -------------- ------------ ---- ------ ------ ----- ----
Weighted
average Base rate 1.4 2.1 1.4 1.4 1.4
--------- --------------
Unemployment 3.9 5.0 5.3 5.0 4.9
--------- --------------
GDP 3.3 (1.5) 1.7 2.5 2.1
Inflation 9.4 6.7 0.2 0.7 1.5
HPI 5.8 (7.4) (5.9) 2.0 6.9
--------- -------------- ------------ ---- ------ ------ ----- ----
2021
2021 2022 2023 2024 2025
Economic
Scenario VMUK weighting measure(2) % % % % %
--------- -------------- ------------ ----- ------ ------ ----- -----
Upside 15% Base rate 0.2 0.6 1.2 1.5 1.6
--------- --------------
Unemployment 4.3 3.8 3.9 3.8 3.6
--------- --------------
GDP 8.1 8.8 2.8 1.8 1.5
Inflation 2.4 3.7 2.5 1.6 1.8
HPI 8.2 0.8 5.2 5.2 3.6
--------- -------------- ------------ ----- ------ ------ ----- -----
Base 50% Base rate 0.1 0.1 0.1 0.3 0.5
--------- --------------
Unemployment 4.8 4.6 4.3 4.0 3.9
--------- --------------
GDP 7.3 6.7 2.1 1.5 1.5
Inflation 2.1 2.7 1.9 1.8 1.8
HPI 5.0 (1.6) 0.6 2.7 3.9
--------- -------------- ------------ ----- ------ ------ ----- -----
Downside 35% Base rate 0.0 (0.5) (0.5) (0.5) (0.3)
--------- --------------
Unemployment 5.6 6.7 6.8 6.8 6.4
--------- --------------
GDP 4.4 2.4 1.1 1.0 1.7
Inflation 1.5 0.7 0.8 2.2 1.7
HPI (2.9) (15.2) (12.1) (3.5) 4.9
--------- -------------- ------------ ----- ------ ------ ----- -----
Weighted
average Base rate 0.1 0.0 0.1 0.2 0.4
--------- --------------
Unemployment 5.0 5.2 5.1 4.9 4.7
--------- --------------
GDP 6.4 5.5 1.9 1.4 1.6
Inflation 2.0 2.1 1.6 1.9 1.8
HPI 2.7 (6.0) (3.2) 0.9 4.2
--------- -------------- ------------ ----- ------ ------ ----- -----
(1) Macroeconomic assumptions provided by Oxford Economics on 1 September 2022 and reported on a calendar year basis unless otherwise stated. The changes in macroeconomic assumptions between 1 September 2022 and 30 September 2022 have been considered as part of the PMAs.
(2) The percentages shown for base rate, unemployment and inflation are averages. GDP is the year-on-year movement, with HPI the Q4 v Q4 movement.
Risk Management
Financial risk
Strong foundations supporting resilience and growth.
The financial risk framework underpins the Group's robust balance sheet, ensuring strategy is resilient and responsive to external pressures and changing regulatory obligations.
Financial risk covers several categories of risk which impact the way in which the Group can support its customers in a safe and sound manner. They include capital risk, funding risk, liquidity risk, market risk and pension risk.
Risk appetite
The primary objective for the management of financial risks is to control the risk profile within approved risk limits in order to maintain the confidence of the Group's customers and other stakeholders. Financial risks are also managed to protect current and future earnings from the impact of market volatility. The Group applies a prudent approach to financial risks in order to safeguard the ongoing strength and resilience of the balance sheet. These activities are undertaken in a manner consistent with the Group's obligations under ring-fencing legislation and prudential rules.
Financial risk appetite is approved by the Board, with authority delegated to ALCO for subsequent implementation and monitoring. The Board has established a range of capital risk appetite measures including CET1, leverage and MREL. Measures for funding and liquidity risks consider the structure of the balance sheet, the Group's overall funding profile and compliance with the regulatory LCR and net stable funding ratio (NSFR) requirements. Board-approved risk appetite covers both regulatory and internal liquidity requirements and the need to maintain access to liquidity resources sufficient to accommodate outflows of funds in a range of stress scenarios over a one-month and three -- month period.
The Group participates in wholesale markets and uses financial instruments to fund its banking activities and manage the liquidity and market risks arising from these activities. The Group establishes an appetite for these risks based on an overriding principle that the Group will not engage in proprietary risk taking.
The Group's pension risk appetite is a component of the Group-wide RAS framework for the management of balance sheet risks and is considered in the context of potential capital impacts as a result of volatility in the Scheme's valuations and future contributions.
Capital risk
Capital is held by the Group to cover inherent risks in a normal and stressed operating environment, to protect unsecured creditors and investors and to support the Group's strategy of sustainable growth. Capital risk is the risk that the Group has or forecasts insufficient capital and other loss-absorbing debt instruments to operate effectively. This includes meeting minimum regulatory requirements, operating within Board approved risk appetite and supporting its strategic goals.
Measurement
The Group manages capital in accordance with prudential rules issued by the PRA and the FCA, which are implemented through the CRD IV CRR regulatory framework. Pillar 1 capital requirements are calculated in respect of credit risk, operational risk, market risk, counterparty credit risk and credit valuation adjustments. The capital requirements are calculated using the following approaches:
-- Retail mortgages: IRB; -- Business lending: FIRB; -- Specialised lending: IRB slotting; and
-- All other portfolios: Standardised approach, via either sequential IRB implementation or Permanent Partial Use.
A rigorous approach is taken to assessing risks that are not adequately covered by Pillar 1. The Group also undertakes analysis of a range of stress scenarios to test the impact on capital arising from severe yet plausible scenarios. These approaches to capital are documented in the Group's ICAAP which is subject to review, challenge and approval by the Board. The outputs from the ICAAP and regulatory stress testing are used to inform minimum capital targets and risk appetite, ensuring survivability above peak-to-trough stress movements.
The Group IRB framework looks at the customer PD along with loss severity (EAD and LGD). The outputs are used in the calculation of RWA, expected loss and IFRS 9 ECL. The IRB parameters and rating assessments are actively embedded in the following day-to-day processes:
-- Credit approval - IRB models and parameters are used to assess the customer risk and outputs are used to inform cut-off models that drive the lending decisions;
-- Pricing - Outputs and estimates are used in the assessment of new products and portfolio pricing reviews;
-- Risk appetite - Parameters are included in the assessment of models and are analysed to inform the Group's risk capacity and appetite; and
-- Asset quality - Parameters are monitored to understand the product and segment performance of the Group's portfolios.
Regulatory capital developments
The regulatory landscape for capital is subject to a number of changes, some of which can lead to uncertainty on eventual outcomes. In order to mitigate this risk, the Group actively monitors emerging regulatory change, assesses the impact and puts plans in place to respond.
Risk Management
Financial risk
COVID-19 regulatory capital developments
Following the BoE's announcements in 2020 regarding supervisory and prudential policy measures to address the challenges of COVID-19, the requirements relating to compliance with updates to definition of default and mortgage IRB models were extended. The Group did not adopt hybrid mortgage models in FY22 and intends to do so in FY23.
As part of the Group's implementation of mortgage IRB models (including Hybrid PD), we will consider the need to apply an overlay to increase RWAs in advance of formal approval of models. A final figure has not yet been determined although this may be in the range of GBP1-1.5bn of RWAs.
The Group continues to apply relevant relief measures introduced by regulatory and supervisory bodies to help address and alleviate various COVID-19 driven financial impacts. These include amendments to the CRR introduced by the 'Quick Fix' package in June 2020, which introduced a number of beneficial modifications, including changes to IFRS 9 transitional arrangements for capital.
UK implementation of Basel Standards
In July 2021, the PRA published Policy Statement 17/21 which provided feedback to Consultation Paper 5/21 with the same title: 'Implementation of Basel standards', with the publication of Policy Statement 22/21 in October containing final rules. The policy statements covered a range of revisions in the areas of counterparty credit risk, large exposures, LCR, NSFR and reporting and disclosure among other changes. These standards became effective in the UK from 1 January 2022 and did not materially impact capital requirements.
Policy Statement 22/21 confirmed the PRA's treatment to fully deduct software assets from CET1 capital, applicable from 1 January 2022. The PRA's view is that intangible assets are not sufficiently loss absorbent on a going concern basis to warrant recognition as CET1 capital.
Basel 3.1
The Basel Committee published its final reforms to the Basel III framework in December 2017. The amendments include changes to the standardised approaches to credit and operational risks and the introduction of a new RWA output floor. There are a number of areas within Basel 3.1 subject to national discretion and choice. The PRA is due to publish a Consultation Paper on UK implementation in the fourth quarter of 2022, with the final reforms expected to become effective on 1 January 2025 (delayed from 2023), subject to a five-year transitional period. Uncertainties therefore remain for a number of topics that will be subject to revisions under Basel 3.1. In response the Group has undertaken an assessment of potential outcomes to assist with planning.
Solvency Stress Test and Annual Cyclical Scenarios
The Group was a participant in the BoE SST in 2021. This was the first time the Group had been involved in the BoE's stress testing for major banks. The Group will be an on-going participant in the BoE's Annual Cyclical Scenario (ACS). Results from the SST were published by the BoE at the end of 2021 and were used by the Financial Policy Committee (FPC) to assess the stress severity required to threaten resilience and test the Group's ability to absorb losses and continue to lend. The Group's results on both a transitional and non-transitional basis were in excess of the published reference rates and the Group was not required to take any additional capital actions or to submit a revised capital plan.
The 2022 ACS was postponed due to the uncertainty caused by the Russian invasion of Ukraine. The delay was to enable lenders to focus on managing the disruption in the financial markets associated with the invasion. In July 2022, it was announced that the ACS stress test would commence in September 2022. The BoE published the Key Elements of the 2022 Stress Test on 26 September 2022 and the Group is in the process of undertaking the 2022 ACS exercise. The scenario tests the resilience of the UK Banking system to deep simultaneous recessions in the UK and global economies, real income shocks, large falls in asset prices and higher global interest rates, as well as a separate stress of misconduct costs. The results will be published in summer 2023.
Resolvability Assessment Framework (RAF)
The BoE has introduced a Resolvability Assessment Framework (RAF), with full implementation required by 2022 to ensure major UK banks can be safely resolved. The Group has undertaken an assessment of its resolvability with disclosures published in June 2022. The BoE concluded that, upon their first assessment as resolution authority of the eight major banks, a major UK bank could enter resolution safely, remaining open and continuing to provide vital banking services to the economy.
UK Leverage Ratio Framework
In October 2021 the FPC and PRA published their changes to the UK leverage ratio framework (Policy Statement 21/21). The changes, effective from 1 January 2022, have simplified the framework with the Group being subject to the UK leverage ratio only rather than the two leverage ratio definitions that previously existed. The Group exceeds the 3.25% leverage ratio requirement.
Mitigation
The Group's capital risk policy standard provides the framework for the management of capital within the Group. The objectives of the policy standard are to efficiently manage the capital base to optimise shareholder returns while maintaining capital adequacy and ensuring that excessive leverage is not taken, so meeting regulatory requirements and managing the rating agencies' assessments of the Group.
The Group is able to accumulate additional capital through retention of profit over time, which may be increased by: income growth and cost cutting; raising new equity, for example via a rights issue; reducing or cancelling distributions on capital instruments; and raising AT1 and Tier 2 capital. The availability and cost of additional capital is dependent upon market conditions and perceptions at the time. The Group is also able to manage the demands for capital through management actions including adjusting its lending strategy.
Capital optimisation remains a key strategic priority, ensuring the Group manages the quantity and quality of resources efficiently while meeting internal targets, stress testing requirements and maintaining regulatory compliance.
Risk Management
Financial risk
Monitoring
The Board approves the capital risk appetite annually, defining minimum levels of capital across a range of capital ratios and measurements. The internal appetite ensures the Group operates above minimum regulatory requirements with reporting conducted through ALCO, Board and Executive Risk Committee. The capital plan, which assesses capital adequacy on a forward-looking basis, is also approved by the Board annually. The annual planning process is supported by rolling forecasting which is reported to ALCO monthly. This ensures that performance trends are reviewed and that there is transparency of the impact on capital ratios, risk appetite and the outlook. As part of the monthly forecasting process, ALCO reviews scenario analysis, considering adverse impacts to economic conditions and modelling sensitivities, including changes to regulation.
In recent years, the PRA has also taken a thematic interest in the quality of regulatory reporting across the industry, specifically focusing on the completeness, accuracy and timing of regulatory reports. This has resulted in a number of s166 Skilled Person Reviews being commissioned over the governance, controls and processes supporting the regulatory reporting framework. The Group is subject to such a review which commenced this year and which will ultimately lead to enhancements to the governance and control framework of the Group's regulatory reporting. In May the Board approved that EY be recommended to the PRA as the preferred Skilled Person to undertake the review and the PRA subsequently approved EY's appointment. The review is scheduled to finalise towards the end of calendar year 2022.
Capital resources
The Group's capital resources position as at 30 September 2022 is summarised below:
30 Sept 30 Sept
2022 2021
Regulatory capital (1) GBPm GBPm
---------------------------------------- ------- -------
Statutory total equity 6,340 5,473
CET1 capital: regulatory adjustments
(2)
Other equity instruments (666) (915)
Defined benefit pension fund assets (650) (551)
Prudent valuation adjustment (5) (5)
Intangible assets (256) (208)
Goodwill (11) (11)
Deferred tax asset relying on future
profitability (302) (258)
Cash flow hedge reserve (699) (10)
AT1 coupon accrual (13) (19)
Foreseeable dividend on ordinary shares (106) (14)
Excess expected loss (100) -
Share buyback (13) -
IFRS 9 transitional adjustments 114 134
---------------------------------------- ------- -------
Total regulatory adjustments to CET1 (2,707) (1,857)
---------------------------------------- ------- -------
Total CET1 capital 3,633 3,616
---------------------------------------- ------- ------- AT1 capital AT1 capital instruments 666 697 ---------------------------------------- ------- ------- Total AT1 capital 666 697 ---------------------------------------- ------- ------- Total Tier 1 capital 4,299 4,313 ---------------------------------------- ------- ------- Tier 2 capital Subordinated debt 1,020 1,019 ---------------------------------------- ------- ------- Total Tier 2 capital 1,020 1,019 ---------------------------------------- ------- ------- Total regulatory capital 5,319 5,332 ---------------------------------------- ------- -------
(1) This table shows the capital position on a CRD IV 'fully loaded' basis and transitional IFRS 9 basis.
(2) A number of regulatory adjustments to CET1 capital are required under CRD IV regulatory capital rules.
Risk Management
Financial risk
2022 2021
Regulatory capital flow of funds (1) GBPm GBPm
-------------------------------------------------------- ------ ------
CET1 capital (2)
CET1 capital at 1 October 3,616 3,271
Share capital and share premium (1) 2
Retained earnings and other reserves (including special
purpose entities) 428 449
Prudent valuation adjustment - 1
Amendment to software asset deduction rules(3) (151) 151
Intangible assets 103 118
Deferred tax asset relying on future profitability (44) (107)
Defined benefit pension fund assets (99) (81)
AT1 distribution paid already deducted from CET1 19 21
Dividend paid already deducted from CET1 14 -
Foreseeable distributions (119) (33)
Share buyback (13) -
Excess expected losses (100) -
IFRS 9 transitional relief (20) (176)
-------------------------------------------------------- ------ ------
Total CET1 capital at 30 September 3,633 3,616
-------------------------------------------------------- ------ ------
AT1 capital
AT1 capital at 1 October 697 915
AT1 instrument issued net of costs 346 -
AT1 instrument repurchased (377) -
Less other equity instruments not qualifying as AT1 - (218)
-------------------------------------------------------- ------ ------
Total AT1 capital at 30 September 666 697
-------------------------------------------------------- ------ ------
Total Tier 1 capital at 30 September 4,299 4,313
-------------------------------------------------------- ------ ------
Tier 2 capital
Tier 2 capital at 1 October 1,019 749
Capital instruments issued: subordinated debt - 298
Capital instruments purchased: subordinated debt - (30)
Amortisation of issue costs 1 2
-------------------------------------------------------- ------ ------
Tier 2 capital at 30 September 1,020 1,019
-------------------------------------------------------- ------ ------
Total capital 5,319 5,332
-------------------------------------------------------- ------ ------
(1) Data in the table is reported under CRD IV on a fully loaded basis with IFRS 9 transitional arrangements applied.
(2) CET1 capital is comprised of shares issued and related share premium, retained earnings and other reserves less specified regulatory adjustments.
(3) The full deduction treatment for software assets was reinstated by the PRA in January 2022.
The Group's CET1 capital increased by GBP17m during the year. Statutory profit after tax of GBP537m drove an overall increase in retained earnings, which when offset against other reserves movements resulted in a net increase in CET1 capital of GBP428m. The Group used this surplus principally to fund capital returns in the year of GBP282m (comprising payments of GBP36m for interim dividends, GBP51m for AT1 distributions, a total GBP76m deduction for share buyback, and a final dividend and AT1 accrual for the current year of GBP119m) and further investment in digital software assets of GBP53m. In addition, GBP100m of CET1 capital was absorbed by the movement in excess expected losses, as releases in IFRS 9 provisions widened the gap between regulatory and accounting credit losses.
In June 2022, the Group successfully issued GBP350m of new AT1 securities, achieving significantly tighter pricing on a spread basis than prior issuances. Concurrently, the Group repurchased GBP377m of its existing AT1 securities that are callable in December of this year. The net impact reduced AT1 capital by GBP31m (after costs) as at 30 September 2022.
Subsequent to the report date, the Group announced its intention to redeem the remaining GBP73m of those AT1 securities on their call date in December 2022.
Risk Management
Financial risk
Risk weighted assets
2022 2021
--------------------- ------------------------------- -------------------------------
Minimum Minimum
capital capital
Minimum capital Exposure RWA requirements Exposure RWA requirements
requirements GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- -------- ------ ------------- -------- ------ -------------
Retail mortgages 62,545 9,155 732 61,146 10,010 801
Business lending 11,959 6,196 497 11,670 6,040 483
Other retail lending 17,408 4,817 385 16,201 4,311 345
Other lending 18,165 277 22 15,467 326 26
Other(1) 584 637 51 765 856 69
--------------------- -------- ------ ------------- -------- ------ -------------
Total credit risk 110,661 21,082 1,687 105,249 21,543 1,724
--------------------- -------- ------ ------------- -------- ------ -------------
Credit valuation
adjustment 258 21 103 8
Operational risk 2,623 210 2,481 198
Counterparty credit
risk 185 15 105 8
--------------------- -------- ------ ------------- -------- ------ -------------
Total 110,661 24,148 1,933 105,249 24,232 1,938
--------------------- -------- ------ ------------- -------- ------ -------------
(1) The items included in the Other exposure class that attract a capital charge include items in the course of collection, fixed assets, intangible assets on software less than three years old (2021 only), prepayments, other debtors and deferred tax assets that are not deducted.
12 months to 30 September 2022 12 months to 30 September 2021
------------------ ------------------------------------------------ ------------------------------------------------
Non-credit Minimum Non-credit Minimum
IRB STD risk capital IRB STD risk capital
RWA RWA RWA(2) Total requirements RWA RWA RWA(2) Total requirements
RWA movements GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------ ----- ---------- ------ ------------- ------ ----- ---------- ------ -------------
Opening RWA 15,699 5,844 2,689 24,232 1,938 15,846 5,642 2,911 24,399 1,953
Asset size 267 575 - 842 68 (553) 152 - (401) (32)
Asset quality (959) 4 - (955) (75) (644) 16 - (628) (50)
Model updates(1) (64) - - (64) (5) 1,086 - - 1,086 87
Methodology and
policy - (160) - (160) (13) (36) 151 - 115 9
Other - (124) 377 253 20 - (117) (222) (339) (29)
------------------ ------ ----- ---------- ------ ------------- ------ ----- ---------- ------ -------------
Closing RWA 14,943 6,139 3,066 24,148 1,933 15,699 5,844 2,689 24,232 1,938
------------------ ------ ----- ---------- ------ ------------- ------ ----- ---------- ------ -------------
(1) Model updates include the mortgage quarterly PD calibrations.
(2) Other RWA includes operational risk, credit valuation adjustment and counterparty credit risk.
RWA reduced c.GBP0.1bn to GBP24.1bn primarily due to the impact of improvements to the HPI offsetting the impact of higher lending and increased other non-credit RWAs.
As well as the HPI improvements of GBP1.5bn, the asset quality movement includes RWA increases relating to the increased risk weights associated with higher mortgage pipeline commitments.
Model updates include a reversal of the GBP344m in RWA specific to COVID-19 related PMAs, with a new PMA of GBP280m to account for increased RWAs arising from Forced Sale Discounts. A further PMA of GBP47m to the Business portfolio relating to the new definition of default was introduced in January 2022, and this was largely offset by a reduction of GBP46m RWAs following recalibration of PDs throughout the year.
Methodology and policy movement is largely driven by the removal of the GBP151m RWA uplift in relation to the CRR Quick Fix amendments in respect of intangible assets, which was removed from January 2022.
The other movement in standardised RWAs reflects reductions to exposures to fixed assets (GBP39m RWA), deferred tax assets (GBP43m RWA) and SPV deposits with other institutions (GBP58m RWA), partially offset by increases to other assets including prepayments and items in the course of collection.
Other non-credit risk RWA movements include an Operational Risk RWA uplift of GBP142m due to a higher proportion of revenue within Commercial Banking business line over the last three years, compared to the three years prior to September 2021. CCR and CVA RWAs have increased by GBP80m and GBP155m respectively, driven by the move to the more risk sensitive SA-CCR methodology per PS22/21 from 1 January 2022 and increased market volatility in recent months.
Risk Management
Financial risk
IFRS 9 transitional arrangements
The table below shows a comparison of capital resources, requirements and ratios with and without the application of transitional arrangements for
IFRS 9.
30 September 2022
-------------------------------------- ----------------------
IFRS 9
IFRS 9 Fully
Transitional loaded
basis basis
Available capital (amounts) GBPm GBPm
-------------------------------------- ------------- -------
CET1 capital 3,633 3,519
Tier 1 capital 4,299 4,185
Total capital 5,319 5,205
-------------------------------------- ------------- -------
RWA (amounts)
Total RWA 24,148 24,056
-------------------------------------- ------------- -------
Capital ratios
CET1 (as a percentage of RWA) 15.0% 14.6%
Tier 1 (as a percentage of RWA) 17.8% 17.4%
Total capital (as a percentage of
RWA) 22.0% 21.6%
-------------------------------------- ------------- -------
Leverage ratio
Leverage ratio total exposure measure 83,771 83,657
UK leverage ratio 5.1% 5.0%
-------------------------------------- ------------- -------
Transitional arrangements in CRR mean the regulatory capital impact of ECL is being phased in over time. Following the CRR Quick Fix amendments package, which applied from 27 June 2020, relevant provisions raised from 1 January 2020 through to 2024 have a CET1 add-back percentage of 75% in 2022, reducing to 50% in 2023 and 25% in 2024.
At 30 September 2022, GBP114m of IFRS 9 transitional adjustments (2021: GBP134m) have been applied to the Group's capital position in accordance with CRR: GBP7m of static and GBP107m of dynamic adjustments (2021: GBP10m static and GBP124m dynamic).
Capital requirements
The Group measures the amount of capital it is required to hold by applying CRD IV as implemented in the UK by the PRA. The table below summarises the amount of capital in relation to RWA the Group is currently required to hold, excluding any PRA buffer.
30 September 2022
---------------------------------- -------------------
Total
Minimum requirements CET1 capital
---------------------------------- ------ -----------
Pillar 1(1) 4.5% 8.0%
Pillar 2A 1.7% 3.1%
---------------------------------- ------ -----------
Total capital requirement 6.2% 11.1%
---------------------------------- ------ -----------
Capital conservation buffer 2.5% 2.5%
UK countercyclical capital buffer 0.0% 0.0%
---------------------------------- ------ -----------
Total (excluding PRA buffer) (2) 8.7% 13.6%
---------------------------------- ------ -----------
(1) The minimum amount of total capital under Pillar 1 of the regulatory framework is determined as 8% of RWA, of which at least 4.5% of RWA are required to be covered by CET1 capital.
(2) The Group may be subject to a PRA buffer as set by the PRA but is not permitted to disclose the level of any buffer.
The Group continues to maintain a significant surplus above its capital requirements. At September the group maintained CET1 capital in excess of its requirements equal to 6.3% of RWAs (equivalent to GBP1,521m).
The PRA sets a Group specific Pillar 2A requirement for risks which are not captured within the Pillar 1 requirement. Together Pillar 1 and Pillar 2A represent the Group's Total Capital Requirement or TCR, which is the minimum requirement which must be met at all times. During the year the PRA updated the Group's Pillar 2A requirement to GBP744m, representing a material reduction in Pillar 2A from 30 September 2021 of GBP209m. At September 2022 this resulted in a TCR of 11.1% of RWAs (equivalent to GBP2,676m) of which 6.2% must be met with CET1 capital (equivalent to GBP1,505m).
Risk Management
Financial risk
In October 2022 the PRA communicated an update to the Group's Pillar 2A requirement setting it as 2.97% of RWAs, of which 1.67% must be met with CET1 capital. In line with previous guidance this requirement has been set as a percentage of RWAs, rather than the fixed nominal Pillar 2A requirements set during 2020 and 2021 in response to COVID-19. Applying this updated requirement as at 30 September 2022 would result in a modest reduction in total capital requirements of GBP27m and CET1 requirements of GBP15m.
The regulatory capital buffer framework is intended to ensure firms maintain a sufficient amount of capital above their regulatory minimum in order to withstand periods of stress and mitigate against firm specific and systemic risks. The UK has implemented the provisions on capital buffers outlined in CRD IV which introduced a combined capital buffer. This includes a Capital Conservation Buffer, a Countercyclical Capital Buffer (CCyB) and where applicable a Global Systemically Important Institution (G-SII) Buffer or an Other Systemically Important Institutions (O-SII) Buffer.
The Group's CCyB reflects an exposure weighted average of the CCyB rates applicable in the geographies the Group operates in. Currently this reflects only the UK. In December 2021, the FPC announced it felt that domestic risks to UK financial stability have returned to around their pre-COVID levels. It subsequently provided guidance that the UK CCyB rate would increase to 1%, effective December 2022, rising to 2% from July 2023 to align with its guidance for the CCyB rate under standard risk conditions. The FPC has noted the considerable uncertainties in relation to the economic outlook and will continue to monitor the situation and stands ready to vary the UK CCyB rate - in either direction - in line with the evolution of economic conditions, underlying vulnerabilities and the overall risk environment.
Currently, the Group does not meet the criteria for the application of either a global or domestic systemically important institution buffer.
MREL
2022 2021
MREL position GBPm GBPm
-------------------------------------- ------ ------
Total capital resources(1)(2) 5,319 5,332
Eligible senior unsecured securities
issued by Virgin Money UK PLC(2) 2,423 2,408
-------------------------------------- ------ ------
Total MREL resources 7,742 7,740
Risk-weighted assets 24,148 24,232
-------------------------------------- ------ ------
Total MREL resources available as
a percentage of risk-weighted assets 32.1% 31.9%
-------------------------------------- ------ ------
UK leverage exposure measure 83,771 83,415
-------------------------------------- ------ ------
Total MREL resources available as
a percentage of UK leverage exposure
measure 9.2% 9.3%
-------------------------------------- ------ ------
(1) The capital position reflects the application of the transitional arrangements for IFRS 9.
(2) Includes MREL instrument maturity adjustments; the add-back of regulatory amortisation and the deduction of instruments with less than one year to maturity. From September 2022, unamortised costs are also deducted from eligible senior unsecured securities.
The BoE as the UK Resolution Authority has published its framework for setting a minimum requirement for own funds and eligible liabilities (MREL). This requires the Group to hold capital resources and eligible debt instruments equal to the greater of two times the Total Capital Requirement (TCR) or 6.5% of the leverage exposure measure. In addition to MREL the Group must also hold any applicable capital buffers, which together with MREL represent the Group's loss-absorbing capacity (LAC) requirement.
As at 30 September 2022, MREL resources were GBP7.7bn (FY21: GBP7.7bn), equivalent to 32.1% of RWAs (FY21: 31.9%). This provides prudent headroom of GBP1.7bn or 7.2% above LAC requirement of 24.9%.
Dividend
Distributable reserves are determined as required by the Companies Act 2006 by reference to a company's individual financial statements. At 30 September 2022, the Company had accumulated distributable reserves of GBP1,056m (2021: GBP792m).
The Board has recommended a final dividend for the financial year ended 30 September 2022 of 7.5p per share.
Share buyback
At the end of June 2022, the Group announced a share buyback programme with an initial repurchase of GBP75m in aggregate between ordinary shares of GBP0.10 each listed on the LSE and CDIs, each representing one share listed on the ASX. Subject to trading liquidity, Virgin Money intends to repurchase shares and CDIs in approximately equal proportions. The buyback commenced on 30 June 2022 and will end no later than 17 December 2022.
On 21 November 2022 an extension to the share buyback programme was announced with an intent to repurchase a further GBP50m in aggregate of shares and CDIs, ending no later than 2 May 2023.
Risk Management
Financial risk
Leverage
2022 2021
Leverage ratio GBPm GBPm
--------------------------------------- -------- -------
Total Tier 1 capital for the leverage
ratio
Total CET1 capital 3,633 3,616
AT1 capital 666 697
--------------------------------------- -------- -------
Total Tier 1 capital 4,299 4,313
--------------------------------------- -------- -------
Exposures for the leverage ratio
Total assets 91,907 89,100
Adjustment for off-balance sheet items 3,204 2,884
Adjustment for derivative financial
instruments 282 91
Adjustment for securities financing
transactions 2,974 2,235
Adjustment for qualifying central
bank claims (11,955) (9,094)
Other adjustments (2,641) (1,801)
--------------------------------------- -------- -------
UK leverage ratio exposure (1) 83,771 83,415
--------------------------------------- -------- -------
UK leverage ratio (1)(2) 5.1% 5.2%
--------------------------------------- -------- -------
Average UK leverage ratio exposure
(3) 83,985 83,213
--------------------------------------- -------- -------
Average UK leverage ratio (3) 5.0% 5.0%
--------------------------------------- -------- -------
(1) As the UK leverage ratio is now the single leverage ratio exposure measure, the analysis of the CRD IV leverage ratio has been replaced with the UK equivalent for this period and the comparative.
(2) IFRS 9 transitional capital arrangements have been applied to the leverage ratio calculation.
(3) The transitional average leverage exposure measure is based on the daily average of on-balance sheet items and month-end average of off-balance sheet and capital items over the quarter (1 July 2022 to 30 September 2022).
The UK leverage ratio framework is relevant to PRA regulated banks and building societies with consolidated retail deposits equal to or greater than GBP50bn. The Group exceeds this threshold and accordingly the average UK leverage ratio exposure and average UK leverage ratio are disclosed.
The PRA simplified the leverage framework from 1 January 2022 with UK banks now subject to a single UK leverage ratio exposure measure. The CRD IV leverage ratio is no longer applicable to UK banks.
The leverage ratio is monitored monthly against a Board-approved RAS, with the responsibility for managing the ratio delegated to ALCO.
The leverage ratio is the ratio of Tier 1 capital to total exposures, defined as:
capital: Tier 1 capital defined on an IFRS 9 transitional basis; and
exposures: total on- and off-balance sheet exposures (subject to credit conversion factors) as defined in the delegated act amending CRR article 429 (Calculation of the Leverage Ratio), which includes deductions applied to Tier 1 capital.
Other regulatory adjustments consist of adjustments that are required under PRA regulations to be deducted from Tier 1 capital. The removal of these from the exposure measure ensures consistency is maintained between the capital and exposure components of the ratio.
The Group's UK leverage ratio of 5.1% (2021: 5.2%) exceeds the UK minimum ratio of 3.25%.
Funding and liquidity risk
Funding risk occurs when the Group is unable to raise or maintain funds of sufficient quantity and quality to support the delivery of the business plan or sustain lending commitments. Prudent funding risk management reduces the likelihood of liquidity risks occurring, increases the stability of funding sources, minimises concentration risks and ensures future balance sheet growth is sustainable.
Liquidity risk occurs when the Group is unable to meet its current and future financial obligations as they fall due or at acceptable cost, or when the Group reduces liquidity resources below internal or regulatory stress requirements.
Risk Management
Financial risk
Exposures
The Group is predominantly funded by Personal and Business customers. Customer funding is supported by the Group's ongoing wholesale funding programmes, medium-term secured funding issuance (e.g. the Group's securitisation programmes), Regulated Covered Bonds and unsecured medium-term notes. The Group also has access to and has drawn against the BoE TFS and TFSME, both schemes introduced to support the UK through periods of instability.
Funding risk exposures arise from an unsustainable or undiversified funding base, for example, a reliance on short-term wholesale deposits. The risk may result in deviation from funding strategy, negatively impact market or customer perception, increase the acquisition cost of new funds or reduce lending capacity, thereby adversely impacting financial performance and stability.
The Group's primary liquidity risk exposure arises through the redemption of retail deposits where customers have the ability to withdraw funds with limited or no notice. Exposure also arises from the refinancing of customer and wholesale funding at maturity and the requirement to fund new and existing committed lending obligations including mortgage pipeline and credit card facilities.
Measurement
Funding and liquidity risks are subject to a range of measures contained within the Group's RAS which reflect both regulatory requirements, as a minimum, and the Group's own view on risk sensitivities. The Group RAS is supported by a series of limits agreed by ALCO. These measures provide a short- and long-term view of risks under both normal and stressed conditions. The measures focus on: cash outflows and inflows under stress; concentration risks; refinancing risks; asset encumbrance; and the quantum, diversity and operational capability of mitigating actions.
The Group's funding plan establishes an acceptable level of funding risk which is approved by the Board and is consistent with risk appetite and the Group's strategic objectives. The development of the Group's funding plan is informed by the requirements of the Group's financial risk policy standards. A series of metrics is used across the Group to measure risk exposures, including funding ratios, limits to concentration risk and maximum levels of encumbrance.
Liquidity is managed in accordance with the ILAAP, which is approved by the Board. Liquidity risk exposures are subject to assessment under both regulatory and internal requirements. The volume and quality of the Group's liquid asset portfolio is defined through a series of stress tests across a range of time horizons and stress conditions. The High-Quality Liquid Asset (HQLA) requirement is quantified as the outflow of funds under a series of stress scenarios less the impact of inflows from assets. Stress cash outflow assumptions have been established for individual liquidity risk drivers across idiosyncratic and market-wide stresses.
The Treasury function is responsible for the development and execution of strategy subject to oversight from the Risk function and review at ALCO. The Group continues to maintain its strong funding and liquidity position and seeks to achieve an appropriate balance between profitability, liquidity risk and capital optimisation.
Monitoring
Liquidity is monitored and measured daily by the Group, with reporting conducted through ALCO and the Executive Risk Committee. In a stress situation or in adverse conditions, the level of monitoring and reporting is increased commensurate with the nature of the stress event, as demonstrated in the Group's response to COVID-19.
Monitoring and control processes are in place against internal and regulatory liquidity requirements. The Group monitors a range of market and internal early warning indicators on a routine basis for early signs of liquidity risk in the market or specific to the Group. These indicators cover a mixture of quantitative and qualitative measures including daily variation of customer balances, measurement against stress requirements and monitoring of the macroeconomic environment.
Mitigation
The Group holds a portfolio of HQLA that can be utilised to raise funding in times of stress. The size of the HQLA portfolio is calibrated based on a view of potential outflows under both systemic and idiosyncratic stress events. In addition, the Group can use the repo market and bilateral relationships to generate funds and can also participate in BoE operations through the Sterling Monetary Framework (SMF). The Group has several sources of funding which are well-diversified in terms of the type of instrument and product, counterparty, term structure and market. In addition to customer funding, wholesale funding is used to support balance sheet growth, lengthen the contractual tenor of funding and diversify funding sources. These funding programmes are a source of strength for the Group and leverage the Group's high-quality mortgage book as collateral for secured funding.
As a participant in the BoE SMF, the Group had access to funding via the TFS and TFSME. TFSME was launched in April 2020 to provide cost-effective funds to banks to support additional lending to the real economy and incentivise lending to SMEs during a period of economic disruption caused by COVID-19. During 2022, the Group repaid the remaining outstanding TFS amounts.
The funding plan includes an assessment of the Group's capacity for raising funds across a wide range of primary funding sources, thereby mitigating funding risk. Refinancing risks are carefully managed and are subject to controls overseen by ALCO. The Group's funding plan includes TFSME repayment profiles designed to manage refinancing risk within a suitably prudent time frame.
The Group recovery plan has been established for management of an escalated liquidity requirement, if the Group experiences either restricted access to wholesale funding or a significant increase in the withdrawal of funds. The plan identifies triggers for escalation, assesses capacity, details the action required, allocates the key tasks to individuals, provides a time frame and defines a management committee to manage the action plan and return the balance sheet structure within appetite.
The Group operates a Funds Transfer Pricing system, a key purpose of which is to ensure that liquidity risk is a factor in the pricing of loans and deposits.
Risk Management
Financial risk
Sources of funding
The table below provides an overview of the Group's sources of funding as at 30 September 2022:
2022 2021
GBPm GBPm
----------------------------------------- ------- -------
Total assets 91,907 89,100
Less: other liabilities(1) (3,122) (3,060)
----------------------------------------- ------- -------
Funding requirement 88,785 86,040
----------------------------------------- ------- -------
Funded by:
Customer deposits 65,434 66,971
Debt securities in issue 8,509 7,678
Due to other banks 8,502 5,918
of which:
----------------------------------------- ------- -------
Secured loans 7,230 5,896
Securities sold under agreements to
repurchase 1,205 -
Transaction balances with other banks 17 -
Deposits with other banks 50 22
----------------------------------------- ------- -------
Equity 6,340 5,473
----------------------------------------- ------- -------
Total funding 88,785 86,040
----------------------------------------- ------- -------
(1) Other liabilities include derivative financial instruments, deferred tax liabilities, provisions for liabilities and charges, and other liabilities as per the balance sheet line item.
The Group's funding objective is to prudently manage the sources and tenor of funds in order to provide a sound base from which to support sustainable lending growth. At 30 September 2022, the Group had a funding requirement of GBP88,785m (2021: GBP86,040m) with the majority being used to support loans and advances to customers.
Customer deposits
The majority of the Group's funding requirement was met by customer deposits of GBP65,434m (2021: GBP66,971m). Customer deposits comprise interest-bearing deposits, term deposits and non-interest-bearing demand deposits from a range of sources including Personal and Business customers. Throughout the year, funding has been managed at a level to support customer lending, with a higher proportion from wholesale, including usage of TFSME and reduced volumes of customer deposits.
Equity
Equity of GBP6,340m (2021: GBP5,473m) was also used to meet the Group's funding requirement. Equity comprises ordinary share capital, retained earnings, other equity investments and a number of other reserves. For full details on equity refer to note 4.1 within the consolidated financial statements.
Liquid assets
The quantity and quality of the Group's liquid assets are calibrated to the Board's view of liquidity risk appetite and remain at a prudent level above regulatory requirements.
The LCR decreased from 149% to 138% during the year and remains comfortably above regulatory and internal risk appetite.
Restated
2022 2021 (1)
LCR GBPm GBPm
-------------------------- ------ ---------
Eligible liquidity buffer 13,139 10,996
Net stress outflows 9,537 7,369
-------------------------- ------ ---------
Surplus 3,602 3,627
-------------------------- ------ ---------
LCR 138% 149%
-------------------------- ------ ---------
(1) In the prior year, certain business customer deposits were incorrectly classified as Corporates, as opposed to Financial Institutions. Due to the different liquidity outflow assumptions applied, this resulted in net outflows being understated by GBP80m and the LCR overstated by 2%. These deposits have been reclassified as Financial Institutions and the prior year comparative has been updated to align with the current year presentation.
Risk Management
Financial risk
The liquid asset portfolio provides a buffer against sudden and potentially sharp outflows of funds. Liquid assets must therefore be high-quality so they can be realised for cash and cannot be encumbered for any other purpose (e.g. to provide collateral for payments systems).
The volume and quality of the Group's liquid asset portfolio is defined through a series of internal stress tests across a range of time horizons and stress conditions. The liquid asset portfolio is primarily comprised of cash at the BoE, UK Government securities (Gilts) and listed securities (e.g. bonds issued by supra-nationals and AAA-rated covered bonds).
The key risk driver assumptions applied to the scenarios are:
Liquidity Risk Internal Stress Assumption
Driver
----------------- ----------------------------------------------
Retail funding Severe unexpected withdrawal of retail
deposits by customers arising from redemption
or refinancing risk.
No additional deposit inflows are assumed.
----------------- ----------------------------------------------
Wholesale funding Limited opportunity to refinance wholesale
contractual maturities. Full outflow
of secured and unsecured funding during
the refinancing period, with no reinvestment
of funding.
----------------- ----------------------------------------------
Off-balance Cash outflows during the period of stress
sheet as a result of off-balance sheet commitments
such as mortgage pipeline, undrawn credit
card facilities and collateral commitments.
Lending outflows, over and above contractual
obligations, are honoured as the Group
preserves ongoing viability.
----------------- ----------------------------------------------
Intra-day Other participants in the payment system
withhold or delay payments or customers
increase transactions resulting in reduced
liquidity.
----------------- ----------------------------------------------
Liquid assets The liquidity portfolio value is reduced,
reflecting stressed market conditions.
----------------- ----------------------------------------------
The Group monitors the movements in its credit ratings and the related requirement to post collateral for payment systems and clearing houses. These figures are not considered material compared to the volume of unencumbered liquid assets.
As at 30 September 2022, the Group held eligible liquid assets well in excess of 100% of net stress outflows and Pillar 2 liquidity requirements, as defined through internal risk appetite.
Average Average
Liquid asset portfolio 2022 2021 Change 2022 2021
(1) GBPm GBPm % GBPm GBPm
-------------------------- ------ ------ ------ ------- -------
Level 1
Cash and balances with
central banks 9,795 7,060 38.7 7,632 7,232
UK Government treasury
bills and gilts 512 771 (33.6) 905 779
Other debt securities 2,827 3,239 (12.7) 2,993 3,296
-------------------------- ------ ------ ------ ------- -------
Total level 1 13,134 11,070 18.6 11,530 11,307
Level 2 (2) 117 23 408.7 32 24
-------------------------- ------ ------ ------ ------- -------
Total LCR eligible assets 13,251 11,093 19.5 11,562 11,331
-------------------------- ------ ------ ------ ------- -------
(1) Excludes encumbered assets.
(2) Includes Level 2A and Level 2B.
Cash and balances with central banks of GBP12,221m, as per note 3.4, include: GBP2,094m of assets that are encumbered to support the issuance of Scottish bank notes (excluding notes not in circulation) and to support payments systems; GBP266m of mandatory central bank deposits; and GBP62m excluded from LCR to cover operating expenses.
Financial assets at FVOCI of GBP5,064m, as per note 3.7, include: GBP1,535m of encumbered UK government treasury bills and gilts, GBP317m of which is encumbered to support Operational Continuity in Resolution.
The NSFR was implemented by the PRA on 1 January 2022 based on Basel standards. The ratio as at 30 September 2022 is 136% (2021: 134%) comfortably in excess of the binding minimum requirement of 100%.
Risk Management
Financial risk
Encumbered assets
The Group manages the level of asset encumbrance to ensure appropriate volumes of assets are maintained to support future planned and potential stressed funding requirements. Encumbrance limits are set in the Group RAS and calibrated to ensure that after a stress scenario is applied, the balance sheet can recover over an acceptable period of time. Reasons for asset encumbrance include, among others, supporting the Group's secured funding programmes to provide stable term funding to the Group, the posting of assets in respect of drawings under the TFSME scheme, use of assets as collateral for payments systems in order to support customer transactional activity and providing security for the Group's issuance of Scottish bank notes.
Encumbered assets by asset category
Other assets
------------ ------- ----------- ------------------------------------------- ------
Assets encumbered with Assets not positioned
non-central bank counterparties at the central bank
--------------------------------------- ----------------------------------- ------
Positioned
at the Other
central Readily assets
bank available capable Cannot
Covered (including for of being be
30 September Bonds Securitisations Other Total encumbered) encumbrance encumbered encumbered Total Total
2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ------- --------------- ----- ------ ----------- ----------- ---------- ---------- ------ ------
Loans and
advances to
customers 4,268 4,620 - 8,888 14,879 28,647 17,054 2,353 62,933 71,821
Cash and
balances
with
central
banks - - - - 2,879 9,342 - - 12,221 12,221
Due from
other banks 67 305 269 641 - - 15 - 15 656
Derivative
financial
instruments - - - - - - - 342 342 342
Financial
instruments
at
FVOCI - - 1,535 1,535 - 3,529 - - 3,529 5,064
Other assets - - 40 40 - - 218 1,545 1,763 1,803
------------ ------- --------------- ----- ------ ----------- ----------- ---------- ---------- ------ ------
Total assets 4,335 4,925 1,844 11,104 17,758 41,518 17,287 4,240 80,803 91,907
------------ ------- --------------- ----- ------ ----------- ----------- ---------- ---------- ------ ------
Other assets
------------ ------- ----------- ------------------------------------------- ------
Assets not positioned
Assets encumbered with at the central
non-central bank counterparties bank
-------------------------------------- ----------------------------------- ------
Positioned
at
the Other
central Readily assets
bank available capable Cannot
Covered (including for of being be
30 September Bonds Securitisations Other Total encumbered) encumbrance encumbered encumbered Total Total
2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------ ------- --------------- ----- ----- ----------- ----------- ---------- ---------- ------ ------
Loans and
advances
to
customers 2,618 4,970 - 7,588 14,108 30,175 17,419 2,719 64,421 72,009
Cash and
balances
with
central
banks - - - - 2,827 6,884 - - 9,711 9,711
Due from
other banks 352 310 76 738 - - 62 - 62 800
Derivative
financial
instruments - - - - - - - 140 140 140
Financial
instruments
at FVOCI - - 586 586 - 3,766 - - 3,766 4,352
Other assets - - 296 296 - - 270 1,522 1,792 2,088
------------ ------- --------------- ----- ----- ----------- ----------- ---------- ---------- ------ ------
Total assets 2,970 5,280 958 9,208 16,935 40,825 17,751 4,381 79,892 89,100
------------ ------- --------------- ----- ----- ----------- ----------- ---------- ---------- ------ ------
The Group's total non-central bank asset encumbrance increased by GBP1,896m to GBP11,104m as at 30 September 2022. This was primarily due to an increase in encumbered mortgages, supporting Covered Bond funding.
Risk Management
Financial risk
Assets and liabilities by maturity
The following tables represent a breakdown of the Group's balance sheet, according to the contractual maturity of the assets and liabilities. Many of the longer-term monetary assets are variable rate products, with behavioural maturities shorter than the contractual terms. The majority of customer deposits are repayable on demand or at short notice on a contractual basis, with behavioural maturities typically longer than their contractual maturity. Accordingly, this information is not relied upon by the Group in its management of interest rate risk. The Group has disclosed certain term facilities within loans and advances to customers with a revolving element at the maturity of the facility as this best reflects their contractual maturity.
3 months 3 to 12 1 to 5 Over 5 No specified
Call or less months years years maturity(1) Total
30 September 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ------ -------- ------- ------ ------ ------------ ------
Assets
Financial assets at amortised cost
Loans and advances to customers 764 2,378 1,019 7,241 55,053 5,296 71,751
Cash and balances with central banks 11,015 - - - - 1,206 12,221
Due from other banks 575 81 - - - - 656
Financial assets at FVTPL
Loans and advances to customers - 2 1 21 46 - 70
Derivative financial instruments 2 46 71 190 33 - 342 Other financial assets - - - - - 8 8 Financial assets at FVOCI - 620 602 1,917 1,925 - 5,064 Other assets - 7 152 1 1 1,634 1,795 ---------------------------------------- ------ -------- ------- ------ ------ ------------ ------ Total assets 12,356 3,134 1,845 9,370 57,058 8,144 91,907 ---------------------------------------- ------ -------- ------- ------ ------ ------------ ------ Liabilities Financial liabilities at amortised cost Customer deposits 48,750 3,786 10,209 2,689 - - 65,434 Debt securities in issue - 485 1,047 6,669 308 - 8,509 Due to other banks 67 285 250 7,900 - - 8,502 Financial liabilities at FVTPL Derivative financial instruments 3 9 29 253 33 - 327 Other liabilities 1,822 135 134 54 59 591 2,795 ---------------------------------------- ------ -------- ------- ------ ------ ------------ ------ Total liabilities 50,642 4,700 11,669 17,565 400 591 85,567 ---------------------------------------- ------ -------- ------- ------ ------ ------------ ------ Off-balance sheet items Financial guarantees - 33 23 12 44 - 112 Other credit commitments 19,247 - - - - - 19,247 ---------------------------------------- ------ -------- ------- ------ ------ ------------ ------ Total off-balance sheet items 19,247 33 23 12 44 - 19,359 ---------------------------------------- ------ -------- ------- ------ ------ ------------ ------
(1) The no specified maturity balance within loans and advances to customers relates to credit cards.
Risk Management
Financial risk
3 to 1 to Over
3 months 12 5 5 No specified
Call or less months years years maturity(1) Total
30 September 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- ------ -------- ------- ------ ------ ------------ ------
Assets
Financial assets at amortised cost
Loans and advances to customers 766 1,966 1,051 6,654 56,812 4,627 71,876
Cash and balances with central banks 8,337 - - - - 1,374 9,711
Due from other banks 800 - - - - - 800
Financial assets at FVTPL
Loans and advances to customers - 3 12 44 74 - 133
Derivative financial instruments 1 8 21 102 8 - 140
Other financial assets - - - - - 20 20
Financial assets at FVOCI - 35 448 2,176 1,693 - 4,352
Other assets - 14 192 2 1 1,859 2,068
---------------------------------------- ------ -------- ------- ------ ------ ------------ ------
Total assets 9,904 2,026 1,724 8,978 58,588 7,880 89,100
---------------------------------------- ------ -------- ------- ------ ------ ------------ ------
Liabilities
Financial liabilities at amortised
cost
Customer deposits 49,477 4,079 9,327 4,088 - - 66,971
Debt securities in issue - 145 1,141 6,392 - - 7,678
Due to other banks 18 2 1,248 4,650 - - 5,918
Financial liabilities at FVTPL
Derivative financial instruments 1 5 38 94 71 - 209
Other liabilities 2,104 52 87 65 70 473 2,851
---------------------------------------- ------ -------- ------- ------ ------ ------------ ------
Total liabilities 51,600 4,283 11,841 15,289 141 473 83,627
---------------------------------------- ------ -------- ------- ------ ------ ------------ ------
Off-balance sheet items
Financial guarantees - 20 21 15 45 - 101
Other credit commitments 17,020 - - - - - 17,020
---------------------------------------- ------ -------- ------- ------ ------ ------------ ------
Total off-balance sheet items 17,020 20 21 15 45 - 17,121
---------------------------------------- ------ -------- ------- ------ ------ ------------ ------
(1) The no specified maturity balance within loans and advances to customers relates to credit cards.
Risk Management
Financial risk
Cash flows payable under financial liabilities by contractual maturity
3 months 3 to 12 1 to 5 Over 5 No specified
Call or less months years years maturity Total
30 September 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- ------ -------- ------- ------- ------ ------------ -------
Liabilities
Financial liabilities at amortised cost
Customer deposits 48,750 3,801 10,291 2,732 - - 65,574
Debt securities in issue - 521 1,294 7,863 315 - 9,993
Due to other banks 67 289 492 8,793 - - 9,641
Financial liabilities at FVTPL
Trading derivative financial instruments - 12 40 63 14 - 129
Hedging derivative liabilities
Contractual amounts payable - 21 557 1,720 - - 2,298
Contractual amounts receivable - (6) (459) (1,477) - - (1,942)
Other liabilities 1,822 135 134 54 59 591 2,795
-------------------------------------------- ------ -------- ------- ------- ------ ------------ -------
Total liabilities 50,639 4,773 12,349 19,748 388 591 88,488
-------------------------------------------- ------ -------- ------- ------- ------ ------------ -------
3 months 3 to 12 1 to 5 Over 5 No specified
Call or less months years years maturity Total
30 September 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------------- ------ -------- ------- ------- ------ ------------ -------
Liabilities
Financial liabilities at amortised cost
Customer deposits 49,477 4,104 9,403 4,127 - - 67,111
Debt securities in issue - 148 1,283 6,886 - - 8,317
Due to other banks 18 2 1,258 4,756 - - 6,034
Financial liabilities at FVTPL
Trading derivative financial instruments - 16 38 31 20 - 105
Hedging derivative liabilities
Contractual amounts payable - 5 244 1,750 25 - 2,024
Contractual amounts receivable - (9) (199) (1,614) - - (1,822)
All other liabilities 2,104 52 87 65 70 473 2,851
-------------------------------------------- ------ -------- ------- ------- ------ ------------ -------
Total liabilities 51,599 4,318 12,114 16,001 115 473 84,620
-------------------------------------------- ------ -------- ------- ------- ------ ------------ -------
The balances in the cash flow table above do not agree directly to the balances in the balance sheet or the assets and liabilities by maturity table presented above, as the table incorporates all cash flows, on an undiscounted basis, related to both principal and future coupon payments.
Analysis of debt securities in issue by residual maturity
The table below shows the residual maturity of the Group's debt securities in issue:
3 to 1 to Over
3 months 12 5 5 Total Total
or less months years years 2022 2021
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------- -------- ------- ------ ------ ----- -----
Covered bonds 4 13 3,450 - 3,467 1,852
Securitisation 462 586 524 308 1,880 2,389
Medium-term notes 6 447 1,796 - 2,249 2,422
Subordinated debt 13 1 899 - 913 1,015
---------------------- -------- ------- ------ ------ ----- -----
Total debt securities
in issue 485 1,047 6,669 308 8,509 7,678
---------------------- -------- ------- ------ ------ ----- -----
Of which issued
by Virgin Money
UK PLC 19 448 2,695 - 3,162 3,437
---------------------- -------- ------- ------ ------ ----- -----
Risk Management
Financial risk
External credit ratings
The Group's long-term credit ratings are summarised below:
Material risk for the Group Outlook As at
as at
--------------------------- -------- ----------------
30 Sept 30 Sept 30 Sept
2022(1) 2022 2021
--------------------------- -------- ------- -------
Virgin Money UK PLC
Moody's Stable Baa1 Baa2
Fitch Stable BBB+ BBB+
Standard & Poor's Stable BBB- BBB-
--------------------------- -------- ------- -------
Clydesdale Bank PLC
Moody's(2) Stable A3 Baa1
Fitch Stable A- A-
Standard & Poor's Stable A- A-
--------------------------- -------- ------- -------
(1) For detailed background on the latest credit opinion by Standard & Poor's, Fitch and Moody's, please refer to the respective rating agency website.
(2) Long-term deposit rating.
In March 2022, Standard & Poor's affirmed Virgin Money UK PLC's and Clydesdale Bank PLC's ratings with stable outlook, reflecting their view that the Group will maintain a sound capital position, deliver statutory profit for full-year 2022 and maintain strong asset quality metrics. This rating reflects the agency's view of the UK economy at the time, coupled with the Group's improving asset quality outlook, conservative risk appetite and robust provisioning.
In June 2022, Moody's upgraded the long-term ratings of Virgin Money UK PLC and Clydesdale Bank PLC by 1-notch, reflecting the closure of payment protection insurance (PPI), finalisation of integration, stable asset quality during the pandemic and strong allowance against loan losses, sound funding & liquidity position and new long-term CET1 target of 13-13.5%. At the same time Moody's reaffirmed the 'Stable' outlook on all of Virgin Money UK PLC's and Clydesdale Bank PLC's ratings.
In July 2022, Fitch affirmed the ratings of Virgin Money UK PLC and Clydesdale Bank PLC with 'Stable' outlook.
As at 20 November 2022, there have been no other changes to the Group's long-term credit ratings or outlooks since the report date.
Market risk
Market risk is the risk of loss associated with adverse changes in the value of assets and liabilities held by the Group as a result of movements in market factors such as foreign exchange risk, interest rates (duration risk), customer behaviour (optionality risk), and the movement in rate spreads across types of assets or liabilities (basis risk and credit spread risk). The Group's balance sheet is predominantly UK based and is denominated in GBP, therefore foreign exchange risk is not a material risk for the Group.
Exposures
The Group's principal exposure comes from structural interest rate risk. It comprises the sensitivity of the Group's current and future NII and economic value to movements in market interest rates. The major contributors to interest rate risk are:
-- the mismatch, or duration, between repricing dates of interest-bearing assets and liabilities;
-- basis risk or assets and liabilities repricing to different reference rates, for example, customer asset and liability products repricing against BoE base rate and Sterling Overnight Index Average (SONIA); and
-- customer optionality, for example, the right to repay borrowing in advance of contractual maturity dates.
The Group provides foreign exchange products and derivative products to enable customers to manage risks within their businesses. As a result of these activities, the Group may be exposed to forms of market risk that would arise from movements in the price on these products. These risks are not a material component of the Group's risk profile. Controls include the hedging of these products as and when they arise.
Risk Management
Financial risk
Measurement
IRRBB is measured, monitored, and managed from both an internal management and regulatory perspective. The RMF incorporates both market valuation and earnings-based approaches. In accordance with the Group IRRBB policy standard, risk measurement techniques include: basis point sensitivity, NII sensitivity, value at risk (VaR), economic value of equity, interest rate risk stress testing, and scenario analysis.
The key features of the internal interest rate risk management model are:
-- basis point sensitivity analysis is performed daily and compares the potential impact of a one basis point (0.01%) change on the present value of all future cash flows;
-- NII sensitivity assesses changes to earnings over a 12-month time horizon as a result of interest rate movements and changes to customer behaviour;
-- VaR is measured on a statistical basis using a 99% confidence level based on daily rate movements over a ten-year history set with a one-year holding period;
-- economic value of equity is measured in line with PRA Rulebook with all six interest rate shock scenarios assessed on a quarterly basis, including customer optionality stresses. Reporting is performed including and excluding equity;
-- static balance sheet (i.e. any new business is assumed to be matched, hedged or subject to immediate repricing);
-- investment term for capital is modelled with a benchmark term agreed by ALCO;
-- investment term for core non-interest-bearing assets and liabilities is modelled on a behavioural basis with a benchmark term agreed by ALCO;
-- assumptions covering the behavioural life of products and customer behaviour for optionality are reviewed and approved by ALCO; and
-- credit spread risk in the banking book (CSRBB) is assessed through VaR applied to the Group's liquid asset buffer portfolio. CSRBB is measured at a 99% confidence level based on daily spread movements over a ten-year history set with a three-month holding period.
Foreign exchange risk is assessed based on the absolute exposure to each currency.
Mitigation
Market risks are overseen by ALCO with delegation for day-to-day management given to Treasury. Treasury uses a number of techniques and products to manage market risks including interest rate swaps, cash flow netting and foreign exchange.
The Group uses derivative financial instruments to manage interest rate and foreign currency risk within approved limits. The Group elects to apply hedge accounting for the majority of its risk management activity that uses derivatives. Certain derivatives are designated as either fair value hedge or cash flow hedge:
Fair value hedges - the Group hedges part of its existing interest rate risk, resulting from potential movements in the fair value of fixed rate assets and liabilities. The fair value of these swaps is disclosed within note 3.6 to the Group's consolidated financial statements. There were no transactions for which fair value hedge accounting had to be discontinued in the year.
Cash flow hedges - the Group hedges a portion of the variability in future cash flows attributable to interest rate risk. The interest risk arises from variable interest rate assets and liabilities which are hedged using interest rate swaps. There were no transactions for which cash flow hedge accounting had to be discontinued in the year as a result of the highly probable cash flows no longer being expected to occur. The fair value of derivatives is disclosed within note 3.6 to the Group's consolidated financial statements.
Monitoring
Model parameters and assumptions are reviewed and updated on at least an annual basis. Material changes require the approval of ALCO. Oversight of market risk is conducted by the Group's Financial Risk team which is independent of the Treasury function. The Board and Executive Risk Committee, through ALCO's oversight, monitor risk to ensure it remains within approved policy limits and Board requirements.
Duration risk(1) Credit spread
---------------------
Value at Risk 2022 GBPm 2021 GBPm 2022 GBPm 2021 GBPm
--------------------- --------- --------- --------- ---------
As at 30 September 17 2 41 45
Average value during
the year 19 2 48 48
Minimum value during
the year 14 1 41 45
Maximum value during
the year 27 3 52 52
--------------------- --------- --------- --------- ---------
(1) The history set for duration risk VaR was increased from two years to ten years and the holding period increased from one day to one year from 1 October 2021 under internal methodology. This results in the significant increase in the reported risk positions year on year with the change in parameters resulting in larger rate shocks applied in the VaR analysis.
Risk Management
Financial risk
Net interest income
Earnings sensitivity measures calculate the change in NII over a 12-month period resulting from an instantaneous and parallel change in interest rates. +/- 25 basis point shocks and +/- 100 basis point shocks represent the primary NII sensitivities assessed internally, though a range of scenarios are assessed on a monthly basis.
30 Sept 30 Sept
2022 2021
12 months NII sensitivity GBPm GBPm
-------------------------------- ------- -------
+ 25 basis point parallel shift 18 30
+100 basis point parallel shift 66 100
- 25 basis point parallel shift 5 (23)
-------------------------------- ------- -------
Sensitivities disclosed reflect the expected mechanical response to a movement in rates and represent a prudent outcome. The sensitivities are indicative only and should not be viewed as a forecast.
The key assumptions and limitations are outlined below:
the sensitivities are calculated based on a static balance sheet and it is assumed there is no change to margins on reinvestment of maturing fixed rate products;
there are no changes to basis spreads with the rate change passed on in full to all interest rate bases;
administered rate products receive a full rate pass on in the rate fall scenario, subject to internal product floor assumptions. In the rate rise scenario administered products receive a rate pass on in line with internal scenario specific pass on assumptions;
additional commercial pricing responses and management actions are not included; and
while in practice hedging strategy would be reviewed in light of changing market conditions, the sensitivities assume no changes over the 12-month period.
Market risk linkage to the balance sheet
The following table shows the Group's principal market risks, linked to the balance sheet assets and liabilities.
Interest
2022 2021 rate Credit Foreign
GBPm GBPm duration Optionality Basis spread exchange
---------------------------------------- ------ ------ --------- ----------- ----- ------- ---------
Assets
Financial assets at amortised cost
Loans and advances to customers 71,751 71,876 -- -- -- --
Cash and balances with central banks 12,221 9,711 -- --
Due from other banks 656 800 -- -- --
Financial assets at FVTPL
Loans and advances to customers 70 133 -- -- -- --
Derivative financial instruments 342 140 -- -- --
Other financial assets 8 20 -- --
Financial instruments at FVOCI 5,064 4,352 -- -- -- --
Other assets 1,795 2,068 -- --
---------------------------------------- ------ ------ --------- ----------- ----- ------- ---------
Total assets 91,907 89,100
---------------------------------------- ------ ------ --------- ----------- ----- ------- ---------
Liabilities
Financial liabilities at amortised cost
Customer deposits 65,434 66,971 -- -- -- --
Debt securities in issue 8,509 7,678 -- -- --
Due to other banks 8,502 5,918 -- -- --
Financial liabilities at FVTPL
Derivative financial instruments 327 209 -- -- --
Other liabilities 2,795 2,851 -- --
---------------------------------------- ------ ------ --------- ----------- ----- ------- ---------
Total liabilities 85,567 83,627
---------------------------------------- ------ ------ --------- ----------- ----- ------- ---------
Risk Management
Financial risk
Repricing periods of assets and liabilities by asset/liability category
The following table shows the repricing periods of the Group's assets and liabilities as assessed by the Group. This repricing takes account of behavioural assumptions where material and the Group's policy to hedge capital in accordance with a benchmark term agreed by ALCO.
3 months 3 to 12 1 to 5 Over 5 Non-interest
Overnight or less months years years bearing Total
30 September 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------------------- --------- -------- ------- -------- ------- ------------ ------
Assets
Financial assets at amortised cost
Loans and advances to customers 7,293 8,796 13,234 41,514 1,699 (785) 71,751
Cash and balances with central banks 10,765 12 37 196 - 1,211 12,221
Due from other banks 656 - - - - - 656
Financial assets at FVTPL
Loans and advances to customers - 30 4 16 20 - 70
Derivative financial assets - - - - - 342 342
Financial assets at FVOCI 1,265 525 320 1,159 1,733 62 5,064
Other assets 40 38 113 604 - 1,008 1,803
----------------------------------------------- --------- -------- ------- -------- ------- ------------ ------
Total assets 20,019 9,401 13,708 43,489 3,452 1,838 91,907
----------------------------------------------- --------- -------- ------- -------- ------- ------------ ------
Liabilities
Financial liabilities at amortised cost
Customer deposits 7,026 18,725 13,449 26,077 - 157 65,434
Debt securities in issue 3,606 191 432 4,686 - (406) 8,509
Due to other banks 8,438 12 - - - 52 8,502
Financial liabilities at FVTPL
Derivative financial instruments - - - - - 327 327
Other liabilities 1,717 - - - - 1,078 2,795
Equity - 264 573 3,306 350 1,847 6,340
----------------------------------------------- --------- -------- ------- -------- ------- ------------ ------
Total liabilities and equity 20,787 19,192 14,454 34,069 350 3,055 91,907
----------------------------------------------- --------- -------- ------- -------- ------- ------------ ------
Notional value of derivatives managing interest
rate sensitivity 16,448 (359) (239) (12,146) (3,704) - -
----------------------------------------------- --------- -------- ------- -------- ------- ------------ ------
Total interest rate gap 15,680 (10,150) (985) (2,726) (602) (1,217) -
----------------------------------------------- --------- -------- ------- -------- ------- ------------ ------
Cumulative interest rate gap 15,680 5,530 4,545 1,819 1,217 - -
----------------------------------------------- --------- -------- ------- -------- ------- ------------ ------
Risk Management
Financial risk
3 to 1 to Over
3 months 12 5 5 Non-interest
Overnight or less months years years bearing Total
30 September 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------------- --------- -------- ------- -------- ------- ------------ ------
Assets
Financial assets at amortised cost
Loans and advances to customers 3,978 12,399 14,199 39,732 1,568 - 71,876
Cash and balances with central banks 8,182 12 37 196 - 1,284 9,711
Due from other banks 538 262 - - - - 800
Financial assets at FVTPL
Loans and advances to customers - 83 8 20 22 - 133
Derivative financial assets - - - - - 140 140
Financial assets at FVOCI 1,147 537 228 1,172 1,268 - 4,352 Other assets - 38 113 604 - 1,333 2,088 ---------------------------------------- --------- -------- ------- -------- ------- ------------ ------ Total assets 13,845 13,331 14,585 41,724 2,858 2,757 89,100 ---------------------------------------- --------- -------- ------- -------- ------- ------------ ------ Liabilities Financial liabilities at amortised cost Customer deposits 4,619 27,599 11,877 22,874 2 - 66,971 Debt securities in issue 2,329 272 198 4,879 - - 7,678 Due to other banks 5,918 - - - - - 5,918 Financial liabilities at FVTPL Derivative financial instruments - - - - - 209 209 Other liabilities - - - - - 2,851 2,851 Equity 723 421 573 3,756 - - 5,473 ---------------------------------------- --------- -------- ------- -------- ------- ------------ ------ Total liabilities and equity 13,589 28,292 12,648 31,509 2 3,060 89,100 ---------------------------------------- --------- -------- ------- -------- ------- ------------ ------ Notional value of derivatives managing interest rate sensitivity 21,786 (1,891) (7,089) (10,415) (2,391) - - ---------------------------------------- --------- -------- ------- -------- ------- ------------ ------ Total interest rate gap 22,042 (16,852) (5,152) (200) 465 (303) - ---------------------------------------- --------- -------- ------- -------- ------- ------------ ------ Cumulative interest rate gap 22,042 5,190 38 (162) 303 - - ---------------------------------------- --------- -------- ------- -------- ------- ------------ ------
LIBOR replacement
The Group's LIBOR cessation programme successfully met the 2021 GBP regulatory and industry milestones. Treasury proactively transitioned all external transactions across issuance, hedging and liquid assets and over 90% of Business Lending customer transactions also switched from LIBOR to alternative reference rates (ARRs), with numbers continuing to reduce.
The Group engaged with the BoE's Working Group on Sterling Risk Free Reference Rates and other industry forums in transitioning to SONIA/ARRs and ensured the risks of being unable to offer products with suitable reference rates are mitigated and that full consideration is given to the other risks, including legal, conduct, financial and operational risks, that may arise.
As at 30 September 2022, all market-facing derivative flows are executed against SONIA. The focus for 2023 is ongoing management of the small business lending tough legacy and USD cohort. Processes have been implemented to ensure continued effort to move customers off synthetic LIBOR to ARRs throughout 2022.
Financial instruments that have yet to transition to alternative benchmark rates are summarised below:
Risk Management
Financial risk
Amounts yet to be transitioned
Non derivative
financial Non derivative
assets financial Derivatives
- liabilities -
carrying - carrying nominal
value(1)(2) value amount(1)(3)
30 September 2022 GBPm GBPm GBPm
----------------------- -------------- -------------- --------------
GBP LIBOR 94 - 67
Other(4) 164 - -
Cross currency swaps
GBP LIBOR to USD LIBOR -
----------------------- -------------- -------------- --------------
Total 258 - 67
----------------------- -------------- -------------- --------------
Non derivative
financial Non derivative
assets financial Derivatives
- liabilities -
carrying - carrying nominal
value(1)(2) value amount(1)(3)
30 September 2021 GBPm GBPm GBPm
----------------------- -------------- -------------- --------------
GBP LIBOR 2,037 - 4,754
Other(4) 157 - -
Cross currency swaps
GBP LIBOR to USD LIBOR 95
----------------------- -------------- -------------- --------------
Total 2,194 - 4,849
----------------------- -------------- -------------- --------------
(1) Excludes exposures that are expected to expire or mature before the Interbank Offered Rate (IBOR) ceases.
(2) Gross carrying amount excluding allowances for ECLs.
(3) The IBOR exposures for derivative nominal amounts include undrawn loan commitments shown as GBP LIBOR. This is materially the case although some facilities allow drawdowns in a number of different currencies.
(4) Comprises financial instruments referencing other IBOR rates yet to transition to alternative benchmark rates (Euro, USD, AUD).
Pension risk
The Group operates a defined benefit pension scheme, the Yorkshire and Clydesdale Bank Pension Scheme (the Scheme). The Bank is the Scheme's principal employer and there are no other participating employers. The Scheme was closed to future accrual on 1 August 2017 for most members. A small number of members remain on a defined benefit accruals basis subject to certain conditions.
Defined benefit pension schemes provide a promise to pay members a pre-determined level of income at retirement which is independent of the contributions, investments and returns (the scheme assets) used to fund these benefit promises (the scheme liabilities). The operation of a defined benefit pension scheme gives rise to several risks, for example, movements in equity valuations, changes in bond yields, life expectancy of scheme members, movements in interest and inflation rates and changes in legislation. The Group also supports a defined contribution scheme, however the nature of this type of scheme places the investment and liability risk on the member rather than the Group.
Pension risk is the risk that, at any point in time, the value of the scheme assets is not enough to meet the current or expected future value of the scheme liabilities. This risk will continue to exist until the scheme is formally wound up, either if all the liabilities are transferred to a third party (for example an insurer) or once all individual member benefits have been honoured.
Risk appetite
The Group's pension risk appetite is a component of the Group-wide RAS framework for the management of balance sheet risks and is considered in the context of potential capital impacts as a result of volatility in the Scheme's valuations.
Assets
The Trustee governs investments according to a Statement of Investment Principles. This is reviewed and agreed by the Trustee Board on a regular basis, with the Bank consulted on any proposed changes. The Statement of Investment Principles is drafted in accordance with the requirements of Section 35 of the Pensions Act 1995 (as amended by the Pensions Act 2004 and regulations made under it). This sets out the Scheme objectives and the journey plan to meet these objectives.
This results in an appropriate mix of return-seeking assets as well as liability matching assets to better match future pension obligations. The split of Scheme assets is shown within note 3.9 of the Group's consolidated financial statements. The fair value of the assets was GBP3.2bn as at 30 September 2022 (2021: GBP4.6bn).
Risk Management
Financial risk
Liabilities
The retirement benefit obligations are a series of future cash outflows with relatively long duration and are responsive to movements on many of the inputs including interest rates. On an IAS 19 basis these cash flows are primarily sensitive to changes in the expected long-term price inflation rates (Retail Price Index (RPI)/Consumer Price Index (CPI)), the life expectancy of members and the discount rate (linked to yields on AA corporate bonds):
-- an increase in long-term expected inflation corresponds to an increase in liabilities; -- an increase in life expectancy corresponds to an increase in liabilities; and -- a decrease in the discount rate corresponds to an increase in liabilities.
The actual outcome on Scheme valuations will also be affected by hedging and investment decisions made by the Trustees and inflationary caps within the terms of the Scheme.
Exposure
The Group's defined benefit pension scheme affects its regulatory capital in two ways:
-- CET1 capital - while an IAS 19 surplus will increase the Group's balance sheet assets and reserves, any such amount is not recognised for the purposes of determining CET1 capital. However, an IAS 19 deficit, which increases balance sheet liabilities and reduces reserves, is recognised for regulatory capital purposes, and so will decrease CET1 capital.
-- Pillar 2A capital - the Group is also required to determine the level of capital required to be held under Pillar 2A for pension obligation risk as part of the annual ICAAP process. This requirement forms part of the Group's regulatory Total Capital Requirement.
Within the Scheme itself, risk arises because the assets (e.g. equities, bonds/gilts, property) are exposed to market valuation movements, within and between asset classes, while the liabilities are more sensitive to interest rate and inflation rate changes, and changes in other actuarial assumptions which may not be borne out in experience, for example life expectancy.
Mitigation
The Trustee and Group have a common view of the Scheme's long-term strategic aims, encapsulated by an agreed de-risking journey plan. Within the journey plan, several core principles have been established, including a long-term self-sufficiency funding target (i.e. the point in time when the Scheme would no longer need to call on the Bank for additional funding) with assumptions as to how this target is expected to be managed, monitored and met. Potential actions to address deviations in the actual funding level relative to the journey plan have also been considered.
Several other activities have been implemented by the Group and Trustee with the specific aim of reducing risk in the Scheme, including increasing the levels of inflation, interest rate hedging and several member benefit reforms, culminating in closure to future accrual for most members.
The Group has signed a contingent security arrangement to provide the Trustee with protection to partially mitigate the risk of adverse changes impacting the Scheme's assets or liabilities. This arrangement also provided security for the Group's obligations under a Recovery Plan, however all payments subject to that Plan have now been made. Further information is shown within note 3.9 to the Group's consolidated financial statements.
The Bank and the Trustee continue to explore other cost-effective options to further reduce risk within the Scheme, for example, approaches for hedging against longevity risk.
Monitoring
Information on the Scheme's current valuations, asset holdings and discount and inflation rate assumptions are presented to ALCO. The impact of the Scheme on the Group is also subject to risk oversight from the Risk function. In addition, semi-annual pension risk updates are provided to the Board Risk Committee.
Performance of the Scheme's asset portfolio against the various risk metrics is independently monitored by the Scheme investment adviser, Willis Towers Watson, and reported to the Investment Sub Committee, which includes Group representation, and Trustee Board on a quarterly basis.
The Scheme's de-risking plan has delivered resilience to stress-testing and continued improvements in Group and Trustee valuations.
Liability Driven Investment (LDI) portfolios are commonly used by pension schemes to protect against adverse movements in interest rates and inflation. In the case of interest rates, this protects against falls in rates which increase the value of a scheme's liabilities. The general trend since LDI strategies were introduced has been long-term interest rates falling, and LDI has helped schemes to maintain more stable and improved funding positions. However, when interest rates rise instead of fall, LDI derivatives require collateral to be posted in order to maintain the same level of interest rate and inflation protection. Therefore sufficient liquidity is needed to meet such a collateral call.
Within the Scheme's matching assets there is an LDI portfolio, which consists of both physical assets and derivatives. The Scheme uses a bespoke, segregated strategy which reflects, as far as possible, the specifics of the Scheme's liabilities in terms of exposure to movements in interest rates and inflation. As at 30 September 2022, the LDI portfolio was valued at GBP968m.
Over the year to 30 September 2022, gilt yields have risen significantly. The Scheme therefore posted additional collateral, resulting in there being net GBP335m collateral posted by the Scheme as at 30 September 2022 (compared to net GBP65m collateral posted by the counterparties as at 30 September 2021). As at 30 September 2022, the Scheme is still estimated to have sufficient collateral headroom available to meet further rises in interest rates of more than 3%. The Scheme also has over GBP1bn of further assets which could be liquidated within a week if needed to meet collateral calls.
Although increased collateral postings have been required, the Scheme's funding position for IAS 19 purposes has improved over the year to 30 September 2022. The IAS 19 position continues to drive the Group's Pillar 2A and regulatory stress testing processes.
The next Triennial Valuation is due to complete by end FY23 (effective date 30 September 2022). The Trustee funding position at 30 September 2022 is a surplus, indicating no further contributions will be required.
Directors' responsibility statement in respect of the Annual Report & Accounts
The responsibility statement below has been prepared in connection with the Company's full Annual Report and Accounts for the year ending 30 September 2022. Certain parts thereof are not included within this announcement.
The Directors confirm that to the best of their knowledge:
- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the Group and the undertakings included in the consolidation taken as a whole; and
- the Strategic report includes a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that they face.
The Directors consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's and Group's position and performance, business model and strategy.
David Duffy
Chief Executive Officer
20 November 2022
Group financial statements
Consolidated income statement
2022 2021
For the year ended 30 September Note GBPm GBPm
----------------------------------- ---- ------- -------
Interest income 2,215 1,906
Other similar interest 2 4
Interest expense and similar
charges (641) (553)
----------------------------------- ---- ------- -------
Net interest income 2.2 1,576 1,357
Gains less losses on financial
instruments at fair value (17) (5)
Other operating income 157 137
----------------------------------- ---- ------- -------
Non-interest income 2.3 140 132
----------------------------------- ---- ------- -------
Total operating income 1,716 1,489
Operating and administrative
expenses before impairment
losses 2.4 (1,069) (1,203)
----------------------------------- ---- ------- -------
Operating profit before impairment
losses 647 286
Impairment (losses)/credit
on credit exposures 3.2 (52) 131
----------------------------------- ---- ------- -------
Profit on ordinary activities
before tax 595 417
Tax (expense)/credit 2.5 (58) 57
----------------------------------- ---- ------- -------
Profit for the year 537 474
----------------------------------- ---- ------- -------
Attributable to:
Ordinary shareholders 467 395
Other equity holders 70 79
----------------------------------- ---- ------- -------
Profit for the year 537 474
----------------------------------- ---- ------- -------
Basic earnings per share (pence) 2.6 32.4 27.3
----------------------------------- ---- ------- -------
Diluted earnings per share
(pence) 2.6 32.3 27.3
----------------------------------- ---- ------- -------
All material items dealt with in arriving at the profit before tax for the above years relate to continuing activities.
The notes on pages 75 to 123 form an integral part of these financial statements.
Group financial statements
Consolidated statement of comprehensive income
2022 2021
For the year ended 30 September Note GBPm GBPm
--------------------------------------------- ------ ----- -----
Profit for the year 537 474
Items that may be reclassified
to the income statement
Change in cash flow hedge
reserve
Gains during the year 962 99
Transfers to the income statement (13) 24
Taxation thereon - deferred
tax charge (260) (33)
--------------------------------------------- ------ ----- -----
4.1.5 689 90
--------------------------------------------- ------ ----- -----
Change in FVOCI reserve
Gains during the year 15 33
Transfers to the income statement (4) -
Taxation thereon - deferred
tax charge (1) (11)
--------------------------------------------- ------ ----- -----
10 22
--------------------------------------------- ------ ----- ----- Total items that may be reclassified to the income statement 699 112 ----------------------------------------------------- ----- ----- Items that will not be reclassified to the income statement Change in defined benefit pension plan 3.9 122 54 Taxation thereon - deferred tax charge (50) (46) Taxation thereon - current tax credit 6 21 --------------------------------------------- ------ ----- ----- Total items that will not be reclassified to the income statement 78 29 ----------------------------------------------------- ----- ----- Other comprehensive income, net of tax 777 141 --------------------------------------------- ------ ----- ----- Total comprehensive income for the year, net of tax 1,314 615 --------------------------------------------- ------ ----- ----- Attributable to: Ordinary shareholders 1,244 536 Other equity holders 70 79 --------------------------------------------- ------ ----- ----- Total comprehensive income for the year, net of tax 1,314 615 --------------------------------------------- ------ ----- -----
The notes on pages 75 to 123 form an integral part of these financial statements.
Group financial statements
Consolidated balance sheet
2022 2021
As at 30 September Note GBPm GBPm
------------------------------------ ---- ------ -------
Assets
Financial assets at amortised
cost
Loans and advances to customers 3.1 71,751 71,876
Cash and balances with central
banks 3.4 12,221 9,711
Due from other banks 656 800
Financial assets at FVTPL
Loans and advances to customers 3.5 70 133
Derivative financial instruments 3.6 342 140
Other financial assets 3.5 8 20
Financial assets at FVOCI 3.7 5,064 4,352
Property, plant and equipment 211 250
Intangible assets and goodwill 3.8 267 373
Current tax assets - 13
Deferred tax assets 2.5 146 377
Defined benefit pension assets 3.9 1,000 847
Other assets 171 208
------------------------------------ ---- ------ -------
Total assets 91,907 89,100
------------------------------------ ---- ------ -------
Liabilities
Financial liabilities at
amortised cost
Customer deposits 3.10 65,434 66,971
Debt securities in issue 3.11 8,509 7,678
Due to other banks 3.12 8,502 5,918
Financial liabilities at
FVTPL
Derivative financial instruments 3.6 327 209
Current tax liabilities 1 -
Deferred tax liabilities 2.5 350 296
Provisions for liabilities
and charges 3.13 50 104
Other liabilities 3.14 2,394 2,451
------------------------------------ ---- ------ -------
Total liabilities 85,567 83,627
------------------------------------ ---- ------ -------
Equity
Share capital and share premium 4.1 148 149
Other equity instruments 4.1 666 915
Capital reorganisation reserve 4.1 (839) (839)
Merger reserve 4.1 2,128 2,128
Other reserves 4.1 766 71
Retained earnings 3,471 3,049
------------------------------------ ---- ------ -------
Total equity 6,340 5,473
------------------------------------ ---- ------ -------
Total liabilities and equity 91,907 89,100
------------------------------------ ---- ------ -------
The notes on pages 75 to 123 form an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 20 November 2022 and were signed on its behalf by:
David Duffy Clifford Abrahams Chief Executive Officer Chief Financial Officer
Virgin Money UK PLC, Registered number: 09595911
Group financial statements
Consolidated statement of changes in equity
Other reserves
-------------- ------- ------- ------- ----------- ------------------------------------------------ -------- ------
Share
capital Equity Cash
and Capital Other Capital Deferred based flow
share reorg' Merger equity redemption shares comp' FVOCI hedge
premium reserve reserve instruments reserve reserve reserve reserve reserve Retained Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm earnings equity
Note 4.1.1 4.1.3 4.1.4 4.1.2 4.1.5 4.1.5 4.1.5 4.1.5 4.1.5 GBPm GBPm
-------------- ------- ------- ------- ----------- ---------- -------- ------- ------- -------- -------- ------
As at 1
October 2020 147 (839) 2,128 915 - 16 10 11 (80) 2,624 4,932
Profit for the
year - - - - - - - - - 474 474
Other
comprehensive
income, net
of tax - - - - - - - 22 90 29 141
-------------- ------- ------- ------- ----------- ---------- -------- ------- ------- -------- -------- ------
Total
comprehensive
income for
the year - - - - - - - 22 90 503 615
AT1
distributions
paid - - - - - - - - - (79) (79)
Ordinary
shares issued 2 - - - - - - - - - 2
Transfer from
equity
based
compensation
reserve - - - - - - (1) - - 1 -
Equity based
compensation
expensed - - - - - - 5 - - - 5
Settlement of
Virgin
Money
Holdings (UK)
Limited share
awards - - - - - (2) - - - - (2)
-------------- ------- ------- ------- ----------- ---------- -------- ------- ------- -------- -------- ------
As at 30
September
2021 149 (839) 2,128 915 - 14 14 33 10 3,049 5,473
Profit for the
year - - - - - - - - - 537 537
Other
comprehensive
income, net
of tax - - - - - - - 10 689 78 777
-------------- ------- ------- ------- ----------- ---------- -------- ------- ------- -------- -------- ------
Total
comprehensive
income for
the year - - - - - - - 10 689 615 1,314
AT1
distributions
paid - - - - - - - - - (70) (70)
Dividends paid
to ordinary
shareholders - - - - - - - - - (50) (50)
Ordinary
shares issued 2 - - - - - - - - - 2
Share buyback (3) - - - 3 - - - - (63) (63)
Transfer from
equity
based
compensation
reserve - - - - - - (9) - - 9 -
Equity based
compensation
expensed - - - - - - 5 - - - 5
Settlement of
Virgin
Money
Holdings (UK)
Limited share
awards - - - - - (3) - - - 1 (2)
AT1 issuance - - - 346 - - - - - - 346
AT1 redemption - - - (595) - - - - - (20) (615)
-------------- ------- ------- ------- ----------- ---------- -------- ------- ------- -------- -------- ------
As at 30
September
2022 148 (839) 2,128 666 3 11 10 43 699 3,471 6,340
-------------- ------- ------- ------- ----------- ---------- -------- ------- ------- -------- -------- ------
The notes on pages 75 to 123 form an integral part of these financial statements.
Group financial statements
Consolidated statement of cash flows
2022 2021
For the year ended 30 September Note GBPm GBPm
------------------------------------------- ----- ------- -------
Operating activities
Profit on ordinary activities before
tax 595 417
Adjustments for:
Non-cash or non-operating items included
in profit before tax 5.2 (1,326) (1,225)
Changes in operating assets 5.2 1,212 832
Changes in operating liabilities 5.2 (238) (1,026)
Payments for short-term and low value
leases (2) (1)
Interest received 2,112 2,088
Interest paid (378) (461)
Tax paid (59) (27)
------------------------------------------- ----- ------- -------
Net cash provided by operating activities 1,916 597
------------------------------------------- ----- ------- -------
Cash flows from investing activities
Interest received 47 19
Proceeds from maturity of financial
assets at FVOCI 479 1,079
Proceeds from sale of financial assets
at FVOCI 194 -
Purchase of financial assets at FVOCI (2,019) (521)
Purchase of shares issued by UTM (4) (12)
Proceeds from sale of property, plant
and equipment 1 6
Purchase of property, plant and equipment (13) (26)
Purchase and development of intangible
assets 3.8 (53) (80)
------------------------------------------- ----- ------- -------
Net cash (used in)/provided by investing
activities (1,368) 465
------------------------------------------- ----- ------- -------
Cash flows from financing activities
Interest paid (246) (161)
Repayment of principal portions of
lease liabilities 3.16 (26) (28)
Redemption of AT1 securities (614) -
Proceeds from issuance of AT1 securities 347 -
Redemption and principal repayment
on RMBS and covered bonds 3.11 (1,264) (1,543)
Redemption and principal repayment
on medium-term notes/subordinated
debt 3.11 - (30)
Issuance of RMBS and covered bonds 3.11 2,480 -
Issuance of medium-term notes/subordinated
debt 3.11 - 732
Amounts drawn down under the TFSME 2,550 3,350
Amounts repaid under the TFS (1,244) (2,864)
Purchase of own shares (53) -
AT1 distributions 4.1.2 (70) (79)
Ordinary dividends paid (50) -
------------------------------------------- ----- ------- -------
Net cash provided by/(used in) financing
activities 1,810 (623)
------------------------------------------- ----- ------- -------
Net increase in cash and cash equivalents 2,358 439
Cash and cash equivalents at the beginning
of the year 10,253 9,814
------------------------------------------- ----- ------- -------
Cash and cash equivalents at the
end of the year 5.2 12,611 10,253
------------------------------------------- ----- ------- -------
Group financial statements
Consolidated statement of cash flows
Movements in liabilities arising from financing activities
Restated
Term debt
funding securities Lease
schemes(1) in issue liabilities Restated
GBPm GBPm GBPm total
Note 3.12 3.11 3.16 GBPm
------------------------------------ ----------- ----------- ------------ --------
At 1 October 2020 5,397 8,758 175 14,330
Cash flows:
Issuances - 732 - 732
Drawdowns 3,350 - - 3,350
Redemptions - (1,573) - (1,573)
Repayment (2,864) - (28) (2,892)
Non-cash flows:
Fair value and other associated
adjustments(2) 12 (183) - (171)
Additions to right-of-use
asset in exchange for increased
lease liabilities - - 4 4
Remeasurement - - 1 1
Movement in accrued interest 1 7 2 10
Unrealised foreign exchange
movements(2) - (69) - (69)
Unamortised costs - 6 - 6
------------------------------------ ----------- ----------- ------------ --------
At 1 October 2021 5,896 7,678 154 13,728
------------------------------------ ----------- ----------- ------------ --------
Cash flows:
Issuances - 2,480 - 2,480
Drawdowns 2,550 - - 2,550
Redemptions - (1,264) - (1,264)
Repayment (1,244) - (26) (1,270)
Non-cash flows:
Fair value and other associated
adjustments - (400) - (400)
Additions to right-of-use
asset in exchange for increased
lease liabilities - - 4 4
Remeasurement - - (4) (4)
Movement in accrued interest 28 8 4 40
Unrealised foreign exchange
movements - 5 - 5
Unamortised costs - 2 - 2
------------------------------------ ----------- ----------- ------------ --------
At 30 September 2022 7,230 8,509 132 15,871
------------------------------------ ----------- ----------- ------------ --------
(1) This includes amounts drawn under the TFS and TFSME.
(2) The accumulated amount of the fair value adjustments on the debt securities in issue has been restated in the comparative year in line with the current year presentation. The restatement had no impact on the debt securities in issue balance, however fair value and other adjustments have increased in the comparative period by GBP59m from GBP124m to GBP183m and unrealised foreign exchange movements has decreased by GBP59m from GBP128m to GBP69m.
The notes on pages 75 to 123 form an integral part of these financial statements.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
Overview This section sets out the Group's accounting policies that relate to the consolidated financial statements as a whole. Where an accounting policy is specific to one note, the policy is described in the note to which it relates. This section also highlights newly adopted accounting standards, amendments and interpretations which are relevant to the Group. Where relevant, we explain how these changes are expected to impact the financial position and performance of the Group. The Group has adopted the UK Finance Code for Financial Reporting Disclosure and has prepared the 2022 Annual Report and Accounts in compliance with the Code.
1.1 General information
The Company is a public company limited by shares, incorporated in the United Kingdom under the Companies Act and registered in England and Wales.
The consolidated financial statements comprise those of the Company and its controlled entities, together the 'Group'.
1.2 Basis of accounting
On 1 October 2021, the Group transitioned to preparing consolidated financial statements under UK adopted International Accounting Standards (IAS) which is a change in accounting framework. This had no impact on the recognition, measurement or disclosure of financial information presented in the year.
The consolidated financial statements have been prepared in accordance with UK adopted IASs. The comparative year financial statements were prepared and presented in accordance with IASs in conformity with the Companies Act 2006 and IFRSs adopted pursuant to regulation (EC) No. 1606/2002 as it applied in the European Union. This also included the early adoption of 'Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform - Phase 2', which had been endorsed by the EU and UK in January 2021 and included in UK adopted IAS.
The financial information has been prepared under the historical cost convention, as modified by the revaluation of certain financial assets and liabilities at fair value through profit or loss and other comprehensive income. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
1.3 Presentation of risk, offsetting and maturity disclosures
Certain disclosures required under IFRS 7 'Financial instruments: disclosures' and IAS 1 'Presentation of financial statements' have been included within the Risk management section of this results announcement.
1.4 Going concern
The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic report contained in the Group's Annual Report & Accounts. In addition, the full Risk report contained in the Group's Annual Report & Accounts includes the Group's risk management objectives and the objectives, policies and processes for managing its capital.
In assessing the Group's going concern position as at 30 September 2022, the Directors have considered a number of factors, including the current balance sheet position (which reflected the Group's consideration of the potential impact of climate-related risks), the Group's strategic and financial plan, taking account of possible changes in trading performance and funding retention, and stress testing and scenario analysis. The assessment concluded that the Group has sufficient capital and liquidity for at least the next 12 months. The Group's capital ratios and its total capital resources are comfortably in excess of PRA requirements and internal stress testing indicates the Group can withstand severe economic and competitive stresses.
As a result of the assessment, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and that the Group is well placed to manage its business risks successfully. Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements.
The Directors' report contained in the Group's Annual Report & Accounts provides further detail on the Group's going concern and viability assessment.
1.5 Basis of consolidation
Controlled entities are all entities (including structured entities) to which the Company is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. An assessment of control is performed on an ongoing basis.
Controlled entities are consolidated from the date on which control is established by the Group until the date that control ceases. The acquisition method of accounting is used to account for business combinations other than those under common control. A non -- controlling interest is recognised by the Group in respect of any portion of the total assets less total liabilities of an acquired entity or entities that is not owned by the Group. Balances and transactions between entities within the Group and any unrealised gains and losses arising from those transactions are eliminated in full upon consolidation.
The Group's interests in JV entities are accounted for using the equity method and then assessed for impairment in the relevant holding companies' financial statements.
The consolidated financial statements have been prepared using uniform accounting policies.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
1.6 Foreign currency
Functional and presentation currency
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates, the 'functional currency'. The consolidated financial statements are presented in pounds sterling (GBP), which is also the Group's presentation currency, rounded to the nearest million pounds sterling (GBPm) unless otherwise stated.
Transactions and balances
The Group records an asset, liability, expense or revenue arising from a transaction using the closing exchange rate between the functional and foreign currency on the transaction date. At each subsequent reporting date, the Group translates foreign currency monetary items at the closing rate. Foreign exchange differences arising on translation or settlement of monetary items are recognised in the income statement during the year in which the gains or losses arise.
Foreign currency non-monetary items measured at historical cost are translated at the date of the transaction, with those measured at fair value translated at the date when the fair value is determined. Foreign exchange differences are recognised directly in equity for non-monetary items where any component of associated gains or losses is recognised directly in equity. Foreign exchange differences arising from non-monetary items, whereby the associated gains or losses are recognised in the income statement, are also recognised in the income statement.
1.7 Financial instruments
Recognition and derecognition
Financial instruments are recognised when the Group becomes party to the contractual provisions of the instrument. Purchases and sales of financial assets classified within FVTPL or FVOCI are recognised on trade date.
The Group derecognises a financial asset when the contractual cash flows from the asset expire or it transfers the right to receive contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership are transferred. Financial liabilities are derecognised when the Group has discharged its obligation to the contract, or the contract is cancelled or expires.
Classification and measurement
The Group measures a financial asset or liability on initial recognition at its fair value, plus or minus transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability (with the exception of financial assets or liabilities at FVTPL, where transaction costs are recognised directly in the income statement as they are incurred).
Financial assets
Subsequent accounting for a financial asset is determined by the classification of the asset depending on the underlying business model and contractual cash flow characteristics. This results in classification within one of the following categories: i) amortised cost; ii) FVTPL; or iii) FVOCI.
A financial asset is measured at amortised cost when: (1) the asset is held within a business model whose objective is achieved by collecting contractual cash flows; and (2) the contractual terms give rise to cash flows on specified dates which are solely payments of principal and interest on the principal amount outstanding. The amortised cost classification applies to the Group's loans and advances to customers (note 3.1), cash and balances from central banks (note 3.4) and balances due from other banks. Financial assets classified at amortised cost are subject to ECL requirements as detailed in note 3.2.
Specific accounting policies for financial assets at FVTPL and FVOCI can be found in notes 3.5 and 3.7 respectively.
Financial liabilities
All financial liabilities are measured at amortised cost, except for financial liabilities at FVTPL. Such liabilities include derivative contracts, other than those which are financial guarantee contracts or designated and effective hedging instruments.
Repurchase agreements
Securities sold subject to repos are retained in their respective balance sheet categories. The associated liabilities are included in amounts due to other banks based upon the counterparties to the transactions. The difference between the sale and repurchase price of repos is treated as interest and accrued over the life of the agreements using the effective interest method.
Offsetting
This can only occur, and the net amount be presented on the balance sheet, when the Group currently has a legally enforceable right to offset the recognised amounts and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
1.8 Property, plant and equipment
The Group's property, plant and equipment is carried at cost, less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to acquisition of the asset. Impairment is assessed whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
All items of property, plant and equipment are depreciated or amortised using the straight line method, at rates appropriate to their estimated useful life to the Group. The annual rates of depreciation or amortisation are:
-- Buildings 50 years
-- Leases (leasehold improvements) the lower of the expected lease term or the asset's remaining useful life
-- Fixtures and equipment 3-10 years
Residual values and useful lives of assets are reviewed at each reporting date. Depreciation is recognised within operating expenses in the income statement. The policy for lessee accounting is provided in note 3.16.
1.9 Critical accounting estimates and judgements
The preparation of financial statements requires the use of certain critical accounting estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosed amount of contingent liabilities. Actual results may differ from those on which management's estimates are based. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable. The Group considers the most significant use of accounting estimates and judgements relate to the following areas:
Area Estimates Judgements Further detail
-------------------- -------------------- -------------------- -----------------
Impairment Asset lifetimes SICR Credit risk
provisions Economic scenarios Definition section of
on credit of default Risk management
exposures PMAs and note 3.2
-------------------- -------------------- -------------------- -----------------
EIR Product life Standard variable Note 2.2
Post promotion rate
attrition Macroeconomic
and yield factors
Model risk
reserve (MRR)
-------------------- -------------------- -------------------- -----------------
Deferred tax Period for Note 2.5
the recoverability
of deferred
tax assets
-------------------- -------------------- -------------------- -----------------
Retirement Discount rate Note 3.9
benefit obligations Inflation
assumptions
Mortality
assumptions
-------------------- -------------------- -------------------- -----------------
Critical accounting estimates and judgements related to climate change
In addition, management has also considered and reflected on the potential impact of climate -- related risks on the Group's financial position and performance.
This involved undertaking an assessment over the Group's assets (both financial and non-financial) and evaluating whether the observable effects of physical and transition risk of climate change would have a material impact on the Group's financial position and performance in the current year. It is widely understood and appreciated that the effects of climate change will not be significant in the short term and that the inherent risks and uncertainties in quantifying the effect of climate change in the financial statements are considerable and more likely to impact in the medium to longer term.
The Group's customer lending is the most significant financial asset exposed to the potential impact of climate-related risks, primarily the ECL implications and the ability of the customer to meet their contractual payments. As a UK-based bank with no significant lending outside of the UK, the Group considers the potential for material ECLs to emerge as a result of climate change in the short term to be negligible.
Other non-financial assets that may be impacted include the Group's deferred tax asset and the pension assets held by the Group's defined benefit pension scheme. The Group assesses the recoverability of deferred tax assets over a six-year corporate planning time horizon which incorporates all aspects of the Group's future performance and expectations. The Trustee of the defined benefit pension scheme is responsible for all investment decisions, and these are made in accordance with a Statement of Investment Principles which incorporates climate change considerations. In addition, by necessity, the investment decisions made by the Trustees are normally medium to long term in nature.
Overall, while the effects of climate change represent a source of significant uncertainty, the Group does not consider there to be a material impact on its estimates and judgements from physical and transition risks of climate change in these financial statements.
Group financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
1.10 New accounting standards and interpretations
The Group has adopted the following International Accounting Standards Board (IASB) pronouncement in the current financial year:
Amendment to IFRS 16 and COVID-19 related rent concessions beyond June 2021 was issued in March 2021 and endorsed for use in the UK in May 2021. The original amendment (issued in May 2020 and effective for annual reporting periods beginning on or after 1 June 2020) introduced the optional practical expedient for lessees from assessing whether a rent concession related to COVID-19 is a lease modification. The IASB subsequently extended the period of application of the practical expedient to 30 June 2022, effective for annual reporting periods beginning on or after 1 April 2021. These pronouncements had no material impact on the Group's consolidated financial statements as it does not receive rent concessions.
The Group also acknowledges the decision by the IFRS Interpretations Committee (IFRIC) in April 2022, which concluded that certain demand deposits with restrictions should be presented as part of the cash and cash equivalents balance. The IFRIC agenda decision was considered but there are no impacts that would require a change in accounting policy for demand deposits.
New accounting standards and interpretations not yet adopted
The IASB has issued a number of other minor amendments to IFRSs that are not mandatory for the current reporting year and have not been early adopted by the Group. These amendments are not expected to have a material impact for the Group.
1.11 Other changes in the year
The following changes took place during the year:
Hedge accounting
The Group has changed the presentation of certain items in the derivative financial instruments note to the financial statements (note 3.6), with the relevant sections of the note restated. These are presentational changes only and have no impact on the Group's primary financial statements or net asset position.
The restatement was necessary to correct the historic presentation of the foreign exchange component of the fair value hedge adjustment, with the following restatements made:
Derivative financial instruments - hedge accounting (note 3.6)
The spot foreign exchange element was previously excluded from the disclosures. This has been corrected and impacts both the hedging instrument and the hedged item. The impact of the restatement on the previous year disclosure is as follows:
Change in fair value
of hedging
instrument in the year
used for
ineffectiveness measurement
------------------------------------- ------------------------------
Original Restated
Hedging instrument GBPm GBPm
------------------------------------- -------------- --------------
Fair value hedges
Foreign exchange and interest rate
risk
Cross currency swaps (12) (86)
------------------------------------- -------------- --------------
Total derivatives designated as fair
value hedges 488 414
------------------------------------- -------------- --------------
Change in fair value
of hedged
Accumulated hedge items in the year used
adjustment on the hedged for
item ineffectiveness measurement
----------------------- --------------------------- ------------------------------
Original Restated Original Restated
Hedged item GBPm GBPm GBPm GBPm
----------------------- ------------- ------------ -------------- --------------
Fair value hedges
Fixed rate currency
issuances (13) 72 17 91
----------------------- ------------- ------------ -------------- --------------
Total (273) (188) (498) (424)
----------------------- ------------- ------------ -------------- --------------
Expected credit losses
During the year, the Group made refinements to the operation of the SICR criteria within the Business portfolio. Further detail can be found in the credit risk section within the Risk report, pages 21 and 35. These refinements do not require any change to the prior period reported position.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.1 Segment information
The Group's operating segments are operating units engaged in providing different products or services and whose operating results and overall performance are regularly reviewed by the Group's Chief Operating Decision Maker, the Executive Leadership Team.
The Group operates under four commercial lines: Mortgages, Unsecured, Business, and Deposits, which are reported through the Chief Commercial Officer. At this point in time, the business continues to be reported to the Group's Chief Operating Decision Maker as a single segment and decisions made on the performance of the Group on that basis. Segmental information will therefore continue to be presented on this single segment basis.
Summary income statement
2022 2021
GBPm GBPm
-------------------------------------- ------- --------
Net interest income 1,576 1,357
Non-interest income 140 132
-------------------------------------- ------- --------
Total operating income 1,716 1,489
Operating and administrative expenses (1,069) (1,203)
Impairment (losses)/credit on credit
exposures (52) 131
-------------------------------------- ------- --------
Segment profit before tax 595 417
-------------------------------------- ------- --------
Average interest earning assets 86,275 86,947
-------------------------------------- ------- --------
The Group has no operations outside the UK and therefore no secondary geographical area information is presented. The Group is not reliant on a single customer. Liabilities are managed on a centralised basis.
2.2 Net interest income
Accounting policy Interest income is recognised in the income statement using the effective interest method which discounts the estimated future cash payments or receipts, at the effective interest rate, over the expected life of the financial instrument to the gross carrying amount of the non-credit impaired financial asset. Interest expense is recognised in the income statement using the same effective interest method on the amortised cost of the financial liability. When calculating the EIR, cash flows are estimated considering all contractual terms of the financial instrument (e.g. prepayment, call and similar options) excluding future credit losses. The calculation includes all amounts paid or received that are an integral part of the EIR such as transaction costs and all other premiums or discounts. Where it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of financial instruments), the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments) are used. Loan origination and commitment fees are recognised within the EIR calculation. Fees in relation to the non-utilisation of a commitment are recognised as revenue upon expiry of the agreed commitment period. Loan related administration and service fees are recognised as revenue over the period of service. Interest income on financial assets in impairment Stages 1 and 2 is recognised on the gross carrying value of the financial asset using the original EIR. Once a financial asset or group of similar financial assets has been categorised as credit-impaired (Stage 3), interest income is recognised on the net carrying value (after deducting the ECL allowance from the gross lending) using the asset's original EIR. The interest income for POCI financial assets is calculated using the credit-adjusted EIR applied to the amortised cost of the financial asset from initial recognition. The Group recognises and presents the reversal of ECLs following the curing of a credit impaired financial asset as a reversal of impairment losses. The Group's policy on ECLs can be found in note 3.2. Interest income and interest expense on hedged assets and liabilities and financial assets and liabilities designated as FVTPL are also recognised as part of NII. Interest income and expense on derivatives economically hedging interest bearing financial assets or liabilities (but not designated as hedging instruments) and other financial assets and liabilities held at FVTPL (either mandatory or by election) are presented within other similar interest. Included in interest income is finance lease income which is recognised at a constant periodic rate of return on the net investment.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.2 Net interest income continued
Critical accounting estimates and judgements
EIR
The EIR is determined at initial recognition based
upon the Group's best estimate of the future cash
flows of the financial instrument over its expected
life. Where these estimates are subsequently revised,
a present value adjustment to the carrying value
of the asset is recognised in profit or loss. Such
adjustments can introduce income statement volatility
and consequently the EIR method is a source of estimation
uncertainty.
The Group considers that significant judgement is
exercised over the mortgage and credit card portfolios.
Due to the inherent judgement and estimation uncertainty
that exists in determining the EIR adjustment, a
MRR is held to mitigate this uncertainty.
Mortgages
For mortgage products the main accounting estimates
and judgements when assessing the cash flows are
the product life (including assumptions based on
observed historic customer behaviour when in a standard
variable rate (SVR) period) and the applicable SVR.
As at 30 September 2022, a total EIR adjustment
of GBP201m (2021: GBP210m) has been recognised for
mortgages. This represented 0.3% (2021: 0.4%) of
the balance sheet carrying value of gross loans
and advances to customers for mortgage lending.
The net impact of the mortgage EIR adjustments on
the income statement in the year represented (0.7)%
of gross customer interest income for mortgages
(2021: 1.4%).
Product life
This primarily involves assumptions of customer
behaviour when a fixed rate product comes to an
end and reverts to the Group's SVR. The Group currently
assumes that 85% (2021: 85%) of customers will have
fully repaid or switched to a new product within
two months of reverting to SVR.
SVR
Changes to the BoE base rate have an impact on the
SVR charged to customers and consequently on the
Group's interest income. The Group historically
passes base rate changes through to the SVR in full
but, on occasion, may choose not to do so.
The significant accounting estimates above are monitored
on an ongoing basis to ensure they remain appropriate
based on recent, observable customer behaviour,
market data (such as market derived base rate forecasts)
and take account of the competitive environment
in which the Group operates. The Group also considers
potential changes to future customer behaviour as
a result of macroeconomic factors. There continues
to be increased uncertainty in purchase and switching
activity as a result of actual and anticipated bate
rate rises. The Group has taken this into account
when determining the EIR model assumptions.
Sensitivity analysis
As noted above, the calculation of the Group's EIR
adjustment is sensitive to changes in product life
and SVR assumptions. There are inter-dependencies
between the assumptions which add to the complexity
of the judgements the Group has to make. This means
that no single factor is likely to move independently
of others, however, the sensitivities disclosed
below assume all other assumptions remain unchanged.
2022 2021
Sensitivity impact on the mortgage
EIR adjustment (GBPm) (GBPm)
------------------------------------- ------- -------
+/- 1 month change to the timing
of customer repayments, redemptions
and product transfers 16/(13) 12/(10)
50bps increase to the BoE base rate
not passed through to the Group's
SVR (46) (43)
------------------------------------- ------- -------
Credit cards
An EIR adjustment arises on credit card products
that have a low introductory rate, followed by a
higher reversionary rate in future years when the
promotional period expires. However, receipt of
such interest income depends on the customer staying
with the Group beyond promotional expiry and therefore
significant judgement is involved in forecasting
customer behaviour and estimating the future cash
flows. Key behavioural assumptions include an estimation
of the utilisation of available credit, transaction
and repayment activity and the retention of the
customer balance after the end of a promotional
period. As at 30 September 2022, a total EIR adjustment
of GBP285m (2021: GBP273m) has been recognised for
credit cards. This represented 5.5% (2021: 6.4%)
of the balance sheet carrying value of gross loans
and advances to customers for credit cards. The
impact of the net credit card EIR adjustments on
the income statement in the year represented 3.3%
of gross customer interest income for credit cards
(2021: 24.3%).
Expected cash flows are estimated based on historical
experience of similar products and are consistent
with those used in product pricing models. The Group
reviews and adjusts assumptions where necessary
on an ongoing basis, using the most recent observable
customer behaviour and market data. The Group also
considers potential future changes to customer behaviour
as a result of macroeconomic factors.
Post-promotional yield
The yield on a credit card following the post-promotional
period is a significant estimate within the EIR
assumptions. Yield is a function of the Interest
Bearing Balance (IBB) and the APR charged to customers. IBB is impacted by customer behaviour and while there is evidence to support the expected IBB following the post-promotional period, there is inherent risk that this data may differ in the future. If the IBB differs to the Group's estimate it can have a material impact on the revised future cash flows. Based on recent experience, the Group has applied an average IBB of 55% (2021: 55%) following the end of the promotional period.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.2 Net interest income continued
Post-promotional attrition
The level of repayment in the post-promotional period
is a key sensitivity within the EIR assumptions.
There is evidence to support the expected behaviour
of customers after the end of promotional periods,
however there is inherent risk that this data may
not be indicative of actual future behaviour. If
the proportion of customers who repay their balance
post-promotion differs to the Group's estimate it
can have a material impact on the revised future
cash flows. Based on recent experience, the Group
has applied a long run average attrition rate of
1.5% per month (2021: 1.5% per month) following
the end of the promotional period.
Macroeconomic factors
When determining assumptions, the Group has considered
the impact to customers of inflationary pressures
including high energy and utility costs and the
recent and anticipated future base rate rises. As
a result, temporary adjustments have been made to
assumptions. Post promotional IBB has been decreased
to 50% for 12 months and balance attrition has been
increased to reflect a reduction in retail and balance
transfer transaction activity for 12 months. If,
however, the stress period was to increase to 24
months, the Group estimates it would result in a
negative present value adjustment of approximately
GBP35m, which would be recognised in the income
statement.
Sensitivity analysis
As noted above, the calculation of the Group's EIR
adjustment for credit cards is sensitive to changes
in post-promotional yield and post-promotional attrition.
There are inter-dependencies between the key assumptions
which add to the complexity of the judgements the
Group has to make. This means that no single factor
is likely to move independently of others, however,
the sensitivities disclosed below assume all other
assumptions remain unchanged. 2022 2021
Sensitivity impact on the credit
card EIR adjustment (GBPm) (GBPm)
---------------------------------------- ------- -------
+/- 5 ppts change to post-promotional
IBB assumption(1) (9.1% relative
increase/decrease) 34/(28) 31/(31)
+/- 0.5 ppts change to post-promotional
monthly balance attrition rate (33%
relative increase/decrease) (20)/23 (23)/27
---------------------------------------- ------- -------
MRR
The complicated nature of EIR models means the Group
exercises prudence on the modelled outcome and therefore
chooses to hold a MRR in relation to both mortgages
and credit cards to mitigate the risk of estimation
uncertainty.
In arriving at the level of MRR, the Group assesses
the judgements made within the EIR modelling and
applies severe downside stress scenarios to quantify
emerging or potential risks. This allows the Group
to hold an appropriate level of MRR across both
asset classes. The MRR is reviewed quarterly based
on the conditions prevalent at the time and adjusted
where necessary.
(1) Where the IBB assumption is already equal to
or less than 50% IBB, no further adjustment has
been made on the basis this already represents a
downside economic stress.
2022 2021
GBPm GBPm
------------------------------------------ ----- -----
Interest income
Loans and advances to customers 2,095 1,880
Loans and advances to other banks 70 8
Financial assets at FVOCI 50 18
------------------------------------------ ----- -----
Total interest income 2,215 1,906
------------------------------------------ ----- -----
Other similar interest
Financial assets at FVTPL 5 9
Derivatives economically hedging interest
bearing assets (3) (5)
------------------------------------------ ----- -----
Total other similar interest 2 4
------------------------------------------ ----- -----
Less: interest expense and similar
charges
Customer deposits (342) (361)
Debt securities in issue (227) (168)
Due to other banks (70) (20)
Other interest expense (2) (4)
------------------------------------------ ----- -----
Total interest expense and similar
charges (641) (553)
------------------------------------------ ----- -----
Net interest income 1,576 1,357
------------------------------------------ ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.3 Non-interest income
Accounting policy
Gains less losses on financial instruments at fair
value
This includes fair value gains and losses from three
distinct activities:
* Derivatives classified as held for trading - the full
change in fair value of trading derivatives is
recognised inclusive of interest income and expense
arising on those derivatives except when economically
hedging other assets and liabilities at fair value as
outlined in note 2.2.
* Other financial assets designated at FVTPL - these
relate principally to the Group's fixed interest rate
loan portfolio (note 3.5), which were designated at
inception as FVTPL. The fair value of these loans is
derived from the future loan cash flows using
appropriate discount rates and includes adjustments
for credit risk and credit losses. The valuation
technique used is reflective of current market
practice.
* Hedged assets, liabilities and derivatives designated
in hedge relationships - fair value movements are
recognised on both the hedged item and hedging
derivative in a fair value hedge relationship, the
net of which represents hedge ineffectiveness, and
hedge ineffectiveness on cash flow hedge
relationships (note 3.6).
Fees and commissions
Fees and commissions receivable which are not an
integral part of the EIR are recognised as income
as the Group fulfils its performance obligations.
The Group's principal performance obligations arising
from contracts with customers are in respect of
current accounts, debit cards and credit cards.
The Group provides the service and consequently
generates the fee and commission income monthly,
with amounts recognised in income on this basis.
Costs incurred to generate fee and commission income
are charged to fees and commissions expense as they
are incurred.
2022 2021
GBPm GBPm
------------------------------------------- ----- -----
Gains less losses on financial instruments
at fair value
Held for trading derivatives 6 6
Financial assets at fair value(1) (19) 4
Ineffectiveness arising from fair
value hedges (note 3.6) 46 (10)
Amounts recycled to profit and loss
from cash flow hedges(2) (note 3.6) (4) (5)
Ineffectiveness arising from cash
flow hedges (note 3.6) (46) -
------------------------------------------- ----- -----
(17) (5)
------------------------------------------- ----- -----
Other operating income
Net fee and commission income 134 124
Margin on foreign exchange derivative
brokerage 19 16
Gains on sale of financial assets
at FVOCI 4 -
Share of JV loss after tax (4) (5)
Other income 4 2
------------------------------------------- ----- -----
157 137
------------------------------------------- ----- -----
Total non-interest income 140 132
------------------------------------------- ----- -----
(1) Included within financial assets at fair value is a credit risk gain on loans and advances at fair value of GBP1m (2021: GBP1m gain), and a fair value gain on equity investments of GBP2m (2021: GBP15m gain).
(2) In respect of terminated hedges.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.3 Non-interest income continued
The Group's unrecognised share of losses of JVs for the year was GBP8m (2021: GBP1m). For entities making losses, subsequent profits earned are not recognised until previously unrecognised losses are extinguished. The Group's unrecognised share of losses net of unrecognised profits on a cumulative basis of JVs is GBP9m (2021: GBP1m).
Non-interest income includes the following fee and commission income disaggregated by income type:
2022 2021
GBPm GBPm
-------------------------------------- ----- -----
Current account and debit card fees 102 90
Credit cards 52 38
Insurance, protection and investments 8 10
Other fees(1) 26 29
-------------------------------------- ----- -----
Total fee and commission income 188 167
Total fee and commission expense (54) (43)
-------------------------------------- ----- -----
Net fee and commission income 134 124
-------------------------------------- ----- -----
(1) Other fees include mortgages, invoice and asset finance and ATM fees.
2.4 Operating and administrative expenses before impairment losses
Accounting policy
Staff costs primarily consist of wages and salaries,
accrued bonus and social security costs arising
from services rendered by employees during the financial
year.
The Group recognises bonus costs where it has a
present obligation that can be reliably measured.
Bonus costs are recognised over the relevant service
period required to entitle the employee to the reward.
The Group's accounting policies on pension expenses
and equity based compensation are included in notes
3.9 and 4.2 respectively.
2022 2021
GBPm GBPm
------------------------------------------ ----- ------
Staff costs 435 426
Property and infrastructure 38 89
Technology and communications 119 121
Corporate and professional services 135 160
Depreciation, amortisation and impairment 179 191
Other expenses 163 216
------------------------------------------ ----- ------
Total operating and administrative
expenses 1,069 1,203
------------------------------------------ ----- ------
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.4 Operating and administrative expenses before impairment losses continued
Staff costs comprise the following items:
2022 2021
GBPm GBPm
------------------------------------- ----- -----
Salaries and wages 254 248
Social security costs 30 30
Defined contribution pension expense 50 49
Defined benefit pension credit (24) (8)
------------------------------------- ----- -----
Compensation costs 310 319
------------------------------------- ----- -----
Equity based compensation(1) 4 8
Bonus awards 27 22
------------------------------------- ----- -----
Performance costs 31 30
------------------------------------- ----- -----
Redundancy and restructuring 3 29
Temporary staff costs 13 13
Other(2) 78 35
------------------------------------- ----- -----
Other staff costs 94 77
------------------------------------- ----- -----
Total staff costs 435 426
------------------------------------- ----- -----
(1) Includes National Insurance on equity based compensation.
(2) Includes a one-off cost of living allowance of GBP7m (2021: GBPNil).
The defined benefit pension credit in the current period includes a credit of GBP10m (2021: GBP5m) arising from the ongoing Pension Increase Exchange (PIE) exercise which will complete in calendar year 2023 (note 3.9). A PIE gives members the option to exchange future increases on their pensions for a one-off uplift to their current pension.
The average number of FTE employees of the Group during the year was made up as follows:
2022 2021
Number Number
--------------- ------- -------
Managers(1) 2,574 2,691
Clerical staff 4,292 4,724
--------------- ------- -------
6,866 7,415
--------------- ------- -------
(1) Includes a combination of managers with and without staff responsibilities.
The average monthly number of employees was 7,829 (2021: 8,613). All staff are contracted employees of the Group and its subsidiary undertakings. The average figures above do not include contractors.
Auditor's remuneration included within other operating and administrative expenses:
2022 2021
GBP'000 GBP'000
------------------------------------------------ -------- --------
Fees payable to the Company's auditor
for the audit of the Company's financial
statements 24 23
Fees payable to the Company's auditor
for the audit of the Company's subsidiaries(1) 4,564 4,272
------------------------------------------------ -------- --------
Total audit fees 4,588 4,295
Audit related assurance services 262 255
Other assurance services 1,877 330
------------------------------------------------ -------- --------
Total non-audit fees 2,139 585
Fees payable to the Company's auditor
in respect of associated pension schemes 107 79
------------------------------------------------ -------- --------
Total fees payable to the Company's
auditor 6,834 4,959
------------------------------------------------ -------- --------
(1) Includes the audit of the Group's structured entities.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.4 Operating and administrative expenses before impairment losses continued
Non-audit fees of GBP2.1m (2021: GBP0.6m) were paid to the auditor during the year for services including the skilled person reporting as required by the PRA, the review of the Interim Financial Report, PRA Written Auditor Reporting, comfort letters for the global medium-term note and covered bond programmes, TFSME assurance, client money reviews and profit attestations.
Out of pocket expenses of GBP13k (2021: GBPNil) were borne by the Group during the year.
2.5 Taxation
Accounting policy
Income tax on the profit or loss for the year comprises
current and deferred tax.
Income tax is recognised in the income statement
except to the extent that it is related to items
recognised directly in equity, in which case the
tax is also recognised in equity (excluding AT1
distributions where the tax impact is recognised
in the income statement).
Current tax is the expected tax payable or receivable
on the taxable profit or loss for the year, using
tax rates enacted or substantively enacted at the
balance sheet date, and any adjustment to tax payable
in respect of previous years.
Deferred tax assets and liabilities are recognised
on temporary differences arising between the tax
bases of assets and liabilities and their carrying
amounts in the financial statements. Deferred tax
is determined using tax rates and laws that have
been enacted or substantively enacted by the balance
sheet date and are expected to apply when the related
deferred tax asset is realised, or the deferred
tax liability is settled.
A deferred tax asset is recognised for unused tax
losses and unused tax credits only if it is probable
that future taxable amounts will arise against which
those temporary differences and losses may be utilised.
Critical accounting estimates and judgements
In arriving at the Group's deferred tax asset balance
of GBP146m (2021: GBP377m), significant judgement
is exercised on the component of deferred tax assets
that relate to tax losses carried forward of GBP302m
(2021: GBP255m).
The Group has assessed the potential for the recovery
of these tax losses carried forward for this component
of deferred tax assets at 30 September 2022 and
considers it probable that sufficient future taxable
profits will be available against which the underlying
deductible temporary differences can be utilised
over the corporate planning horizon. Deferred tax
assets are recognised to the extent that they are
expected to be utilised over six years from the
balance sheet date. If instead of six years the
period were five years or seven years, the recognised
deferred tax asset would be GBP115m or would remain
at GBP146m respectively. If Group profit forecasts
were 10% lower than anticipated, the deferred tax
asset would be GBP140m. This is only GBP6m lower
than the reported position as there is excess plan
profit capacity for losses to be recognised; all
historic tax losses are now recognised on the balance
sheet. All tax assets arising will be used within
the UK.
2022 2021
GBPm GBPm
------------------------------------- ----- -----
Current tax
Current year 81 62
Adjustment in respect of prior years 4 -
------------------------------------- ----- -----
85 62
------------------------------------- ----- -----
Deferred tax
Current year (21) (124)
Adjustment in respect of prior years (6) 5
------------------------------------- ----- -----
(27) (119)
------------------------------------- ----- -----
Tax expense/(credit) for the year 58 (57)
------------------------------------- ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.5 Taxation continued
The tax assessed for the year differs from that arising from applying the standard rate of corporation tax in the UK of 19%. A reconciliation from the expense implied by the standard rate to the actual tax expense/(credit) is as follows:
2022 2021
GBPm GBPm
-------------------------------------- ----- -----
Profit on ordinary activities before
tax 595 417
-------------------------------------- ----- -----
Tax expense based on the standard
rate of corporation tax in the UK
of 19% (2021: 19%) 113 79
-------------------------------------- ----- -----
Effects of:
Disallowable expenses 4 13
Bank levy - 1
Conduct indemnity adjustment (12) 58
Deferred tax assets recognised (83) (126)
Impact of rate changes 23 (92)
AT1 distribution (13) (15)
Banking surcharge 28 20
Adjustments in respect of prior years (2) 5
-------------------------------------- ----- -----
Tax expense/(credit) for the year 58 (57)
-------------------------------------- ----- -----
In February 2022 legislation was enacted to reduce the banking surcharge from 8% to 3%, and to increase the threshold below which it is not chargeable to GBP100m (previously GBP25m). The changes are effective for current tax from 1 April 2023 but, in accordance with accounting standards, have effect for deferred tax in the current year. The impact is a reduction in the value of deferred tax assets, reflected within the GBP23m charge to the income statement above.
The Group has recognised deferred tax in relation to the following items in the balance sheet, income statement, and statement of other comprehensive income:
Movement in deferred tax (liability)/asset
Gains
on Defined
Cash financial Tax Total benefit Total
Acquisition flow instruments losses Other deferred pension deferred
accounting hedge at carried Capital Pension temporary tax scheme tax
adjustments reserve FVOCI forward allowances spreading differences assets surplus liabilities
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ----------- ------- ----------- ------- ---------- --------- ----------- -------
At 1 October
2020 (10) 23 (4) 151 113 9 23 305 (253) (253)
Income statement
(charge)/credit - 1 - 104 11 - 6 122 (3) (3)
Other
comprehensive
income
charge - (33) (11) - - (4) (2) (50) (40) (40)
---------------- ----------- ------- ----------- ------- ---------- --------- ----------- -------- ------- -----------
At 30 September
2021 (10) (9) (15) 255 124 5 27 377 (296) (296)
---------------- ----------- ------- ----------- ------- ---------- --------- ----------- -------- ------- -----------
Income statement
credit/(charge) 2 2 - 47 (13) - (2) 36 (9) (9)
Other
comprehensive
income
charge - (260) (1) - - (5) (1) (267) (45) (45)
---------------- ----------- ------- ----------- ------- ---------- --------- ----------- -------- ------- -----------
At 30 September
2022 (8) (267) (16) 302 111 - 24 146 (350) (350)
---------------- ----------- ------- ----------- ------- ---------- --------- ----------- -------- ------- -----------
Other temporary differences include the IFRS 9 transitional adjustment of GBP11m and equity based compensation of GBP6m (2021: GBP15m and GBP9m respectively).
The Group has deferred tax assets of GBP146m (2021: GBP377m), the principal components of which are tax losses of GBP302m (2021: GBP255m) and capital allowances of GBP111m (2021: GBP124m) offset by the cash flow hedge reserve deferred tax liability of GBP267m (2021: GBP9m). The Group also has deferred tax liabilities of GBP350m (2021: GBP296m) in relation to the defined benefit pension surplus.
The deferred tax assets and liabilities detailed above arise primarily in Clydesdale Bank PLC which has a right to offset current tax assets against current tax liabilities and is party to a Group Payment Arrangement for payments of tax to HMRC. Therefore, in accordance with IAS 12, deferred tax assets and deferred tax liabilities have also been offset in this year where they relate to payments of income tax to this tax authority.
Historic trade tax losses are now fully recognised (2021: unrecognised deferred tax asset of GBP112m representing trading losses with a gross value of GBP449m). The Group also has historic non-trading losses of GBP6m gross, tax value GBP1m; a deferred tax asset has not been recognised in respect of these losses as their use cannot be foreseen.
On 17 October 2022, the Chancellor of the Exchequer confirmed that the UK corporation tax rate will increase to 25% from 1 April 2023. On 17 November 2022 it was confirmed that the previously enacted reduction in Banking Surcharge to 3%, with an allowance of GBP100m, would proceed, also from 1 April 2023. In line with the requirements of IAS 12, these enacted tax rates have been used to determine the deferred tax balances at 30 September 2022.
Group financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.6 Earnings per share
Accounting policy Basic EPS Basic EPS is calculated by taking the profit attributable to ordinary shareholders of the parent company and then dividing this by the weighted average number of ordinary shares outstanding during the year after deducting the weighted average of the Group's holdings of its own shares. Diluted EPS This requires the weighted-average number of ordinary shares in issue to be adjusted to assume conversion of all dilutive potential ordinary shares. These arise from awards made under equity based compensation schemes. Share awards with performance conditions attaching to them are not considered to be dilutive unless these conditions have been met at the reporting date.
The Group presents basic and diluted loss per share data in relation to the ordinary shares of Virgin Money UK PLC.
2022 2021
GBPm GBPm
--------------------------------------- ----- -----
Profit attributable to ordinary equity
holders for the purposes of basic
and diluted EPS 467 395
--------------------------------------- ----- -----
2022 2021
--------------------------------------- ----- -----
Weighted-average number of ordinary
shares in issue (millions)
- Basic 1,441 1,442
Adjustment for share awards made under
equity based compensation schemes 3 1
--------------------------------------- ----- -----
- Diluted 1,444 1,443
--------------------------------------- ----- -----
Basic earnings per share (pence) 32.4 27.3
Diluted earnings per share (pence) 32.3 27.3
--------------------------------------- ----- -----
Basic earnings per share has been calculated after deducting 0.3m (2021: 0.1m) ordinary shares representing the weighted-average of the Group's holdings of its own shares.
Note 4.1 provides details of the share buyback programme including buybacks intended for beyond 30 September 2022.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.1 Loans and advances to customers
Accounting policy
Loans and advances to customers arise when the Group
provides money directly to a customer and includes
mortgages, term lending, overdrafts, credit card
lending, lease finance and invoice financing. They
are recognised initially at fair value and are subsequently
measured at amortised cost, using the effective
interest method, adjusted for ECLs (note 3.2). They
are derecognised when the rights to receive cash
flows have expired or the Group has transferred
substantially all the risks and rewards of ownership.
Leases entered into by the Group as lessor, where
the Group transfers substantially all the risks
and rewards of ownership to the lessee, are classified
as finance leases. The leased asset is not held
on the Group balance sheet; instead, a finance lease
is recognised representing the minimum lease payments
receivable under the terms of the lease, discounted
at the rate of interest implicit in the lease. Interest
income is recognised in interest receivable, allocated
to accounting years to reflect a constant periodic
rate of return.
2022 2021
GBPm GBPm
--------------------------------------------- ------ -------
Gross loans and advances to customers 73,146 72,551
Impairment provisions on credit exposures(1)
(note 3.2) (454) (496)
Fair value hedge adjustment (941) (179)
--------------------------------------------- ------ -------
71,751 71,876
--------------------------------------------- ------ -------
(1) ECLs on off-balance sheet exposures of GBP3m (2021: GBP8m) are presented as part of the provisions for liabilities and charges balance (note 3.13).
The Group has a portfolio of fair valued business loans of GBP70m (2021: GBP133m) which are classified separately as financial assets at FVTPL on the balance sheet (note 3.5). Combined with the above, this is equivalent to total loans and advances of GBP71,821m (2021: GBP72,009m).
The fair value hedge adjustment represents an offset to the fair value movement on hedging derivatives transacted to manage the interest rate risk inherent in the Group's fixed rate Mortgage portfolio.
The Group has transferred a proportion of mortgages to the securitisation and covered bond programmes (note 3.3).
Lease finance
The Group leases a variety of assets to third parties under finance lease arrangements, including vehicles and general plant and machinery. The cost of assets acquired by the Group during the year for the purpose of letting under finance leases and hire purchase contracts amounted to GBP46m (2021: GBP9m) and GBP405m (2021: GBP301m) respectively.
Finance lease receivables are presented in the statement of financial position within loans and advances to customers. The maturity analysis of lease receivables, including the undiscounted lease payments to be received, are as follows:
Gross investment in finance lease and hire purchase receivables
2022 2021
GBPm GBPm
------------------------------------ ----- -----
Less than 1 year 269 257
1-2 years 170 156
2-3 years 117 99
3-4 years 66 50
4-5 years 46 26
More than 5 years 24 26
------------------------------------ ----- -----
692 614
Unearned finance income (45) (30)
------------------------------------ ----- -----
Net investment in finance lease and
hire purchase receivables 647 584
------------------------------------ ----- -----
Finance income recognised on the net investment in the lease was GBP21m (2021: GBP19m) and is included in interest income in the income statement (note 2.2).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.2 Impairment provisions on credit exposures
Accounting policy At each reporting date, the Group assesses financial assets measured at amortised cost, as well as loan commitments and financial guarantees not measured at FVTPL, for impairment. The impairment loss allowance is calculated using an ECL methodology and reflects: (i) an unbiased and probability weighted amount; (ii) the time value of money which discounts the impairment loss; and (iii) reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. ECL methodology is based upon the combination of PD, LGD and EAD estimates that consider a range of factors that impact on credit risk and consequently the level of impairment loss provisioning. The Group uses reasonable and supportable forecasts of future economic conditions in estimating the ECL allowance. The methodology and assumptions used in the ECL calculation are reviewed regularly and updated as necessary. SICR assessment and staging The ECL is calculated as either a 12-month (Stage 1) or lifetime ECL depending on whether the financial asset has suffered a SICR since origination (Stage 2) or has otherwise become credit impaired (Stage 3) as at the reporting date. The Group uses a PD threshold curve (distinct for each portfolio) to assess for a SICR in addition to the 30 DPD and 90 DPD backstops for recognising Stage 2 and Stage 3 provisions respectively. Financial assets can move between stages when the relevant staging criteria are no longer satisfied subject to certain restrictions for forborne assets. If the level of impairment loss reduces in a subsequent year, the previously recognised impairment loss allowance is reversed and recognised in the income statement. POCI financial assets are those which are assessed as being credit impaired upon initial recognition. Once a financial asset is classified as POCI, it remains there until derecognition irrespective of its credit quality at each reporting date. POCI financial assets are disclosed separately from those financial assets in Stage 3. The Group regards the date of acquisition as the origination date for purchased portfolios. The Group has not made use of the low credit risk option under IFRS 9 for loans and advances at amortised cost. Further detail on the low credit risk option can be found in note 3.7. The ECL assessment is performed on either a collective or individual basis: Collective: these assets are assessed and provided for on a group or a pooled basis due to the existence of shared risk characteristics for as long as they retain those similar characteristics. Financial assets are considered to have shared risk characteristics when, at a given point in time, they will tend to display a similar PD and credit risk profile and can be allocated to Stages 1, 2 or 3. Individual: these assets are assessed and provided for at the financial instrument level, with the assessment (which is governed by the Group's Credit Policy) taking into consideration a range of likely potential outcomes relating to each customer and their associated financial assets. These will be allocated to Stage 3. Regardless of the calculation basis, the Group generates a modelled ECL allowance at the individual financial instrument level. The modelled ECL output can be supplemented by management judgements in the form of PMAs where appropriate. Write-offs and recoveries When there is no reasonable expectation of recovery for a loan, it is written off against the related provision. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the impairment charge in the income statement. The Group's impairment policy for debt instruments at FVOCI is included in note 3.7. The impact of the ECL methodology on the Group's cash and balances with central banks and due from other banks balances held at amortised cost is immaterial. ECLs relating to loan commitments and financial guarantees can be found in note 3.13. Critical accounting estimates and judgements ECL methodology requires the Group to apply estimates and exercise judgement when calculating an impairment allowance for credit exposures. Further information on the chosen scenarios, macroeconomic assumptions, and scenario weightings used in the ECL calculation, including management's use of PMAs together with sensitivity analysis, is contained in the credit risk section of Risk management on pages 39 to 45.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.2 Impairment provisions on credit exposures continued
Movement in impairment provisions on credit exposures
2022 2021
GBPm GBPm
----------------------------------- ----- ------
Opening balance 496 735
Charge/(credit) for the year(1) 57 (132)
Amounts written off (129) (126)
Recoveries of amounts written off
in previous years 30 26
Transfer of off-balance sheet ECLs
to provisions (note 3.13) - (7)
----------------------------------- ----- ------
Closing balance 454 496
----------------------------------- ----- ------
(1) The GBP52m charge (2021: GBP131m credit) for impairment losses on credit exposures shown in the income statement also includes a GBP5m credit (2021: GBP1m charge) in respect of off-balance sheet ECLs (note 3.13).
Off-balance sheet ECLs are presented as part of the provisions for liabilities and charges balance (note 3.13).
3.3 Securitisation and covered bond programmes
Accounting policy The Group sponsors the formation of structured entities, primarily for the purpose of facilitation of asset securitisation and covered bond transactions, the full details of which can be found in note 6.2 to the Company financial statements. The Group has no shareholding in these entities, but is exposed, or has rights, to variable returns and has the ability to affect those returns. The entities are consolidated in the Group's financial statements in accordance with note 1.5. Securitisation The Group has securitised a portion of its retail mortgage loan portfolio under both master trust (Lanark and Lannraig) and standalone (Gosforth) securitisation programmes. The securitised mortgage loans have been assigned at principal value to bankruptcy remote structured entities. The securitised debt holders have no recourse to the Group other than the principal and interest (including fees) generated from the securitised mortgage loan portfolio. The externally held securitised notes in issue are included within debt securities in issue (note 3.11). There are a number of notes held internally by the Group which are used as collateral for repurchases and similar transactions or for credit enhancement purposes. Covered bond A subset of the Group's retail mortgage loan portfolio has been ring-fenced and assigned to a bankruptcy remote limited liability partnership, Eagle Place Covered Bonds LLP, to provide a guarantee for the obligations payable on the covered bonds issued by the Group. The covered bond partnership is consolidated with the mortgage loans retained on the Group balance sheet and the covered bonds issued included within debt securities in issue (note 3.11). The covered bond holders have dual recourse: firstly, to the bond issuer on an unsecured basis; and secondly, to the LLP under the Covered Bond Guarantee secured against the mortgage loans. Under both the securitisation and covered bond programmes, the mortgage loans do not qualify for derecognition because the Group remains exposed to the majority of the risks and rewards of the mortgage loan portfolio, principally the associated credit risk. The Group continues to service the mortgage loans in return for an administration fee and is also entitled to any residual income after all payment obligations due under the terms of the programmes and senior programme expenses have been met. A deemed loan liability is recognised in the programme sponsor for the proceeds of the funding transaction. Significant restrictions Where the Group uses its financial assets to raise finance through securitisation and the sale of securities subject to repurchase agreements, the assets become encumbered and are not available for transfer around the Group.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.3 Securitisation and covered bond programmes continued
The assets and liabilities in relation to securitisation and covered bonds in issue at 30 September are as follows:
2022 2021
-------------------------- ----------------------- -----------------------
Loans Notes Loans Notes
and in issue and in issue
advances GBPm advances GBPm
securitised securitised
GBPm GBPm
-------------------------- ------------ --------- ------------ ---------
Securitisation programmes
Lanark 3,776 2,768 4,383 3,396
Lannraig 768 622 921 693
Gosforth 2017-1 - - 712 591
Gosforth 2018-1 872 745 1,107 887
-------------------------- ------------ --------- ------------ ---------
5,416 4,135 7,123 5,567
Less held by the Group (2,260) (3,181)
-------------------------- ------------ --------- ------------ ---------
1,875 2,386
-------------------------- ------------ --------- ------------ ---------
Covered bond programmes
Clydesdale Bank PLC - - 999 742
Clydesdale Bank PLC
(formerly Virgin Money
PLC) 6,739 3,450 3,960 1,100
-------------------------- ------------ --------- ------------ ---------
6,739 3,450 4,959 1,842
-------------------------- ------------ --------- ------------ ---------
During the year the Clydesdale Bank PLC Global Covered Bond Programme ceased activity and the Series 2012-2 Covered Bonds transferred to the Clydesdale Bank PLC (formerly Virgin Money PLC) Global Covered Bond Programme. There was no financial impact to the Group in relation to this transfer.
The fair values of financial assets and associated liabilities relating to the securitisation programmes were GBP5,235m and GBP1,878m respectively (2021: GBP7,171m and GBP2,406m) where the counterparty to the liabilities has recourse only to the financial assets.
There were no events during the year that resulted in any Group transferred financial assets being derecognised.
The Group has contractual and non-contractual arrangements which may require it to provide financial support as follows:
Securitisation programmes
The Group provides credit support to the structured entities via reserve funds, which are partly funded through subordinated debt arrangements and by holding junior notes. Exposures are shown in the table below:
2022 2021
GBPm GBPm
------------------------- ----- ------
Beneficial interest held 1,239 1,521
Subordinated loans 42 1
Junior notes held 978 1,206
------------------------- ----- ------
2,259 2,728
------------------------- ----- ------
Looking forward through future reporting years there are a number of date-based options on the notes issued by the structured entities which could be actioned by them as issuer. These could require the Group, as sponsor, to provide additional liquidity support.
Covered bond programmes
The nominal level of over-collateralisation was GBP3,127m (2021: GBP2,827m) in the Clydesdale Bank PLC (formerly Virgin Money PLC) programme. In the prior year there was also GBP541m over -- collateralisation in the Clydesdale Bank PLC programme. From time to time the obligations of the Group to provide over -- collateralisation may increase due to the formal requirements of the programme.
Under all programmes, the Group has an obligation to repurchase mortgage exposures if certain mortgage loans no longer meet the programme criteria.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.4 Cash and balances with central banks
Accounting policy
Cash and balances with central banks are measured
at amortised cost, using the effective interest
method, and are derecognised when the rights to
receive cash flows have expired or the Group has
transferred substantially all the risks and rewards
of ownership. These balances form part of the Group's
treasury-related activities and are mostly short
term in nature and repayable on demand or within
a short timescale, generally three months.
2022 2021
GBPm GBPm
--------------------------------------- ------ ------
Cash assets 1,206 1,374
Balances with central banks (including
EU payment systems) 11,015 8,337
--------------------------------------- ------ ------
12,221 9,711
Less mandatory deposits with central
banks(1) (266) (258)
--------------------------------------- ------ ------
Included in cash and cash equivalents
(note 5.2) 11,955 9,453
--------------------------------------- ------ ------
(1) Mandatory deposits are not available for use in the Group's day-to-day business and are non-interest bearing.
3.5 Financial assets at fair value through profit or loss
Accounting policy A financial asset is measured at FVTPL if it: (i) does not fall into one of the business models for amortised cost (note 1.7) or FVOCI (note 3.7); (ii) is specifically designated as FVTPL on initial recognition in order to eliminate or significantly reduce a measurement mismatch; or (iii) is classified as held for trading. A financial instrument is classified as held for trading if it is acquired principally for the purpose of selling in the near term, forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative not in a qualifying hedge relationship. Associated gains and losses are recognised in the income statement as they arise (note 2.3).
Loans and advances
Included in financial assets at FVTPL is a historical portfolio of loans (sales ceased in 2012). Interest rate risk associated with these loans is managed using interest rate derivative contracts and the loans are recorded at fair value to avoid an accounting mismatch. The maximum credit exposure of the loans is GBP70m (2021: GBP133m). The cumulative loss in the fair value of the loans attributable to changes in credit risk amounts to GBP1m (2021: GBP2m); the change for the current year is a decrease of GBP1m (2021: decrease of GBP1m), of which GBP1m (2021: GBP1m) has been recognised in the income statement.
Other financial assets
Included in other financial assets are GBP7m (2021: GBP19m) of unlisted securities and GBP1m (2021: GBP1m) of debt instruments.
Note 3.15 contains further information on the valuation methodology applied to financial assets held at FVTPL and their classification within the fair value hierarchy. Details of the credit quality of financial assets is provided in the Risk management section of this results announcement.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments
Accounting policy The Group uses derivative financial instruments to manage exposure to interest rate, contractually specified inflation and foreign currency risk. Interest rate risk arises primarily due to the mismatch, or duration, between repricing dates of interest-bearing assets and liabilities, or basis risk from assets and liabilities repricing to different reference rates. Contractually specified inflation risk arises from financial instruments whose cash flows are linked to an inflation index. Currency risk arises when assets and liabilities are not denominated in the functional currency of the entity. Derivatives are recognised on the balance sheet at fair value on trade date and are measured at fair value throughout the life of the contract. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. The notional amount of a derivative contract is not recorded on the balance sheet but is disclosed as part of this note. Netting Derivative assets and liabilities are offset against collateral received and paid respectively, and the net amount reported in the balance sheet only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis. Amounts offset on the balance sheet represent the Group's centrally cleared derivative financial instruments and collateral paid to/from central clearing houses, which meet the criteria for offsetting under IAS 32. Hedge accounting The Group elects to apply hedge accounting for the majority of its risk management activity that uses derivatives. This results in greater alignment in the timing of recognition of gains and losses on hedged items and hedging instruments and therefore reduces income statement volatility. The Group does not have a trading book, however derivatives that do not meet the hedging criteria, or for which hedge accounting is not applied, are classified as held for trading. The Group has elected, as a policy choice permitted under IFRS 9, to continue to apply hedge accounting in accordance with IAS 39. The method of recognising the fair value gain or loss on a derivative depends on whether it is designated as a hedging instrument and the nature of the item being hedged. Certain derivatives are designated as either hedges of highly probable future cash flows attributable to a recognised asset or liability, or a highly probable forecast transaction (a cash flow hedge); or hedges of the fair value of recognised assets or liabilities or firm commitments (a fair value hedge). Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity. Specifically, the separate component of equity (note 4.1) is adjusted to the lesser of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the expected future cash flows on the hedged item from the inception of the hedge. Any remaining gain or loss on the hedging instrument is recognised in the income statement. The carrying value of the hedged item is not adjusted. Amounts accumulated in equity are transferred to the income statement in the period in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge is discontinued or no longer meets the criteria for hedge accounting, any cumulative gain or loss remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. This movement in the fair value of the hedged item is made as an adjustment to the carrying value of the hedged asset or liability. Where the hedged item is derecognised from the balance sheet, the adjustment to the carrying amount of the asset or liability is immediately transferred to the income statement. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item is amortised to the income statement over the remaining life of the asset or liability. Derivatives held for trading Changes in value of held for trading derivatives are immediately recognised in the income statement (note 2.3).
The tables below analyse derivatives between those designated as hedging instruments and those classified as held for trading:
2022 2021
GBPm GBPm
----------------------------------- ----- -----
Fair value of derivative financial
assets
Designated as hedging instruments 277 94
Designated as held for trading 65 46
----------------------------------- ----- -----
342 140
----------------------------------- ----- -----
Fair value of derivative financial
liabilities
Designated as hedging instruments 201 143
Designated as held for trading 126 66
----------------------------------- ----- -----
327 209
----------------------------------- ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
Cash collateral totalling GBP241m (2021: GBP18m) has been pledged and GBP38m has been received (2021: GBP76m) in respect of derivatives with other banks. These amounts are included within due from and due to other banks respectively. Net collateral received from clearing houses, which did not meet offsetting criteria, totalled GBP149m (2021: collateral placed of GBP82m) and is included within other assets and other liabilities.
The derivative financial instruments held by the Group are further analysed below. The notional contract amount is the amount from which the cash flows are derived and does not represent the principal amounts at risk relating to these contracts.
Total derivative contracts
2022 2021
------------------------- -------------------------------------- --------------------------------------
Notional Fair Fair Notional Fair Fair
contract value value contract value value
amount of assets of liabilities amount of assets of liabilities
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------- --------- ---------- --------------- --------- ---------- ---------------
Derivatives designated
as hedging instruments
Cash flow hedges
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps
(gross) 35,753 1,988 930 24,886 71 90
Less: net settled
interest rate swaps(1) (33,188) (1,803) (900) (21,500) (64) (79)
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps
(net)(2) 2,565 185 30 3,386 7 11
Fair value hedges
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps
(gross) 16,600 1,201 636 30,707 295 447
Less: net settled
interest rate swaps(1) (14,611) (1,144) (570) (25,260) (209) (390)
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps
(net)(2) 1,989 57 66 5,447 86 57
Cross currency swaps(2) 2,113 35 105 1,880 1 75
4,102 92 171 7,327 87 132
------------------------- --------- ---------- --------------- --------- ---------- ---------------
Total derivatives
designated as hedging
instruments 6,667 277 201 10,713 94 143
------------------------- --------- ---------- --------------- --------- ---------- ---------------
Derivatives designated
as held for trading
Foreign exchange
rate related contracts
Spot and forward
foreign exchange(2) 599 26 20 805 13 12
Cross currency swaps(2) - - - 490 - 3
Options(2) 1 - - 1 - -
------------------------- --------- ---------- --------------- --------- ---------- ---------------
600 26 20 1,296 13 15
------------------------- --------- ---------- --------------- --------- ---------- ---------------
Interest rate related
contracts
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps
(gross) 1,411 52 66 734 14 31
Less: net settled
interest rate swaps(1) (665) (50) - - - -
--------- ---------- --------------- --------- ---------- ---------------
Interest rate swaps
(net)(2) 746 2 66 734 14 31
Swaptions(2) 10 - 2 10 - 1
Options(2) 501 16 17 495 1 2
------------------------- --------- ---------- --------------- --------- ---------- ---------------
1,257 18 85 1,239 15 34
------------------------- --------- ---------- --------------- --------- ---------- ---------------
Commodity related
contracts 199 21 21 97 17 17
Equity related contracts - - - 1 1 -
------------------------- --------- ---------- --------------- --------- ---------- ---------------
Total derivatives
designated as held
for trading 2,056 65 126 2,633 46 66
------------------------- --------- ---------- --------------- --------- ---------- ---------------
(1) Presented within other assets and other liabilities.
(2) Presented within derivative financial instruments.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
Hedge accounting
The hedging strategy of the Group is divided into micro hedges, where the hedged item is a distinctly identifiable asset or liability, and portfolio hedges, where the hedged item is a homogenous portfolio of assets or liabilities.
In some hedge accounting relationships, the Group designates risk components of hedged items as follows:
-- benchmark interest rate risk as a component of interest rate risk, such as the SONIA component;
-- exchange rate risk for foreign currency financial assets and financial liabilities; -- inflation risk where it is a contractually specified component of a debt instrument; and
-- components of cash flows of hedged items, for example certain interest payments for part of the life of an instrument.
Other risks such as credit risk and liquidity risk are managed by the Group but are not included in the hedge accounting relationship. Changes in the designated risk component usually account for the largest portion of the overall change in fair value or cash flows of the hedged item.
Portfolio cash flow hedges
The Group applies macro cash flow hedge accounting to a portion of its floating rate financial assets and liabilities. The hedged cash flows are a group of forecast transactions that result in cash flow variability from resetting of interest rates, reinvestment of financial assets, or refinancing and rollovers of financial liabilities. This cash flow variability can arise on recognised assets or liabilities or highly probable forecast transactions. The hedged items are designated as the gross asset or liability positions allocated to time buckets based on projected repricing and interest profiles. The Group aims to maintain a position where the principal amount of the hedged items is greater than or equal to the notional amount of the corresponding interest rate swaps used as the hedging instruments. The hedge accounting relationship is reassessed on a monthly basis with the composition of hedging instruments and hedged items changing frequently in line with the underlying risk exposures. If necessary, the hedge relationships are de-designated and redesignated based on the effectiveness test results.
Micro cash flow hedges
Floating rate issuances that are denominated in currencies other than the functional currency of the Group are designated in cash flow hedges with cross currency swaps. There are no active micro cash flow hedges at the Group's balance sheet date.
Portfolio fair value hedges
The Group applies macro fair value hedging to a portion of its fixed rate mortgages. The Group determines hedged items by identifying portfolios of homogeneous loans based on their contractual maturity and other risk characteristics. Loans within the identified portfolios are allocated to repricing time buckets based on expected, rather than contractual, repricing dates. The hedging instruments are designated to those repricing time buckets. Hedge effectiveness is measured on a monthly basis, by comparing fair value movements of the designated proportion of the bucketed loans due to the hedged risk against the fair value movements of the derivatives.
The aggregated fair value changes in the hedged loans are recognised on the Group's balance sheet as an asset. At the end of every month, in order to minimise the ineffectiveness from early repayments and accommodate new exposures, the Group voluntarily de-designates the hedge relationships and redesignates them as new hedges. Fair value hedging of fixed rate deposits was discontinued in 2020, and the hedge adjustment recognised on the Group's balance sheet is amortised to profit and loss over the life of the hedged item.
Micro fair value hedges
The Group uses this hedging strategy on GBP, inflation or foreign currency denominated fixed rate assets held at FVOCI and GBP and foreign currency denominated fixed rate debt issuances by the Group. Where assets and liabilities are exposed to multiple risk components, for example interest rate and foreign currency risk, these components are simultaneously designated as hedged risks within the same hedge relationship.
Hedge ineffectiveness
Hedge ineffectiveness can arise from:
-- mismatches between the contractual terms of the hedged item and hedging instrument, including basis differences;
-- differences in timing of cash flows of hedged items and hedging instruments; -- changes in expected timings and amounts of forecast future cash flows; and
-- derivatives used as hedging instruments having a non-zero fair value at the time of designation.
Additionally, for portfolio fair value hedges of the Group's fixed rate mortgage portfolio, ineffectiveness also arises from the difference between forecast and actual repayments (e.g. prepayment risk).
The Group has no remaining hedge relationships exposed to LIBOR and as no uncertainty remains regarding interest rate benchmark reform, the Group no longer applies the reliefs provided by 'Interest Rate Benchmark Reform - Phase 1 and Phase 2 amendments' to hedge accounting. Further detail on the Group's approach to managing the risk of LIBOR replacement, including derivatives designated as held for trading that have not yet transitioned, is provided on page 65.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
Summary of hedging instruments in designated hedge relationships
In the table below, the Group sets out the accumulated adjustments arising from the corresponding continuing hedge relationships, irrespective of whether or not there has been a change in hedge designation during the year:
2022 2021
----------------- ------------------------------------------------ -------------------------------------------------
Carrying amount Carrying amount
--------- ------------------- ---------------- --------- ------------------- -----------------
Change Change
in fair in fair
value value of
of hedging hedging
instrument instrument
in the in the
year year used
Notional used for Notional for
contract ineffectiveness contract ineffectiveness
amount Assets Liabilities measurement(2) amount Assets Liabilities measurement(2)(3)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- --------- ------ ----------- ---------------- --------- ------ ----------- -----------------
Cash flow hedges
Interest rate
risk
Interest rate
swaps(1) 35,753 1,988 930 916 24,886 71 90 127
Foreign exchange
risk
Cross currency
swaps - - - - - - - (28)
----------------- --------- ------ ----------- ---------------- --------- ------ ----------- -----------------
Total derivatives
designated
as cash flow
hedges 35,753 1,988 930 916 24,886 71 90 99
----------------- --------- ------ ----------- ---------------- --------- ------ ----------- -----------------
Fair value hedges
Interest rate
risk
Interest rate
swaps(1) 16,150 1,059 361 1,052 30,707 295 447 500
Inflation and
interest rate
risk
Inflation
linked
interest
rate swaps(1) 450 142 275 96 - - - -
Foreign exchange
and interest
rate risk
Cross currency
swaps 2,113 35 105 6 1,880 1 75 (86)
----------------- --------- ------ ----------- ---------------- --------- ------ ----------- -----------------
Total derivatives
designated
as fair value
hedges 18,713 1,236 741 1,154 32,587 296 522 414
----------------- --------- ------ ----------- ---------------- --------- ------ ----------- -----------------
(1) As shown in the total derivatives contracts table on page 94, for centrally cleared derivatives, where the IAS 32 'Financial Instruments: Presentation' netting criteria is met, the derivative balances are offset within other assets.
For all other derivatives, the derivative balances are presented within derivative financial instruments.
(2) Changes in fair value of cash flow hedging instruments are recognised in other comprehensive income. Changes in fair value of fair value hedging instruments are recognised in the income statement in non-interest income.
(3) The change in fair value of the hedging instrument used for ineffectiveness measurement has been restated in the comparative year in line with the current year presentation, as detailed in note 1.11.
Summary of hedged items in designated hedge relationships
In the table below, the Group sets out the accumulated adjustments arising from the corresponding continuing hedge relationships, irrespective of whether or not there has been a change in hedge designation during the year.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
2022 2021
------------------------------ ------------------------------------------ ------------------------------------------
Cash flow hedge Cash flow hedge
reserve reserve
---------------- ------------------------ ---------------- ------------------------
Change Change
in fair in fair
value value
of of
hedged hedged
item item
in the in the
year year
used for used for
ineffectiveness Continuing Discontinued ineffectiveness Continuing Discontinued
measurement hedges hedges measurement hedges hedges
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ---------------- ---------- ------------ ---------------- ---------- ------------
Cash flow hedges
Interest rate risk
Gross floating rate assets
and gross floating rate
liabilities(1) (962) 979 (14) (127) 2 13
Foreign exchange risk
Floating rate currency
issuances(2) - - - 29 - -
------------------------------ ---------------- ---------- ------------ ---------------- ---------- ------------
Total (962) 979 (14) (98) 2 13
------------------------------ ---------------- ---------- ------------ ---------------- ---------- ------------
2022 2021
------------------ ------------------------------------------------- --------------------------------------------------
Carrying amount Carrying amount
of hedged items of hedged items
------------------- ----------- --------------- -------------------- ----------- ---------------
Change
in fair Change
value in fair
of hedged value
items of hedged
Accumulated in the Accumulated items
hedge year hedge in the
adjustment used adjustment year used
on the for on the for
hedged ineffectiveness hedged ineffectiveness
Assets Liabilities item measurement Assets Liabilities item(3) measurement(3)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------ ----------- ----------- --------------- ------- ----------- ----------- ---------------
Fair value hedges
Interest rate risk
Fixed rate
mortgages(4) 9,520 - (941) (779) 24,265 - (179) (420)
Fixed rate
customer
deposits(5) - - (2) - - - (5) -
Fixed rate
FVOCI debt
instruments(6) 2,443 - (613) (629) 3,010 - (115) (197)
Fixed rate
issuances(2) - (2,392) 350 388 - (2,779) 39 107
Inflation and
interest
rate risk
Fixed rate
FVOCI debt
instruments(6) 589 - (105) (96) - - - -
Foreign exchange
and
interest rate risk
Fixed rate
currency FVOCI
debt
instruments(6) 76 - (3) (3) 78 - - (5)
Fixed rate
currency
issuances(2) - (1,954) 83 11 - (1,730) 72 91
------------------ ------ ----------- ----------- --------------- ------- ----------- ----------- ---------------
Total 12,628 (4,346) (1,231) (1,108) 27,353 (4,509) (188) (424)
------------------ ------ ----------- ----------- --------------- ------- ----------- ----------- ---------------
(1) Highly probable future cash flows arising from loans and advances to customers, due to customers and debt securities in issue.
(2) Hedged item is recorded in debt securities in issue.
(3) The accumulated hedge adjustment on the hedged item and the change in fair value of the hedged items used for ineffectiveness measurement have been restated in the comparative year in line with the current year presentation, as detailed in note 1.11.
(4) Hedged item and the cumulative fair value changes, are recorded in loans and advances to customers.
(5) Hedge relationship was discontinued in 2020. The fair value adjustment taken will be amortised over the remaining life of the hedged items, and is recorded in customer deposits.
(6) Hedged item is recorded in financial assets at FVOCI.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.6 Derivative financial instruments continued
2022 2021
--------------- ------------------------------------------------------ ------------------------------------------------------
Reclassified Reclassified
into income into income
statement statement
as as
--------------- ------------- ---------------------- --------------- ------------- ----------------------
Effective Effective
Hedge portion Hedge portion
ineffectiveness recognised ineffectiveness recognised
recognised in other Net recognised in other Net
in income comprehensive interest Non-interest in income comprehensive interest Non-interest
statement(1) income income income statement(1) income income income
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------------- --------------- ------------- -------- ------------ --------------- ------------- -------- ------------
Cash flow
hedges
Interest rate
risk
Gross
floating
rate assets
and gross
floating
rate
liabilities (46) 962 17 (4) - 127 10 (5)
Foreign
exchange risk
Floating
rate
currency
issuances - - - - - (28) - -
--------------- --------------- ------------- -------- ------------ --------------- ------------- -------- ------------
Total
gains/(losses)
on cash flow
hedges (46) 962 17 (4) - 99 10 (5)
--------------- --------------- ------------- -------- ------------ --------------- ------------- -------- ------------
Hedge ineffectiveness
recognised in income
---------------------------------------------- -----------------------
2022 2021
GBPm GBPm
---------------------------------------------- ----------- ----------
Fair value hedges
Interest rate risk
Fixed rate mortgages 33 (10)
Fixed rate FVOCI debt instruments (2) 1
Fixed rate issuances 1 (1)
Inflation and interest rate risk
Fixed rate FVOCI debt instruments - -
Foreign exchange and interest rate risk
Fixed rate currency FVOCI debt instruments (1) -
Fixed rate currency issuances 15 -
---------------------------------------------- ----------- ----------
Total losses on fair value hedges(1) 46 (10)
---------------------------------------------- ----------- ----------
(1) Recognised in gains less losses on financial assets at fair value.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.7 Financial assets at fair value through other comprehensive income
Accounting policy A financial asset is measured at FVOCI when: (i) the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and (ii) the contractual terms give rise to cash flows on specified dates which are solely payments of principal and interest on the principal amount outstanding unless the financial asset is designated at FVTPL on initial recognition. An option for equity investments that are not held for trading can be taken to classify them at FVOCI where an irrevocable election is made at initial recognition. This option is available for each separate investment. The Group has not exercised this option for any equity investments. Interest income and impairment gains and losses on FVOCI assets are measured in the same manner as for assets measured at amortised cost and are recognised in the income statement, with all other gains or losses recognised in other comprehensive income as a separate component of equity in the year in which they arise. Gains and losses arising from changes in fair value are included as a separate component of equity until sale when the cumulative gain or loss is transferred to the income statement. For all FVOCI assets, the gain or loss is calculated with reference to the gross carrying amount. Debt instruments at FVOCI are subject to the same impairment criteria as amortised cost financial assets (note 3.2), with the ECL element recognised directly in the income statement. As the financial asset is fair valued through other comprehensive income, the change in its value includes the ECL element, with the remaining fair value change recognised in other comprehensive income. Any reversal of the ECL is recorded in the income statement up to the value recognised previously. A low credit risk option is available which allows entities not to assess whether there has been a significant increase in credit risk since initial recognition where the financial asset is deemed as being of low credit risk at the reporting date. The result of exercising the low credit risk exemption is that the financial assets are classed under Stage 1 with a 12-month ECL calculation applied. The Group exercises the low credit risk option for debt instruments classified as FVOCI, recognising the high credit quality of the instruments. No material ECL provision is held for these financial assets.
Financial assets at FVOCI consists of GBP5,064m of listed securities (2021: GBP4,352m).
Note 3.15 contains further information on the valuation methodology applied to financial instruments at FVOCI at 30 September 2022 and their classification within the fair value hierarchy. Details of the credit quality of financial assets is provided in the Risk management section of this results announcement.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.8 Intangible assets and goodwill
Accounting policy Capitalised software is stated at cost, less amortisation and any provision for impairment. Identifiable and directly associated external and internal costs of acquiring and developing software are capitalised where the software is controlled by the Group, and where it is probable that future economic benefits that exceed its cost will flow from its use over more than one year. Costs associated with maintaining software are recognised as an expense as incurred. Capitalised software costs are amortised on a straight-line basis over their expected useful lives, usually between three and ten years. Impairment losses are recognised in the income statement as incurred. Goodwill arises on the acquisition of an entity and represents the excess of the fair value of the purchase consideration and direct costs of making the acquisition over the fair value of the Group's share of the net assets at the date of the acquisition. Goodwill is not subject to amortisation and is tested for impairment on an annual basis. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, which typically arises when the benefits associated with the software were substantially reduced from what had originally been anticipated or the asset has been superseded by a subsequent investment. In such situations, an impairment loss is recognised for the amount by which the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is the higher of its fair value less costs of disposal or its value-in-use. Intangible assets which are fully amortised are reviewed annually to consider whether the assets remain in use.
Capitalised Core deposit
software Goodwill intangible Total
GBPm GBPm GBPm GBPm
------------------------- ----------- -------- ------------ -----
Cost
At 1 October 2020 1,028 11 6 1,045
Additions 80 - - 80
Write-off (65) - - (65)
------------------------- ----------- -------- ------------ -----
At 30 September 2021 1,043 11 6 1,060
Additions 53 - - 53
Write-off (28) - - (28)
Disposal (8) - - (8)
------------------------- ----------- -------- ------------ -----
At 30 September 2022 1,060 11 6 1,077
------------------------- ----------- -------- ------------ -----
Accumulated amortisation
and impairment
At 1 October 2020 552 - 2 554
Charge for the year 123 - 1 124
Impairment 9 - - 9
------------------------- ----------- -------- ------------ -----
At 30 September 2021 684 - 3 687
Charge for the year 81 - 3 84
Impairment 47 - - 47
Disposal (8) - - (8)
------------------------- ----------- -------- ------------ -----
At 30 September 2022 804 - 6 810
------------------------- ----------- -------- ------------ -----
Net book value
------------------------- ----------- -------- ------------ -----
At 30 September 2022 256 11 - 267
------------------------- ----------- -------- ------------ -----
At 30 September 2021 359 11 3 373
------------------------- ----------- -------- ------------ -----
All (2021: all) of the software additions form part of internally generated software projects.
A GBP62m charge (2021: GBP68m) (comprising write-offs of GBP17m (2021: GBP65m) and impairments of GBP45m (2021: GBP3m)) was recognised in the year following a reassessment of the Group's accounting practices on the capitalisation of internally generated software against the backdrop of the move to an Agile project delivery.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Retirement benefit obligations
Accounting policy The Group makes contributions to both defined benefit and defined contribution pension schemes which entitle employees to benefits on retirement or disability. Defined contribution pension scheme The Group recognises its obligation to make contributions to the scheme as an expense in the income statement as incurred. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Defined benefit pension scheme A liability or asset is recognised on the balance sheet in respect of the defined benefit scheme and is measured as the difference between the present value of the defined benefit obligation less the fair value of the defined benefit scheme assets at the reporting date. The present value of the defined benefit obligation for the scheme is discounted by high-quality corporate bond rates that have maturity dates approximating to the terms of the defined benefit obligation. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through refunds from the scheme. In assessing whether a surplus is recoverable, the Group considers its current right to obtain a refund or a reduction in future contributions and does not anticipate any future acts by other parties that could change the amount of the surplus that may ultimately be recovered. Pension expense attributable to the Group's defined benefit scheme comprises current service cost, past service cost resulting from a scheme amendment or curtailment, net interest on the net defined benefit obligation/asset, gains or losses on settlement and administrative costs incurred. Where actuarial remeasurements arise, the Group recognises such amounts directly in equity through the statement of comprehensive income in the year in which they occur. Actuarial remeasurements arise from experience adjustments (the effects of differences between previous actuarial assumptions and what has actually occurred) and changes in actuarial assumptions.
The Group's principal trading subsidiary, Clydesdale Bank PLC, is the sponsoring employer of the Yorkshire and Clydesdale Bank Pension Scheme, a defined benefit pension scheme, which was closed to future benefit accrual for the majority of current employees on 1 August 2017.
The following table summarises the present value of the defined benefit obligation and fair value of plan assets for the Scheme as at 30 September:
2022 2021
GBPm GBPm
------------------------------------------------ ------- --------
Active members' defined benefit obligation (9) (16)
Deferred members' defined benefit
obligation (987) (1,973)
Pensioner and dependant members' defined
benefit obligations (1,220) (1,800)
------------------------------------------------ ------- --------
Total defined benefit obligation (2,216) (3,789)
Fair value of Scheme assets 3,216 4,636
------------------------------------------------ ------- --------
Net defined benefit pension asset 1,000 847
------------------------------------------------ ------- --------
Post-retirement medical benefits obligations(1) (2) (2)
------------------------------------------------ ------- --------
(1) Post-retirement medical benefits obligations are included within other liabilities (note 3.14).
The Group's pension arrangements
The current version of the Scheme was established under trust on 30 September 2009 with the assets held in a Trustee administered fund. The Trustee is responsible for the operation and governance of the Scheme, including making decisions regarding the Scheme's funding and investment strategy.
The Scheme is subject to the funding legislation outlined in the Pensions Act 2004 which came into force on 30 December 2005. This, together with documents issued by the Pensions Regulator, sets out the framework for funding defined benefit occupational pension plans in the UK.
The Group has implemented several reforms to the Scheme to manage the obligation. It closed the Scheme to new members in 2004 and since April 2006 has provided benefits accruing on a career average revalued earnings basis. On 1 August 2017, the Scheme was closed to future benefit accrual for the majority of current employees, with both affected and new employees' future pension benefits being provided through the Group's existing defined contribution scheme, 'My Retirement'. The income statement charge for this is separately disclosed in note 2.4.
The Group also provides post-retirement healthcare under a defined benefit scheme for some pensioners and their dependant relatives for which provision has been made on a basis consistent with the methodology applied to the defined benefit pension scheme. This is a closed scheme and the provision will be utilised over the life of the remaining scheme members. The obligation in respect of this scheme was GBP2m at 30 September 2022 (2021: GBP2m) and is included within other liabilities in note 3.14.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Retirement benefit obligations continued
Scheme valuations
There are a number of means of measuring liabilities in the defined benefit schemes, with the ultimate aim of the Trustee being that the Scheme is 100% funded on an agreed self-sufficiency basis (which is where the Scheme is essentially self-funded and does not need to call on the Group for any additional funding). The two bases used by the Group to value its obligations are: (i) an IAS 19 accounting basis; and (ii) a Trustee's Technical Provision basis.
(i) IAS 19 accounting basis
The valuations of the Scheme assets and obligations are calculated on an accounting basis in accordance with the applicable accounting standard IAS 19 which provides the basis for the accounting framework and methodology for entries in the income statement, balance sheet and capital reporting. The principal purpose of this valuation is to allow comparison of pension obligations between companies. The obligation under an accounting valuation can be higher or lower than those under a Trustee's Technical Provision valuation.
The rate used to discount the obligation on an IAS 19 basis is a key driver of any potential volatility and is based on yields on AA rated high-quality corporate bonds, regardless of how the Trustee of the Scheme invests the assets. The accounting valuation under IAS 19 can therefore move adversely because of low rates and narrowing credit spreads which are not fully matched by the Scheme assets. Inflation is another key source of volatility and arises as a result of member benefits having an element of index linking, which causes the obligation to increase in line with rises in long-term inflation assumptions. In practice however, over the long term, the relationship between interest and inflation rates tends to be negatively correlated resulting in a degree of risk offset.
(ii) Trustee's Technical Provision basis
This valuation basis reflects how much money the Trustee considers is required now in order to provide for the promised benefits as they come up for payment in the future. The Trustee is responsible for ensuring that the calculation is conducted prudently on an actuarial basis, considering factors including the Scheme's investment strategy and the relative financial strength of the sponsoring employer.
A key aspect of this valuation is the investment strategy the Trustee proposes to follow as part of the policy for meeting the Scheme's obligations. Because there are no guarantees about investment returns over long periods, legislation requires the Trustee to consider carefully how much of their expected future investment returns it would be prudent for them to account for in advance.
During 2020 the Trustee concluded the latest triennial valuation for the Scheme, which was conducted in accordance with Scheme data and market conditions as at 30 September 2019. The valuation resulted in an improvement in the Scheme's funding position, with a reported surplus of GBP144m (previously a deficit of GBP290m) and a technical provisions funding level of 103% (previously 94%). As the 2019 valuation outcome was a funding surplus, the future payments to the Scheme were limited solely to those relating to a payment holiday agreed between the Group and Scheme Trustee in respect of contributions due under the prior 2016 valuation. These totalled GBP52m and were paid in full by the end of September 2021.
The next triennial valuation is due to be conducted in 2023 with Scheme data and market conditions as at 30 September 2022.
Scheme assets are not subject to the same valuation differences as Scheme obligations and are consistently valued at current market value.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Retirement benefit obligations continued
IAS 19 position
The Scheme movements in the year are as follows:
2022 2021
----------------- ------------------------------------------------- ------------------------------------------------
Cumulative Cumulative
impact impact
Present Fair value in other Present Fair value in other
value of plan comprehensive value of plan comprehensive
of obligation assets Total income of obligation assets Total income
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ------------- ---------- ------- ------------- ------------- ---------- ----- --------------
Balance sheet
surplus at 1
October (3,789) 4,636 847 (3,958) 4,681 723
(248) (302)
Total expense
Past service
credit 9 - 9 3 - 3
Interest
(expense)/income (84) 104 20 (61) 73 12
Administrative
costs - (5) (5) - (6) (6)
----------------- ------------- ---------- ------- ------------- ------------- ---------- ----- --------------
Total
(expense)/income
recognised in
the
consolidated
income statement (75) 99 24 (58) 67 9
Remeasurements
Return on Scheme
assets greater
than discount
rate - (1,393) (1,393) (1,393) - (19) (19) (19)
Actuarial:
Loss - experience
adjustments (16) - (16) (16) (15) - (15) (15)
Gain -
demographic
assumptions 36 - 36 36 2 - 2 2
Gain - financial
assumptions 1,495 - 1,495 1,495 86 - 86 86
----------------- ------------- ---------- ------- ------------- ------------- ---------- ----- --------------
Remeasurement
gains/(losses)
recognised
in other
comprehensive
income 1,515 (1,393) 122 122 73 (19) 54 54
Contributions and
payments
Employer
contributions - 7 7 - 61 61
Benefit payments 105 (105) - 99 (99) -
Transfer payments 28 (28) - 55 (55) -
----------------- ------------- ---------- ------- ------------- ------------- ---------- ----- --------------
133 (126) 7 154 (93) 61
----------------- ------------- ---------- ------- ------------- ------------- ---------- ----- --------------
Balance sheet
surplus at 30
September (2,216) 3,216 1,000 (3,789) 4,636 847
----------------- ------------- ---------- ------- ------------- ------------- ---------- ----- --------------
(126) (248)
----------------- ------------- ---------- ------- ------------- ------------- ---------- ----- --------------
In July 2021, the Trustees communicated a Pension Increase Exchange (PIE) exercise to members. A PIE gives members the option to exchange future increases on their pensions for a one-off uplift to their current pension. The exercise is being undertaken in three phases and is due to complete in calendar year 2023. A past service credit of GBP10m has been recognised in the year to 30 September 2022 (2021: GBP5m) in line with member acceptance of the PIE offer by the balance sheet date; the balance of the credit will be recognised next calendar year as the exercise concludes.
The expected contributions and benefit payments for the year ending 30 September 2023 are GBP10m (2022: GBP7m) and GBP118m (2022: GBP115m) respectively.
The Group and Trustee have entered into a contingent security arrangement (the 'Security Arrangement') (note 5.3).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Retirement benefit obligations continued
Maturity of Scheme liabilities
The estimated maturity period of Scheme obligations on an IAS 19 accounting basis is as follows:
The discounted mean term of the defined benefit obligation at 30 September 2022 is 14 years (2021: 18.5 years).
Scheme assets
In order to meet the obligations of the Scheme, the Trustee invests in a diverse portfolio of assets, with the level and volatility of asset returns being a key factor in the overall investment strategy. The investment portfolio is subject also to a range of risks typical of the types of assets held, such as: equity risk; credit risk on bonds; currency risk; interest rate and inflation risk; and exposure to the property market. The Trustee's investment strategy (including physical assets and derivatives) seeks to reduce the Scheme's exposure to these risks. In managing interest rate and inflation risks, the investment strategy seeks to hold portfolios of matching assets (including derivatives) that enable the Scheme's assets to better match movements in the value of liabilities due to changes in interest rates and inflation.
As at 30 September 2022, the interest rate and inflation rate hedge ratios were 97% and 95% respectively (2021: 95% and 95%) of the obligation when measured on a self-sufficiency basis. This strategy reflects the Scheme's obligation profile and the Trustee's and the Group's attitude to risk. The Trustee monitors the investment objectives and asset allocation policy on a regular basis.
The Trustee's investment strategy involves two main categories of investments:
Matching assets - a range of investments that provide a match to changes in obligation values.
Return seeking assets - a range of investments designed to provide specific, planned and consistent returns.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Retirement benefit obligations continued
The major categories of plan assets for the Scheme, stated at fair value, are as follows:
2022 2021
---------------------------- ----------------------------- ------------------------------
Quoted Unquoted Total Quoted Unquoted Total
GBPm GBPm GBPm % GBPm GBPm GBPm %
---------------------------- ------ -------- ----- ---- ------ -------- ------ ----
Bonds
Fixed government 350 - 350 894 - 894
Index-linked government 1,314 - 1,314 1,815 - 1,815
Global sovereign 90 2 92 117 4 121
Corporate and other 781 37 818 1,011 47 1,058
---------------------------- ------ -------- ----- ---- ------ -------- ------ ----
2,535 39 2,574 80% 3,837 51 3,888 84%
Equities(1)
Global equities - 137 137 - 150 150
Emerging market equities - 14 14 - 16 16
UK equities - 7 7 - 8 8
---------------------------- ------ -------- ----- ---- ------ -------- ------ ----
- 158 158 5% - 174 174 4%
Other
Secured income alternatives - 229 229 - 197 197
Derivatives(2) - (83) (83) - 6 6
Repurchase agreements - (803) (803) - (719) (719)
Property - 59 59 - 122 122
Alternative credit - 645 645 - 597 597
Infrastructure - 194 194 - 161 161
Cash - 243 243 - 209 209
Equity options - - - 1 - 1
---------------------------- ------ -------- ----- ---- ------ -------- ------ ----
- 484 484 15% 1 573 574 12%
---------------------------- ------ -------- ----- ---- ------ -------- ------ ----
Total Scheme assets 2,535 681 3,216 100% 3,838 798 4,636 100%
---------------------------- ------ -------- ----- ---- ------ -------- ------ ----
(1) Equity investments are classified as unquoted reflecting the nature of the funds in which the Scheme invests directly. The underlying investments within those funds are, however, mostly quoted.
(2) Derivative financial instruments are used to modify the profile of the assets of the Scheme to better match the Scheme liabilities. Derivative holdings may lead to increased or decreased exposures to the physical asset categories disclosed above.
At 30 September 2022, the Scheme had employer-related investments within the meaning of Section 40 (2) of the Pensions Act 1995 totalling GBP2m (2021: GBP2m).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.9 Retirement benefit obligations continued
Actuarial assumptions
The following assumptions were used in arriving at the IAS 19 defined benefit obligation:
2022 2021
% p.a. % p.a.
----------------------------------------------- ------- -------
Financial assumptions
Discount rate 5.45 2.08
Inflation (RPI) 3.58 3.40
Inflation (CPI) 2.94 2.77
Career average revalued earnings revaluations:
Pre 31 March 2012 benefits (RPI) 3.58 3.40
Post 31 March 2012 benefits (CPI capped
at 5% per annum) 2.90 2.73
Pension increases (capped at 2.5%
per annum) 2.21 2.16
Pension increases (capped at 5% per
annum) 3.37 3.23
Rate of increase for pensions in deferment 2.91 2.73
----------------------------------------------- ------- -------
Demographic assumptions
2022 2021
Years Years
---------------------------------- ------ ------
Post-retirement mortality:
Current pensioners at 60 - male 27.0 27.2
Current pensioners at 60 - female 29.3 29.4
Future pensioners at 60 - male 28.0 28.3
Future pensioners at 60 - female 30.4 30.5
---------------------------------- ------ ------
Critical accounting estimates and judgements
The value of the Group's defined benefit pension
scheme requires management to make several assumptions.
The key areas of estimation uncertainty are:
discount rate applied: this is set with reference
to market yields at the end of the reporting year
on high-quality corporate bonds in the currency
and with a term consistent with the Scheme's obligations.
The average duration of the Scheme's obligations
is approximately 20 years. The market for bonds
with a similar duration is illiquid and, as a result,
significant management judgement is required to
determine an appropriate yield curve on which to
base the discount rate;
inflation assumptions: this is set with reference
to market expectations of the RPI measure of inflation
for a term consistent with the Scheme's obligations,
based on data published by the BoE. Other measures
of inflation (such as CPI, or inflation measures
subject to an annual cap) are derived from this
assumption; and
mortality assumptions: the cost of the benefits
payable by the Scheme will also depend upon the
life expectancy of the members. The assumptions
for mortality rates are based on standard mortality
tables (as adjusted to reflect the characteristics
of Scheme members) which allow for future improvements
in life expectancies.
The table below sets out the sensitivity and impact
on the balance sheet surplus position of the Scheme,
the defined benefit obligation and pension cost
to changes in the key actuarial assumptions: Balance
sheet Pension
surplus Obligation cost
Assumption change GBPm GBPm GBPm
------------------ ------- -------- ---------- -------
Discount rate +0.25% (63) (70) (7)
-0.25% 64 74 6
Inflation +0.25% 36 43 2
-0.25% (34) (43) (2)
Life expectancy +1 year (67) 67 4
-1 year 67 (67) (4)
------------------ ------- -------- ---------- -------
The above sensitivity analyses are based on a change
in an assumption while holding all other assumptions
constant. In practice, changes in some of the assumptions
may be correlated.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.10 Customer deposits
2022 2021
GBPm GBPm
------------------------------------- ------ -------
Interest bearing demand deposits 46,457 46,839
Term deposits 13,951 15,097
Non-interest bearing demand deposits 4,952 4,936
------------------------------------- ------ -------
65,360 66,872
Accrued interest payable 74 99
------------------------------------- ------ -------
65,434 66,971
------------------------------------- ------ -------
3.11 Debt securities in issue
Accounting policy Debt securities comprise short and long-term debt issued by the Group including commercial paper, medium-term notes, covered bonds and RMBS notes. Debt securities are initially recognised at fair value, being the issue proceeds, net of transaction costs incurred. These instruments are subsequently measured at amortised cost using the effective interest method resulting in premiums, discounts and associated issue costs being recognised in the income statement over the life of the instrument. Where relevant fair value hedge adjustments have been applied.
The breakdown of debt securities in issue is shown below:
Medium-term Subordinated Covered
notes debt Securitisation bonds Total
GBPm GBPm GBPm GBPm GBPm
------------------------ ----------- ------------ -------------- ------- ------
2022
Debt securities 2,236 899 1,875 3,450 8,460
Accrued interest payable 13 14 5 17 49
------------------------ ----------- ------------ -------------- ------- ------
2,249 913 1,880 3,467 8,509
------------------------ ----------- ------------ -------------- ------- ------
2021
Debt securities 2,409 1,001 2,386 1,842 7,638
Accrued interest payable 13 14 3 10 40
------------------------ ----------- ------------ -------------- ------- ------
2,422 1,015 2,389 1,852 7,678
------------------------ ----------- ------------ -------------- ------- ------
Key movements in the year are shown in the table below (1) .
2022 2021
--------------- ----------------------------------------- ---------------------------------------
Issuances Redemptions Issuances Redemptions
-------------------- ------------------- ------------------ -------------------
Denomination GBPm Denomination GBPm Denomination GBPm Denomination GBPm
--------------- ------------- ----- ------------ ----- ------------ ---- ------------ -----
Medium-term
notes - - - - EUR 432 - -
Subordinated
debt - - - - GBP 300 GBP 30
USD,
USD, EUR,
Securitisation GBP 700 GBP 1,264 - - GBP 1,543
Covered EUR,
bonds GBP 1,780 - - - - - -
--------------- ------------- ----- ------------ ----- ------------ ---- ------------ -----
2,480 1,264 732 1,573
----------------------------- ----- ------------ ----- ------------ ---- ------------ -----
(1) Other movements relate to foreign exchange, hedging adjustments and the capitalisation and amortisation of issuance costs.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.11 Debt securities in issue continued
The following tables provide a breakdown of the medium-term notes and subordinated debt by instrument as at 30 September:
Medium-term notes (excluding accrued interest)
2022 2021
GBPm GBPm
--------------------------------------- ----- ------
VM UK 3.125% fixed-to-floating rate
callable senior notes due 2025 299 299
VM UK 4% fixed rate reset callable
senior notes due 2026 444 509
VM UK 3.375% fixed rate reset callable
senior notes due 2026 317 359
VM UK 4% fixed rate reset callable
senior notes due 2027 331 390
VM UK 2.875% fixed rate reset callable
senior notes due 2025 413 424
VM UK 0.375% fixed rate reset callable
senior notes due 2024 432 428
--------------------------------------- ----- ------
2,236 2,409
--------------------------------------- ----- ------
Subordinated debt (excluding accrued interest)
2022 2021
GBPm GBPm
--------------------------------------- ----- -----
VM UK 7.875% fixed rate reset callable
subordinated notes due 2028 249 248
VM UK 5.125% fixed rate reset callable
subordinated notes due 2030 400 458
VM UK 2.625% fixed rate reset callable
subordinated notes due 2031 250 295
--------------------------------------- ----- -----
899 1,001
--------------------------------------- ----- -----
Details of securitisation and covered bond issuances are included in note 3.3.
Full details of all notes in issue can be found at https://www.virginmoneyukplc.com/investor -- relations/debt-investors/ .
3.12 Due to other banks
2022 2021
GBPm GBPm
-------------------------------------- ----- ------
Secured loans 7,230 5,896
Securities sold under agreements to
repurchase(1) 1,205 -
Transaction balances with other banks 17 -
Deposits from other banks 50 22
-------------------------------------- ----- ------
8,502 5,918
-------------------------------------- ----- ------
(1) The underlying securities sold under agreements to repurchase have a carrying value of GBP1,873m (2021: GBPNil).
Secured loans comprise amounts drawn under the TFSME scheme (including accrued interest). In 2021, secured loans included both TFS and TFSME scheme drawings (including accrued interest).
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.13 Provisions for liabilities and charges
Accounting policy
Provisions for liabilities and charges are recognised
when a legal or constructive obligation exists as
a result of past events, it is probable that an
outflow of economic benefits will be necessary to
settle the obligation, and the obligation can be
reliably estimated. Provisions for liabilities and
charges are not discounted to the present value
of their expected net future cash flows except where
the time value of money is considered material.
Employee
related Customer Off-balance
costs related Property sheet
provision provision provision ECL provisions(1)
GBPm GBPm GBPm GBPm Total
--------------------- ---------- ---------- ---------- ------------------ -----
As at 1 October
2020 16 130 26 - 172
Transfer of
ECL from impairment
provisions - - - 7 7
Charge to the
income statement 31 78 39 1 149
Utilised (25) (189) (10) - (224)
--------------------- ---------- ---------- ---------- ------------------ -----
As at 30 September
2021 22 19 55 8 104
Charge to the
income statement 2 8 - - 10
Utilised (17) (14) (28) (5) (64)
--------------------- ---------- ---------- ---------- ------------------ -----
As at 30 September
2022 7 13 27 3 50
--------------------- ---------- ---------- ---------- ------------------ -----
(1) The Group's ECL accounting policy can be found in (note 3.2).
During the year, the Group has refined its methodology for categorising provisions for liabilities and charges to align with current business operations. There has been no change to the total provisions in the prior year and comparatives have been amended to conform with the current year's presentation.
The change took the original provision categories and analysed this further to align with business operations. The revised prior year categories of PPI redress provision (GBP1m), customer redress and other provisions (GBP28m) and property closure and redundancy provision (GBP67m) is now allocated to employee related costs provision (GBP22m), customer related provision (GBP19m) and property provision (GBP55m). PPI redress provision of GBP1m has been reallocated to customer related provision, GBP10m of customer redress and other provisions has been reallocated in part GBP3m to employee related costs provision and GBP7m to property provision, and restructuring provisions of GBP19m which were previously included within property closure and redundancy provision has been reallocated to employee related costs provision.
Employee related costs provision
This includes provision for staff redundancies and for NIC on equity based compensation. During the year, provisions of GBP2m (2021: GBP31m) were raised relating to staff redundancy costs.
Customer related provision
This relates to customer matters, legal proceedings, claims arising in the ordinary course of the Group's business and other matters. A number of these matters are now reaching a conclusion and the risk that the final amount required to settle the Group's potential liabilities in these matters being materially more than the remaining provision is now considered to be low.
Property provision
This includes costs for stores and office closures. During the year, provisions of GBPNil (2021: GBP39m) were raised relating to store and office closures.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.14 Other liabilities
Accounting policy
Deferred grants
Deferred grants are recognised when there is reasonable
assurance that the grant will be received and that
any conditions attached to the grant will be complied
with. Where the grant relates to costs, it is released
to the income statement on a systematic basis in
line with the incurring of the related costs. Where
the grant relates to the cost of an asset, it is
released and recognised directly against the cost
of the asset when incurred.
2022 2021
GBPm GBPm
----------------------------- ----- ------
Notes in circulation 1,822 2,104
Accruals and deferred income 74 76
Deferred grant - 20
Other 498 251
----------------------------- ----- ------
2,394 2,451
----------------------------- ----- ------
In 2021, the Group received GBP9m from the Capability and Innovation Fund (as part of the RBS alternative remedies package), which has been utilised under the terms of the grant application during the year. As part of the grant the Group is subject to delivering a number of public commitments. These commitments can be found on Banking Competition Remedies (BCR's) (the awarding body) website. As at 30 September 2022 the Group is currently on track with the delivery of these commitments.
The movement in the deferred grant is shown below:
2022 2021
GBPm GBPm
---------------------------------- ----- -----
Opening balance 20 35
Grants received - 9
Utilised against income statement
spend in the year (20) (24)
---------------------------------- ----- -----
Closing balance - 20
---------------------------------- ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.15 Fair value of financial instruments
Accounting policy
Fair value is the price that would be received to
sell an asset or paid to transfer a liability in
an orderly transaction between market participants
at the valuation date.
When available, the Group measures the fair value
of a financial instrument using quoted prices in
an active market for that instrument. Where no such
active market exists for the particular asset or
liability, the Group uses a valuation technique
to arrive at the fair value, including the use of
transaction prices obtained in recent arm's length
transactions where possible, discounted cash flow
analysis, option pricing models and other valuation
techniques commonly used by market participants.
In doing so, fair value is estimated using a valuation
technique that makes maximum possible use of market
inputs and that places minimal possible reliance
upon entity-specific inputs.
The best evidence of the fair value of a financial
instrument at initial recognition is the transaction
price, which represents the fair value of the consideration
paid or received, unless the fair value of that
instrument is evidenced by comparison with other
observable current market transactions in the same
instrument (i.e. without modification or repackaging)
or based on a valuation technique whose variables
include only data from observable markets. When
such evidence exists, the Group recognises profits
or losses on the transaction date.
In certain limited circumstances, the Group applies
the fair value measurement option to financial assets
including loans and advances where the inherent
market risks (principally interest rate and option
risk) are individually hedged using appropriate
interest rate derivatives. The loan is designated
as being carried at FVTPL to offset the movements
in the fair value of the derivative within the income
statement and therefore avoid an accounting mismatch.
When a loan is held at fair value, a statistical-based
calculation is used to estimate credit losses attributable
to adverse movements in credit risk on the assets
held. This adjustment to the credit quality of the
asset is then applied to the carrying amount of
the loan to arrive at fair value and recognised
in the income statement.
Analysis of the fair value disclosures uses a hierarchy
that reflects the significance of inputs used in
measuring fair value. The level in the fair value
hierarchy within which a fair value measurement
is categorised is determined on the basis of the
lowest level input that is significant to the fair
value measurement in its entirety. The fair value
hierarchy is as follows:
* Level 1 fair value measurements - quoted prices
(unadjusted) in active markets for an identical
financial asset or liability.
* Level 2 fair value measurements - inputs other than
quoted prices within Level 1 that are observable for
the financial asset or liability, either directly (as
prices) or indirectly (derived from prices).
* Level 3 fair value measurements - inputs for the
financial asset or liability that are not based on
observable market data (unobservable inputs).
For the purpose of reporting movements between levels
of the fair value hierarchy, transfers are recognised
at the beginning of the reporting year in which
they occur.
(a) Fair value of financial instruments recognised on the balance sheet at amortised cost
The tables show a comparison of the carrying amounts of financial assets and liabilities measured at amortised cost, as reported on the balance sheet, and their fair values where these are not approximately equal.
There are various limitations inherent in this fair value disclosure, particularly where prices are derived from unobservable inputs due to some financial instruments not being traded in an active market. The methodologies and assumptions used in the fair value estimates are therefore described in the notes to the tables. The difference between carrying value and fair value is relevant in a trading environment but is not relevant to assets such as loans and advances.
2022 2021
---------------------- -------------------- --------------------
Carrying Carrying
value Fair value value Fair value
GBPm GBPm GBPm GBPm
---------------------- -------- ---------- -------- ----------
Financial assets
Loans and advances
to customers(1) 71,751 69,277 71,876 72,229
Financial liabilities
Customer deposits(2) 65,434 65,069 66,971 67,012
Debt securities in
issue(3) 8,509 8,515 7,678 8,050
Due to other banks(2) 8,502 8,485 5,918 5,918
---------------------- -------- ---------- -------- ----------
(1) Loans and advances to customers are categorised as Level 3 in the fair value hierarchy with the exception of GBP1,098m (2021: GBP1,057m) of overdrafts which are categorised as Level 2.
(2) Categorised as Level 2 in the fair value hierarchy.
(3) Categorised as Level 2 in the fair value hierarchy with the exception of GBP3,156m of listed debt (2021: GBP3,704m) which is categorised as Level 1.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.15 Fair value of financial instruments continued
The Group's fair values disclosed for financial instruments at amortised cost are based on the following methodologies and assumptions:
(a) Loans and advances to customers - The fair values of loans and advances are determined by firstly segregating them into portfolios which have similar characteristics. Contractual cash flows are then adjusted for ECLs and expectations of customer behaviour based on observed historic data. The cash flows are then discounted at a weighted average cost of capital (appropriate to the portfolio) to arrive at an estimate of their fair value.
(b) Customer deposits - The fair value of deposits is determined using a replacement cost method which assumes alternative funding is raised in the most advantageous market. The contractual cash flows have been discounted using a funding curve with credit spreads reflecting the tenor of each deposit.
(c) Debt securities in issue - The fair value is taken directly from quoted market prices where available or determined from a discounted cash flow model using current market rates for instruments of similar terms and maturity.
(d) Due to other banks - The fair value is determined from a discounted cash flow model using current market rates for instruments of similar terms and maturity.
(b) Fair value of financial instruments recognised on the balance sheet at fair value
The following tables provide an analysis of financial instruments that are measured subsequent to initial recognition at fair value, using the fair value hierarchy described above:
Fair value measurement 2022 Fair value measurement 2021
---------------- --------------------------------- ---------------------------------
Level Level Level Level Level Level
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------- ------- ------- ------- ------ -------- ------ ------ -------
Financial
assets
Financial
assets at
FVOCI 5,064 - - 5,064 4,352 - - 4,352
Loans and
advances at
FVTPL - 70 - 70 - 133 - 133
Other financial
assets at
FVTPL - 4 4 8 - 14 6 20
Derivative
financial
assets - 342 - 342 - 139 1 140
---------------- ------- ------- ------- ------ -------- ------ ------ -------
Total financial
assets at
fair value 5,064 416 4 5,484 4,352 286 7 4,645
---------------- ------- ------- ------- ------ -------- ------ ------ -------
Financial
liabilities
Derivative
financial
liabilities - 327 - 327 - 209 - 209
---------------- ------- ------- ------- ------ -------- ------ ------ -------
Total financial
liabilities
at fair value - 327 - 327 - 209 - 209
---------------- ------- ------- ------- ------ -------- ------ ------ -------
There were no transfers between Level 1 and 2 in the current or prior year.
The Group's valuations for financial instruments that are measured subsequent to initial recognition at fair value are based on the following methodologies and assumptions:
(a) FVOCI - The fair values of listed investments are based on quoted closing market prices.
(b) Loans and advances to customers (Level 2) - The fair value is derived from data or valuation techniques based upon observable market data and non-observable inputs as appropriate to the nature and type of the underlying instrument.
(c) Other financial assets at FVTPL (Level 2) - Represents GBP4m of Visa Inc. Series A preferred stock received following a conversion event in July 2022. The fair value of the preference shares has been calculated by taking the year end New York Stock Exchange share price for Visa inc. The prior year amount represented GBP14m of an unlisted equity investment that was valued based on an offer of purchase by an independent third party, with the sale concluded in January 2022.
(d) Other financial assets at FVTPL (Level 3) - Partly represents GBP1m (2021: GBP4m) of Visa Inc. Series B preferred stock received as partial consideration for the sale of the Group's share in Visa Europe. The preferred stock is convertible into Visa Inc. common stock or its equivalent at a future date, subject to potential reduction for certain litigation losses that may be incurred by Visa Europe. The fair value of the preference shares has been calculated by taking the year end New York Stock Exchange share price for Visa Inc. and discounting for illiquidity and clawback related to contingent litigation. For other unlisted equity investments, the Group's share of the net asset value or the transaction price respectively is considered the best representation of the exit price and is the Group's best estimate of fair value.
(e) Derivative financial assets and liabilities (Level 2) - The fair values of derivatives, including foreign exchange contracts, interest rate swaps, interest rate and currency option contracts, and currency swaps, are obtained from discounted cash flow models or option pricing models as appropriate.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.15 Fair value of financial instruments continued
Level 3 movement analysis:
2022 2022 2021 2021
------------------------------- ---------- --------- --------- ----------
Derivative Financial Financial Derivative
financial assets assets financial
assets at FVTPL at FVTPL assets
GBPm GBPm GBPm GBPm
------------------------------- ---------- --------- --------- ----------
Balance at the beginning of
the year 1 6 5 -
Fair value gains recognised(1)
In profit or loss - unrealised (1) - 1 1
Settlements - (2) - -
------------------------------- ---------- --------- --------- ----------
Balance at the end of the year - 4 6 1
------------------------------- ---------- --------- --------- ----------
(1) Net gains or losses were recorded in non-interest income.
Sensitivity of Level 3 fair value measurements to reasonably possible alternative assumptions
The Group has limited exposure to Level 3 fair value measurements. If all risks inherent in the valuations were to crystallise in their entirety, total assets would reduce by GBP4m which would be recognised directly in the income statement.
3.16 Lessee accounting
Accounting policy The Group as lessee The Group leases offices, stores and other premises, and sub-leases certain premises which are no longer occupied by the Group. The Group applies a single lessee accounting model to all lease arrangements it enters into from the date on which the leased asset is available for use, with the exception of low value leases and short-term leases (less than 12 months) in respect of which the associated lease payments are expensed in the income statement on a straight line basis over the lease term. Under the single lessee accounting model, the Group recognises a right-of-use asset and a lease liability at the commencement date of the lease. The right-of-use asset is initially measured at cost, comprising the initial amount of the lease liability plus any initial direct costs incurred and any lease payments made at or before the lease commencement date, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight line method from the commencement date to the earlier of the end of the useful life of the asset or the end of the lease term, subject to review for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease, or if that rate cannot readily be determined (as is the case in the majority of the leasing activities of the Group), the incremental borrowing rate. The liability is remeasured when there is a change in future lease payments arising from a change in an index or a rate or a change in the Group's assessment of whether it will exercise an extension or termination option. When the lease liability is remeasured, a corresponding adjustment is made to the right-of-use asset or is recorded in the income statement if the carrying amount of the right -- of -- use asset has been reduced to zero. Termination options are included in several leases across the Group with a small number of leases having extension options. These terms are used to maximise operational flexibility in terms of managing contracts. In determining judgements on the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Periods covered by termination options are only included in the lease term if it is reasonably certain that the lease will not be terminated. The assessment of the lease term is reviewed if a significant event or a significant change in circumstances occurs that is within the control of the Group. The Group as sub-lessor Sub-leases are classified as finance leases if substantially all the risks and rewards incidental to ownership of the underlying asset are transferred, otherwise they are classified as operating leases. Finance sub-leases are recognised in other assets representing the minimum lease payments receivable under the terms of the lease, discounted at the rate of interest implicit in the lease. Interest income is recognised reflecting a constant periodic rate of return. Operating sub-lease income is recognised in the income statement on a straight line basis over the lease term.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.16 Lessee accounting continued
a) Amounts recognised in the income statement
The income statement includes the following amounts related to leases:
2022 2021
GBPm GBPm
-------------------------------------------- ----- -----
Interest expense and similar charges
Interest expense (2) (3)
Other operating income
Income from operating sub-leases where
the Group is a lessor 1 1
Operating and administrative expenses
Depreciation and impairment of right-of-use
assets (26) (28)
Expense relating to short-term leases (1) (1)
Expense relating to leases of low-value
assets that are not short-term leases (1) (1)
-------------------------------------------- ----- -----
Amounts recognised in the income
statement (29) (32)
-------------------------------------------- ----- -----
Total leasing cash outflow in the year was GBP28m (2021: GBP29m).
b) Amounts recognised on the balance sheet
Right-of-use assets
2022 2021
GBPm GBPm
---------------------------- ----- -----
As at 1 October 135 161
Additions 4 4
Remeasurements 1 1
Disposals (1) (2)
Depreciation and impairment (26) (29)
---------------------------- ----- -----
As at 30 September 113 135
---------------------------- ----- -----
All right-of-use assets relate to leases of land and buildings and are presented within property, plant and equipment on the balance sheet.
The Group reviewed its existing surplus estate population for impairment. Where it is expected the Group can sub-lease the property, the recoverable amount was determined based on expected sub-lease income. Where the Group does not expect to be able to generate any cash inflows beyond the closure date, the value-in-use was determined to be GBPNil. It was concluded that 19 properties (2021: 22) should be impaired following a reduction in value-in-use, resulting in an impairment charge of GBP4m (2021: GBP1m). In addition, an impairment of GBP5m was recognised in the current year in relation to right-of-use assets for office estate where no further economic benefit was expected following exit. In the prior year the Group announced the closure of 30 stores leased by the Group and to relocate four stores to more prime locations in existing towns. The right-of-use assets were assessed following the above methodology resulting in an impairment charge of GBP5m.
Sub-leases
Future undiscounted minimum payments receivable in respect of sub-leased assets at 30 September were as follows:
2022 2021
GBPm GBPm
----------------- ------ -----
Operating leases 1 1
Finance leases 3 5
----------------- ------ -----
4 6
------------------------ -----
Lease liabilities
2022 2021
GBPm GBPm
--------------------- ----- -----
Lease liabilities(1) 132 154
--------------------- ----- -----
(1) Lease liabilities are presented within other liabilities on the balance sheet.
Group financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities
3.16 Lessee accounting continued
Future undiscounted minimum payments under lease liabilities at 30 September are as follows:
2022 2021
Amounts falling due GBPm GBPm
---------------------- ----- -----
Within 1 year 22 26
Between 1 and 5 years 60 73
Over 5 years 66 78
---------------------- ----- -----
148 177
---------------------- ----- -----
c) Lease commitments not recognised on the balance sheet
In addition to the lease liabilities recognised on the balance sheet, the Group also has lease commitments relating to leases which have not yet commenced at the balance sheet date. Future undiscounted minimum payments on leases which are yet to commence were as follows:
2022 2021
Amounts falling due GBPm GBPm
---------------------- ----- -----
Within 1 year 4 -
Between 1 and 5 years 22 21
Over 5 years 99 104
---------------------- ----- -----
125 125
---------------------- ----- -----
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital
4.1 Equity
Accounting policy Equity The financial instruments issued by the Company are treated as equity (i.e. forming part of shareholders' funds) only to the extent that they meet the following two conditions: (a) They impose no contractual obligations upon the Company to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Group. (b) Where the instrument will or may be settled in the Company's own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company's own equity instruments or is a derivative that will be settled by the Company exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments. To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds. Dividends Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Company's shareholders. Interim dividends are deducted from equity when they are no longer at the discretion of the Company.
4.1.1 Share capital and share premium
2022 2021
GBPm GBPm
-------------------------------- ----- -----
Share capital 141 144
Share premium 7 5
-------------------------------- ----- -----
Share capital and share premium 148 149
-------------------------------- ----- -----
2022 2021
Number Number 2022 2021
of shares of shares GBPm GBPm
------------------------ ------------- -------------- ----- -----
Ordinary shares of
GBP0.10 each -
allotted, called up
and fully paid
Opening ordinary share
capital 1,439,993,431 1,438,574,687 144 144
Issued under employee
share schemes 2,982,745 1,418,744 - -
Share buyback programme (34,445,188) - (3) -
------------------------ ------------- -------------- ----- -----
Closing ordinary share
capital 1,408,530,988 1,439,993,431 141 144
------------------------ ------------- -------------- ----- -----
The holders of ordinary shares are entitled to dividends as declared from time to time and are entitled to one vote per share at meetings of the shareholders of the Company. All shares in issue at 30 September 2022 rank equally with regard to the Company's residual assets.
A final dividend in respect of the year ended 30 September 2021 of 1p per ordinary share in the Company, amounting to GBP14m, was paid in March 2022.
An interim dividend in respect of the year ended 30 September 2022 of 2.5p per ordinary share in the Company, amounting to GBP36m, was paid in June 2022.
The Directors have recommended a final dividend in respect of the year ended 30 September 2022 of 7.5p per ordinary share in the Company to be paid in March 2023. The payment of the final dividend is subject to approval of the shareholders at the 2023 AGM. These financial statements do not reflect the recommended dividend.
On 30 June 2022 the Company announced a share buyback programme, with an initial repurchase of up to GBP75m in aggregate between its ordinary shares of GBP0.10 each listed on the LSE and CDIs, each representing one share, listed on the ASX. Subject to trading liquidity, the Company intends to repurchase shares and CDIs in approximately equal proportions. The buyback commenced on 30 June 2022 and will end no later than 17 December 2022. 34m shares, with a nominal value of GBP3m, were repurchased in the year ended 30 September 2022 for a total consideration of GBP50m (2021: GBPNil). All shares repurchased were cancelled and the nominal value of the share cancellation transferred to the capital redemption reserve with the premium paid deducted from retained earnings.
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital
4.1 Equity continued
On 21 November 2022 the Company announced an extension to the share buyback programme with an intent to repurchase a further GBP50m in aggregate of shares and CDIs. Subject to trading liquidity, the Company again intends to repurchase shares and CDIs in approximately equal proportions. The buyback extension will commence on 21 November 2022 and will end no later than 2 May 2023.
Share premium represents the aggregate of all amounts that have ever been paid above par value to the Company when it has issued ordinary shares.
A description of the other equity categories included within the consolidated statement of changes in equity, and significant movements during the year, is provided below:
4.1.2 Other equity instruments
Other equity instruments comprises AT1 capital which consists of the following Perpetual Contingent Convertible Notes:
-- Perpetual securities (fixed 8% up to the first reset date) issued on 8 February 2016 with a nominal value of GBP73m and optional redemption on 8 December 2022. On 17 June 2022, securities totalling GBP377m (representing 83.86% of the original GBP450m principal amount) were redeemed. On 10 October 2022 it was announced that the remaining securities would be redeemed on the optional redemption date.
-- Perpetual securities (fixed 9.25% up to the first reset date) issued on 13 March 2019
with a nominal value of GBP250m and optional redemption on 8 June 2024.
-- Perpetual securities (fixed 8.25% up to the first reset date) issued on 17 June 2022
with a nominal value of GBP350m and optional redemption on 17 June 2027.
On 10 November 2021, perpetual securities with a nominal value of GBP230m were redeemed in full.
The issues are treated as equity instruments in accordance with IAS 32 'Financial Instruments: Presentation' with the proceeds included in equity, net of transaction costs of GBP7m (2021: GBP15m). AT1 distributions of GBP70m were paid in the year (2021: GBP79m).
4.1.3 Capital reorganisation reserve
The capital reorganisation reserve of GBP839m was recognised on the issuance of the Company's ordinary shares in February 2016 in exchange for the acquisition of the entire share capital of the Group's previous parent company, CYB Investments Limited (CYBI). The reserve reflects the difference between the consideration for the issuance of the Company's shares and CYBI's share capital and share premium.
4.1.4 Merger reserve
A merger reserve of GBP633m was recognised on the issuance of the Company's ordinary shares in February 2016 in exchange for the acquisition of the entire share capital of CYBI. An additional GBP1,495m was recognised on the issuance of the Company's ordinary shares in October 2018 in exchange for the acquisition of the entire share capital of Virgin Money Holdings (UK) Limited. The merger reserve reflects the difference between the consideration for the issuance of the Company's shares and the nominal value of the shares issued.
4.1.5 Other reserves
Own shares held and treasury shares
Virgin Money Holdings (UK) Limited established an EBT in 2011 in connection with the operation of its share plans. On the date of acquisition by the Company, the shares held in the EBT were converted to the Company's shares at a ratio of 1.2125 Company shares for each Virgin Money Holdings (UK) Limited share. The investment in own shares as at 30 September 2022 is GBP0.6m (2021: GBP0.2m). The market value of the shares held in the EBT at 30 September 2022 was GBP0.4m (2021: GBP0.2m).
As part of the buyback programme, the Company has entered a non-discretionary arrangement with Citigroup Global Markets Limited to purchase shares as riskless principal and to make trading decisions independently of the Company. Any purchase of shares pursuant to this engagement will be carried out on the LSE or other recognised investment exchange. This arrangement results in the recognition of a liability (included within due to other banks) and a deduction from retained earnings of GBP11m at 30 September 2022 (2021: GBPNil). The liability will reduce as shares are repurchased and cancelled with the impact on share capital and capital redemption reserve as described elsewhere within this note.
Capital redemption reserve
Under UK companies legislation, when shares are redeemed or purchased wholly or partly out of the company's profits, the amount by which the company's issued share capital is diminished must be transferred to the capital redemption reserve. The capital maintenance provisions of UK companies legislation apply to the capital redemption reserve as if it were part of the company's paid up share capital. The nominal value of the shares repurchased and cancelled under the buyback programme during 2022 has been transferred to the capital redemption reserve.
Deferred shares reserve
The deferred shares reserve comprises shares to be issued in the future relating to employee share plans in regard to the settlement of outstanding Virgin Money Holdings (UK) Limited share awards, which will be settled through the issuance of the Company's shares at a future date in line with the vesting profile of the underlying plans.
Equity based compensation reserve
The Group's equity based compensation reserve records the value of equity settled share based payment benefits provided to the Group's employees as part of their remuneration that has been charged through the income statement and adjusted for deferred tax.
FVOCI reserve
The FVOCI reserve records the unrealised gains and losses arising from changes in the fair value of financial assets at FVOCI. The movements in this reserve are detailed in the consolidated statement of comprehensive income.
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital
4.1 Equity continued
Cash flow hedge reserve
The cash flow hedge reserve represents the effective portion of cumulative post-tax gains and losses on derivatives designated as cash flow hedging instruments that will be recycled to the income statement when the hedged items affect profit or loss.
2022 2021
GBPm GBPm
------------------------------------------ ----- -----
At 1 October 10 (80)
Amounts recognised in other comprehensive
income:
Cash flow hedge - interest rate risk
Effective portion of changes in fair
value of interest rate swaps 962 127
Amounts transferred to the income
statement (13) (5)
Taxation (260) (33)
Cash flow hedge - foreign exchange
risk
Effective portion of changes in fair
value of cross currency swaps - (28)
Amounts transferred to the income
statement - 29
------------------------------------------ ----- -----
At 30 September 699 10
------------------------------------------ ----- -----
4.2 Equity based compensation
Accounting policy The Group operates a number of equity settled share based compensation plans in respect of services received from certain of its employees. The fair value of the services received is recognised as an expense. The total amount to be expensed is measured by reference to the fair value of the Company's shares, performance options or performance rights granted, including, where relevant, any market performance conditions and any non-vesting conditions. The impacts of any service and non-market performance vesting conditions are not included in the fair value and instead are included in estimating the number of awards or options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. A corresponding credit is recognised in the equity based compensation reserve, adjusted for deferred tax. In some circumstances, employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognising the expense during the period between the start of the service period and the grant date. At the end of each reporting year, the Group revises its estimates of the number of shares, performance options and performance rights that are expected to vest based on the non-market and service vesting conditions. The impact of the revision to original estimates, if any, is recognised in the income statement, with a corresponding adjustment to the equity based compensation reserve.
The equity settled share based payment charge for the year is GBP5m (2021: GBP5m).
Virgin Money UK PLC awards
The Group issues awards to employees under the following share plans:
Plan Eligible Nature of Vesting conditions(1) Grant dates(2)
employees award
------ ----------------- --------------- ---------------------- --------------
DEP(3) Selected Conditional Continuing employment 2017, 2018,
employees rights to or leaving in certain 2019, 2020
shares limited circumstances and 2021
------ ----------------- --------------- ---------------------- --------------
LTIP Selected Conditional Continuing employment 2017, 2018,
senior employees rights to or leaving in certain 2019, 2020
shares limited circumstances and 2021
and achievement
of delivery of
the Group's strategic
goals
and growth in
shareholder value
------ ----------------- --------------- ---------------------- --------------
SIP All employees Non-conditional Continuing employment 2016, 2017
share award and 2019
------ ----------------- --------------- ---------------------- --------------
(1) All awards are subject to vesting conditions and therefore may or may not vest.
(2) The year in which grants have been made under the relevant plan.
(3) Grants made under the DEP are made the year following the financial year to which they relate.
Group financial statements
Notes to the consolidated financial statements
Section 4: Capital
4.2 Equity based compensation continued
Further detail on each plan is provided below:
DEP
Under the plan, employees are awarded conditional rights to Virgin Money UK PLC shares. The shares are subject to forfeiture conditions including forfeiture as a result of resignation, termination by the Group or failure to meet compliance requirements. Awards include:
-- the upfront and deferred elements of bonus awards where required to comply with the PRA Remuneration Code or the Group's deferral policy; and
-- buyout of equity from previous employment.
LTIP
Under the plan, employees are awarded conditional rights to Virgin Money UK PLC shares. The shares are subject to forfeiture conditions including forfeiture as a result of resignation, termination by the Group or failure to meet compliance requirements. The performance conditions of the plan must be met over a three-year performance period. The measures reflect a balanced approach between financial and non-financial performance and are aligned to the Group's strategic goals. Measures, relative weightings and the quantum for assessing performance are outlined in the Directors' remuneration report contained in the Group's Annual Report & Accounts.
SIP
At the date of the awards, eligible employees are awarded Group shares which are held in the SIP Trust. Awards are not subject to performance conditions and participants are the beneficial owners of the shares granted to them, but not the registered owners. Voting rights over the shares are normally exercised by the registered owner at the direction of the participants.
Awards/rights made during the year
Average
Number Number fair
outstanding outstanding value
at at of awards
1 October Number Number Number 30 September at grant
Plan 2021 awarded forfeited released 2022 pence
------------------ ------------ --------- ----------- ----------- ------------- ----------
DEP
2016 Commencement 2,620 - - (1,310) 1,310 266.03
2017 Bonus 49,909 - - (47,789) 2,120 313.20
2018 Bonus 170,649 - - (34,129) 136,520 192.35
2019 Bonus 85,544 - - (6,384) 79,160 174.50
2019 Commencement 19,843 - - (11,797) 8,046 174.50
2020 Commencement 19,570 - - (9,970) 9,600 135.40
2021 Bonus - 590,513 (10,536) (579,977) - 172.65
2021 Commencement - 107,747 - - 107,747 142.70
------------------ ------------ --------- ----------- ----------- ------------- ----------
LTIP
2017 LTIP 380,924 - - (111,295) 269,629 313.20
2018 LTIP 4,751,736 - (1,906,079) (845,346) 2,000,311 190.47
2019 LTIP 7,680,636 - (739,329) - 6,941,307 174.50
2020 LTIP 10,379,519 - (2,019,760) - 8,359,759 135.40
2021 LTIP - 6,761,290 (273,467) - 6,487,823 172.65
------------------ ------------ --------- ----------- ----------- ------------- ----------
SIP(1)
2015 Demerger 629,169 - - (629,169) - 194.67
2017 Free
Share 564,118 - - (564,118) - 313.20
2019 Free
Share 1,684,854 - (58,794) (1,626,060) - 202.53
------------------ ------------ --------- ----------- ----------- ------------- ----------
(1) Shares awarded under the SIP do not have a release date but become available to award holders without restriction following the completion of relevant service conditions. The service conditions applicable to each of the awards in the table above has now been completed and, since no ongoing charge is taken in respect of these awards, the values in the table reflect that all awards have now fully vested and are available to award holders without restriction, with no awards still to vest as at 30 September 2022.
Determination of grant date fair values
The grant date fair value of the awards has been taken as the market value of the Company's ordinary shares at the grant date. Where awards are subject to non-market performance conditions, an estimate is made of the number of awards expected to vest in order to determine the overall share based payment charge to be recognised over the vesting period. Awards were granted under the LTIP and DEP on 9 December 2021, based on the middle market share price on the day immediately preceding the grant (172.65p).
The Group has not issued awards under any plan with market performance conditions.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
5.1 Contingent liabilities and commitments
Accounting policy Financial guarantees The Group provides guarantees in the normal course of business on behalf of its customers. Guarantees written are conditional commitments issued by the Group to guarantee the performance of a customer to a third party and are primarily issued to support direct financial obligations such as commercial bills or other debt instruments issued by a counterparty. The rating of the Group as a guarantee provider enhances the marketability of the paper issued by the counterparty in these circumstances. The ECL requirements as described in note 3.2 apply to loan commitments and financial guarantee contracts, with the ECL allowance held as part of the provision for liabilities and charges balance (note 3.13). Contingent liabilities Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised on the balance sheet but are disclosed unless they are remote.
The table below sets out the amounts of financial guarantees and commitments which are not recorded on the balance sheet. Financial guarantees and commitments are credit-related instruments which include acceptances, letters of credit, guarantees and commitments to extend credit. The amounts do not represent the amounts at risk at the balance sheet date but the amounts that would be at risk should the contracts be fully drawn upon and the customer default. Since a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements.
Financial guarantees
2022 2021
GBPm GBPm
-------------------------------------------- ------ ------
Guarantees and assets pledged as collateral
security:
Due in less than 3 months 33 20
Due between 3 months and 1 year 23 21
Due between 1 year and 3 years 9 13
Due between 3 years and 5 years 3 2
Due after 5 years 44 45
-------------------------------------------- ------ ------
112 101
-------------------------------------------- ------ ------
Other credit commitments
Undrawn formal standby facilities,
credit lines and other commitments
to lend at call 19,247 17,020
-------------------------------------------- ------ ------
Capital commitments
The Group committed to providing additional funding of up to GBP5.5m over an eight-month period from June 2021 to enable the JV UTM to support the business transformation and to meet its regulatory capital and liquidity requirements, of which GBPNil was the remaining commitment as at 30 September 2022 (2021: GBP4m). Further detail on UTM can be found in the JVs and associates section of note 5.3.
The Group had future capital expenditure which had been contracted for, but not provided for, at 30 September 2022 of GBP0.4m (2021: GBP0.2m).
Other contingent liabilities
Conduct risk related matters
There continues to be uncertainty with judgement required in determining the quantum of conduct risk related liabilities, with note 3.13 reflecting the Group's current position where a provision can be reliably estimated. Until all matters are resolved the final amount required to settle the Group's potential liabilities for conduct related matters remains uncertain.
The Group will continue to reassess the adequacy of provisions for these matters and the assumptions underlying the calculations at each reporting date based upon experience and other relevant factors at that time.
Legal claims
The Group is named in and is defending a number of legal claims arising in the ordinary course of business. No material adverse impact on the financial position of the Group is expected to arise from the ultimate resolution of these legal actions.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
5.2 Notes to the statement of cash flows
2022 2021
GBPm GBPm
------------------------------------------ ------- -------
Adjustments included in the profit
before tax
Interest receivable (2,217) (1,910)
Interest payable 641 553
Depreciation, amortisation and impairment
(note 2.4) 179 191
Derivative financial instruments fair
value movements 17 5
Impairment losses/(credit) on credit
exposures (note 3.2) 52 (131)
Equity based compensation (note 4.2) 4 5
Gain on disposal of FVOCI assets (note
2.3) (4) -
Other non-cash movements 2 62
------------------------------------------ ------- -------
(1,326) (1,225)
------------------------------------------ ------- -------
Changes in operating assets
Net (increase)/decrease in:
Balances with supervisory central
banks (3) (38)
Derivative financial instruments 1,847 269
Financial assets at FVTPL 57 30
Loans and advances to customers (713) 491
Defined benefit pension assets (7) (61)
Other assets 31 141
------------------------------------------ ------- -------
1,212 832
------------------------------------------ ------- -------
Changes in operating liabilities
Net increase/(decrease) in:
Due to other banks 1,235 (50)
Derivative financial instruments 119 (41)
Customer deposits (1,510) (644)
Provisions for liabilities and charges (50) (72)
Other liabilities (32) (219)
------------------------------------------ ------- -------
(238) (1,026)
------------------------------------------ ------- -------
For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances with less than three months maturity from the date of acquisition. This includes cash and liquid assets and amounts due to other banks (to the extent less than 90 days).
2022 2021
GBPm GBPm
-------------------------------------- ------ ------
Cash and balances with central banks
(less mandatory deposits) 11,955 9,453
Due from other banks (less than three
months) 656 800
-------------------------------------- ------ ------
12,611 10,253
-------------------------------------- ------ ------
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
5.3 Related party transactions
The Group undertakes activity with the following entities which are considered to be related party transactions:
Yorkshire and Clydesdale Bank Pension Scheme
The Group provides banking services to the Scheme, with customer deposits of GBP12m (2021: GBP40m). Pension contributions of GBP7m were made to the Scheme in the year (2021: GBP61m).
The Group and the Trustee to the Scheme (note 3.9) have entered into a contingent Security Arrangement which provides additional support to the Scheme by underpinning recovery plan contributions and some additional investment risk. The security is in the form of a pre-agreed maximum level of assets that are set aside for the benefit of the Pension Scheme in certain trigger events. These assets are held by Red Grey Square Funding LLP, an insolvency remote consolidated structured entity.
Joint ventures and associates
The Group holds investments in JVs of GBP10m (2021: GBP10m). The total share of loss for the year was GBP4m (2021: GBP5m). In addition, the Group had the following transactions with JV entities during the period:
-- Salary Finance - the Group provides Salary Finance with a revolving credit facility funding line, of which the current gross lending balance was GBP318m (2021: GBP223m) and the undrawn facility was GBP32m (2021: GBP37m). The facility is held under Stage 2 for credit risk purposes (2021: Stage 1), with an ECL allowance of GBP19m (2021: GBPNil) held against the lending; further detail on the ECL allowance is provided in the credit risk section within this results announcement. Additionally, the Group received GBP10m (2021: GBP6m) of interest income from Salary Finance in the year. Board approval is in place for this facility up until March 2023 with GBP400m being the approved limit.
-- UTM - the Group provides banking services to UTM which has resulted in amounts due of GBP4m (2021: GBP3m). Additionally, the Group received GBP7m of recharge income in the year (2021: GBP7m) from UTM in accordance with a Service Level Agreement in respect of resourcing, infrastructure and marketing. During the year, the Group provided GBP4m of additional funding to UTM (2021: GBP12m).
Other related party transactions with Virgin Group
The Group has related party transactions with other Virgin Group companies (1) :
-- Licence fees due to Virgin Enterprises Limited for the use of the Virgin Money brand trademark resulted in an amount payable of GBP5m (2021: GBP4m), with expenses incurred in the year of GBP15m (2021: GBP14m).
-- The Group incurs credit card commissions and air mile charges with Virgin Atlantic Airways Limited (VAA) in respect of an agreement between the two parties. Amounts payable to VAA totalled GBP1m (2021: GBP2m) and expenses of GBP16m were incurred in the year (2021: GBP12m).
-- The Group incurs charges and receives commissions concerning the cashback incentive scheme with Virgin Red Limited in relation to the credit card and PCA portfolio. Amounts receivable from Virgin Red totalled GBP0.1m (2021: GBPNil), amounts payable totalled GBP1m (2021: GBPNil) and during the year this resulted in expenses of GBP3m (2021: GBP0.8m) along with income of GBP0.5m (2021: GBPNil).
-- The Group has an arrangement with Virgin Start Up Limited to host a series of events, podcasts and videos and other digital content. During the year this resulted in expenses of GBP0.5m (2021: GBP0.1m).
-- The Group paid GBP7m (2021: GBPNil) of ordinary dividends to Virgin Group Holdings Limited.
(1) All companies were incorporated in England and Wales with the exception of Virgin Group Holdings Limited, which was incorporated in the British Virgin Islands.
Charities
The Group provides banking services to The Virgin Money Foundation which has resulted in customer deposits of GBP1m (2021: GBP1m). The Group has made donations of GBP1m in the year (2021: GBP1m) to the Foundation to enable it to pursue its charitable objectives. The Group has also provided a number of support services to the Foundation on a pro bono basis, including use of facilities and employee time. The estimated gift in kind for support services provided during the year was GBP0.4m (2021: GBP0.4m).
Compensation of key management personnel (KMP)
KMP comprises Directors of the Company and members of the Executive Leadership Team.
2022 2021
GBPm GBPm
--------------------------------- ----- -----
Salaries and short-term benefits 9 9
Equity based compensation(1) 3 3
--------------------------------- ----- -----
12 12
--------------------------------- ----- -----
(1) The expense recognised in the year is in accordance with IFRS 2 'Equity based compensations', including associated employers' NIC.
Group financial statements
Notes to the consolidated financial statements
Section 5: Other notes
5.3 Related party transactions continued
The following information regarding Directors' remuneration is presented in accordance with the Companies Act 2006.
2022 2021
GBPm GBPm
-------------------------- ------ -----
Aggregate remuneration(1) 5 3
-------------------------- ------ -----
(1) Aggregate remuneration includes amounts paid for the 2022 year and amounts paid under the LTIPs in relation to the 2018 LTIP award. LTIP figures in the single figure table for Executive Directors' 2022 remuneration in the Remuneration report contained in the Group's Annual Report & Accounts relate to the 2019 LTIP award in respect of the 2020-2022 LTIP performance period cycle.
None of the Directors were members of the Group's defined contribution or defined benefit pension schemes during 2022 (2021: none).
None of the Directors hold share options and none were exercised during the year (2021: none).
Transactions with KMP
KMP, their close family members, and any entities controlled or significantly influenced by the KMP have undertaken the following transactions with the Group in the normal course of business. The transactions were made on the same terms and conditions as applicable to other Group employees, or on normal commercial terms:
2022 2021
GBPm GBPm
------------------- ------ -----
Loans and advances 1 3
Deposits 1 2
------------------- ------ -----
No provisions have been recognised in respect of loans provided to the KMP (2021: GBPNil). There were no debts written off or forgiven during the year to 30 September 2022 (2021: GBPNil). Included in the above are five (2021: six) loans totalling GBP0.3m (2021: GBP0.3m) made to Directors. In addition to the above, there are guarantees of GBPNil (2021: GBPNil) made to Directors and their related parties.
5.4 Pillar 3 disclosures
UK Capital Requirements Regulation
Pillar 3 disclosure requirements are set out within the Disclosure (CRR) part of the PRA rulebook. The disclosures required under the PRA framework are substantially equivalent to those required by Part Eight of the EU CRR. The consolidated disclosures of the Group, for the 2022 financial year, will be issued concurrently with the Annual Report and Accounts and can be found at www.virginmoneyukplc.com/investor-relations/results-and-reporting/annual-reports/ .
5.5 Post balance sheet events
On 21 November 2022 the Company announced an extension to the share buyback programme with an intent to repurchase a further GBP50m in aggregate of shares and CDIs. Subject to trading liquidity, the Company again intends to repurchase shares and CDIs in approximately equal proportions. The buyback extension will commence on 21 November 2022 and will end no later than 2 May 2023.
Additional information
Measuring the Group's performance
As highlighted within the Strategic report, Financial results, Directors' remuneration report, and Risk report, all contained in the Group's Annual Report & Accounts, a range of metrics are considered that measure and track the Group's performance. Some of these metrics will be the Group's KPIs, which are a set of quantifiable measurements used to gauge the Group's overall long-term performance. Others are not referred to as KPIs, but are still useful metrics for the Group to reflect on and are disclosed to aid comparisons with peers.
These metrics fall into two main categories:
-- Financial - which are further split into:
o IFRS based - meaning the basis of the calculation is derived from a measure that can be found and is directly required under generally accepted accounting principles (GAAP); and
o Non-IFRS based - these are also referred to as APMs and can be derived from non-GAAP measures.
-- Non-Financial - being those that are not directly linked to the Group's financial performance, but more in relation to other external factors.
Non-IFRS based financial performance metrics can be calculated on either a statutory or an 'underlying' basis; with further detail on how the underlying measure is arrived at, along with management's reasoning for excluding the impact of certain items from the Group's current underlying performance rationale, can be found on page 134, directly following this section.
Financial performance metrics
Profitability:
Metric KPI LTIP LTIP Basis Definition/formula Why it matters?
Year
----------- --- ---- ----- -------- ------------------------------------------------------------------------------------------ ---------------------------
Gross Yes No N/a Non-IFRS Annualised gross cost savings benefits It provides an
annualised driven from the Group's efficiency annualised progress
cost programmes. indicator for the
savings Group's accelerated
digital strategy
and stated target
of delivering
approximately
GBP175m of additional
cost savings by
FY24, enabled by
GBP275m of restructuring
investment.
----------- --- ---- ----- -------- ------------------------------------------------------------------------------------------ ---------------------------
Statutory Yes Yes 2022 Non-IFRS Statutory profit after tax attributable It's an indicator
return to ordinary equity holders as a of the Group's
on tangible percentage of average tangible profitability and
equity equity (average total equity less gives the return
(RoTE) intangible assets and AT1) for generated for shareholders
a given year. 2022 2021 2020 as a percentage
of the Group's
tangible equity.
2021 ---------------------------- --------- --------- ---------
2020 Statutory profit after tax
2019 attributable to ordinary
equity holders (a) GBP467m GBP395m GBP(220)m
Average tangible equity (b) GBP4,539m GBP3,875m GBP3,554m
Statutory RoTE (a)/(b) 10.3% 10.2% (6.2)%
---------------------------- --------- --------- ---------
----------- --- ---- ----- -------- ------------------------------------------------------------------------------------------ ---------------------------
Underlying Yes Yes 2021 Non-IFRS Underlying operating and administrative It's a measure
cost:ratio expenses as a percentage of underlying of efficiency in
(CIR) total operating income for a given terms of how total
year. 2022 2021 2020 operating expenses
compare to total
operating income
on an underlying
basis.
2020 ----------------------------- --------- --------- ---------
2019 Underlying operating and
administrative expenses (a) GBP914m GBP902m GBP917m
Underlying total operating
income (b) GBP1,755m GBP1,572m GBP1,542m
Underlying CIR (a)/(b) 52.1% 57.4% 59.5%
----------------------------- --------- --------- ---------
----------- --- ---- ----- -------- ------------------------------------------------------------------------------------------ ---------------------------
Net No No N/a Non-IFRS Underlying NII as a percentage It's an indicator
interest of average interest earning assets of the Group's
margin (which is adjusted to exclude short-term profitability by
(NIM) repos used for liquidity management showing the difference
purposes) for a given year. 2022 2021 2020 between how much
-------------------------- ---------- ---------- ---------- the Group is earning
Underlying NII (a) GBP1,592m GBP1,412m GBP1,351m in interest on
Average interest earning its loans compared
assets (b) GBP86,275m GBP86,947m GBP86,826m to how much it
Short-term repos used for is paying out in
liquidity management (c) GBP12m GBP16m GBP16m interest on deposits.
NIM (a)/((b)-(c)) 1.85% 1.62% 1.56%
-------------------------- ---------- ---------- ----------
----------- --- ---- ----- -------- ------------------------------------------------------------------------------------------ ---------------------------
Additional information
Measuring the Group's performance
Financial performance metrics continued
Profitability continued:
Metric KPI LTIP LTIP Basis Definition/formula Why it
Year matters?
---------- --- ---- ---- -------- ------------------------------------------------------------------------------------ --------------
Statutory No No N/a IFRS Statutory profit after tax attributable It's an
basic to ordinary equity shareholders, indicator
earnings divided by the weighted average of the
per share number of ordinary shares in issue Group's
(EPS) for a given year (which includes profitability
deferred shares and excludes own on
shares held or contingently returnable a statutory
shares). 2022 2021 2020 basis.
-------------------------------- ------- ------- ---------
Statutory profit/(loss) after
tax attributable to ordinary
equity shareholders (a) GBP467m GBP395m GBP(220)m
Weighted average number of
ordinary shares in issue
(b) 1,441m 1,442m 1,440m
Statutory basic earnings/(loss)
per share (a)/(b) 32.4p 27.3p (15.3)p
-------------------------------- ------- ------- ---------
---------- --- ---- ---- -------- ------------------------------------------------------------------------------------ --------------
Statutory No No N/a Non-IFRS Statutory operating and administrative It's a
CIR expenses as a percentage of statutory measure
total operating income for a given of efficiency
year. 2022 2021 2020 in
--------------------------------------- --------- --------- --------- terms of how
Statutory operating and administrative total
expenses (a) GBP1,069m GBP1,203m GBP1,104m operating
Statutory total operating expenses
income (b) GBP1,716m GBP1,489m GBP1,443m compare to
Statutory CIR (a)/(b) 62.3% 80.8% 76.5% total
--------------------------------------- --------- --------- --------- operating
income
on a
statutory
basis.
---------- --- ---- ---- -------- ------------------------------------------------------------------------------------ --------------
Statutory No No N/a Non-IFRS Statutory profit after tax as a It's an
return percentage of average total assets indicator
on assets for a given year. 2022 2021 2020 of the
------------------------------ ---------- ---------- ---------- Group's
Statutory profit/(loss) after profitability
tax (a) GBP537m GBP474m GBP(141)m on
Average total assets (b) GBP89,504m GBP90,537m GBP90,522m a statutory
Statutory return on assets basis.
(a)/(b) 0.60% 0.52% (0.16)% Underlying
------------------------------ ---------- ---------- ---------- return
on assets is
no
longer
considered
to be a
performance
measure, with
the
focus being
on
the statutory
measure.
---------- --- ---- ---- -------- ------------------------------------------------------------------------------------ --------------
Underlying No No N/a Non-IFRS Underlying profit after tax attributable It's an
basic EPS to ordinary equity shareholders, indicator
divided by the weighted average of the
number of ordinary shares in issue Group's
for a given year (which includes profitability
deferred shares and excludes own on
shares held or contingently returnable an underlying
shares). 2022 2021 2020 basis.
---------------------------- ------- -------
Underlying profit after tax
attributable to ordinary
equity shareholders (a) GBP612m GBP691m GBP20m
Weighted average number of
ordinary shares in issue
(b) 1,441m 1,442m 1,440m
Underlying basic earnings
per share (a)/(b) 42.4p 47.9p 1.4p
---------------------------- ------- ------- ------
---------- --- ---- ---- -------- ------------------------------------------------------------------------------------ --------------
Additional information
Measuring the Group's performance
Financial performance metrics continued
Profitability continued:
Metric KPI LTIP LTIP Basis Definition/formula Why it
Year matters?
------------ --- ---- ---- -------- ---------------------------------------------------------------------------------------------- --------------
Underlying No No N/a Non-IFRS Statutory profit before tax plus It's an
profit total underlying adjustments to indicator
before the statutory view of performance. 2022 2021 2020 of the
tax ------------------------------ ------- ------- --------- Group's
Statutory profit/(loss) before profitability
tax (a) GBP595m GBP417m GBP(168)m on
Restructuring charges (b) GBP82m GBP146m GBP139m an underlying
Acquisition accounting unwinds basis.
(c) GBP35m GBP88m GBP113m
Legacy conduct (d) GBP8m GBP76m GBP26m
Other (e) GBP69m GBP74m GBP14m
Underlying profit before
tax (a) + (b) + (c) + (d)
+ (e) GBP789m GBP801m GBP124m
------------------------------ ------- ------- ---------
------------ --- ---- ---- -------- ---------------------------------------------------------------------------------------------- --------------
Underlying No No N/a Non-IFRS Underlying profit before tax less It's an
profit after underlying tax charge, less AT1 indicator
tax distributions. The underlying tax of the
attributable charge (or credit) is the difference Group's
to ordinary between the statutory tax charge profitability
equity (or credit) and the tax attributable on
shareholders to exceptional items. 2022 2021 2020 an underlying
--------------------------- ------- ------- ------- basis.
Underlying profit before
tax (a) GBP789m GBP801m GBP124m
Underlying tax charge (b) GBP107m GBP31m GBP25m
AT1 distributions (c) GBP70m GBP79m GBP79m
Underlying profit after tax
attributable to ordinary
equity shareholders (a) -
(b) - (c) GBP612m GBP691m GBP20m
--------------------------- ------- ------- -------
------------ --- ---- ---- -------- ---------------------------------------------------------------------------------------------- --------------
Underlying No No N/a Non-IFRS Underlying profit after tax attributable It's an
RoTE to ordinary equity holders as a indicator
percentage of average tangible of the
equity (average total equity less Group's
intangible assets and AT1) for profitability
a given year. 2022 2021 2020 on
---------------------------- --------- --------- --------- an underlying
Underlying profit after tax basis
attributable to ordinary and gives the
equity holders (a) GBP612m GBP691m GBP20m return
Average tangible equity (b) GBP4,539m GBP3,875m GBP3,554m generated for
Underlying RoTE (a)/(b) 13.5% 17.8% 0.6% shareholders
---------------------------- --------- --------- --------- as a
percentage
of the
Group's
tangible
equity.
------------ --- ---- ---- -------- ---------------------------------------------------------------------------------------------- --------------
Additional information
Measuring the Group's performance
Lending (Basis - non-IFRS):
Metric KPI LTIP LTIP Definition and formula (where applicable) Why it matters?
Year
------------ --- ---- ----- ---------------------------------------------------------------------------------------- ------------------------
Target Yes No N/a Target lending segment asset growth It's an indicator
lending over the year. Target lending is of how well the
segment defined as Unsecured and BAU Business Group is performing
asset growth lending (excluding Government lending against its 'pioneering
schemes noting these are closed growth' strategic
and in run off. 2022 2021 2020 priority.
------------------------------------ ---------- ---------- ----------
Total lending - current year
(a) GBP13,448m GBP12,573m GBP13,006m
Total lending - prior year
(b) GBP12,573 GBP13,006m GBP12,900m
Target lending growth ((a)-(b))/(b) 7.0% (3.3)% 0.8%
------------------------------------ ---------- ---------- ----------
------------ --- ---- ----- ---------------------------------------------------------------------------------------- ------------------------
Relationship No Yes 2021 Relationship deposit growth over It's an indicator
deposits the year. 2022 2021 2020 of how well the
growth Group is performing
against its 'pioneering
growth' strategic
priority.
2020 ---------------------------- ---------- ---------- ----------
Total relationship deposits
- current year (a) GBP34,649m GBP30,596m GBP25,675m
Total relationship deposits
- prior year (b) GBP30,596m GBP25,675m GBP21,347m
Relationship deposit growth
((a)-(b))/(b) 13.2% 19.2% 20.3%
---------------------------- ---------- ---------- ----------
------------ --- ---- ----- ---------------------------------------------------------------------------------------- ------------------------
Additional information
Measuring the Group's performance
Asset quality (Basis - non-IFRS):
Metric KPI LTIP LTIP Definition/formula Why it
Year matters?
---------- --- ---- ---- -------------------------------------------------------------------------------------------- -----------
Impairment No No N/a Impairment losses on credit exposures It's an
charge to as a percentage of average customer indicator
average loans (defined as loans and advances of the
customer to customers, other financial assets asset
loans at fair value and due from customers quality
(cost of on acceptances). 2022 2021 2020 of the
risk) --------------------------- ---------- ---------- ---------- Group's
Impairment charge/(credit) lending
(a) GBP52m GBP(131)m GBP501m portfolio.
Average customer loans (b) GBP71,989m GBP72,447m GBP73,403m
Cost of risk (a)/(b) 0.07% (0.18)% 0.68%
--------------------------- ---------- ---------- ----------
---------- --- ---- ---- -------------------------------------------------------------------------------------------- -----------
% of loans No No N/a Stage 2 loans as a percentage of It allows
in Stage 2 gross loans and advances. 2022 2021 2020 period
------------------------------ ---------- ---------- ---------- on period
Stage 2 loans (a) GBP5,736m GBP10,178m GBP12,844m comparison
Gross loans and advances of
(b) GBP73,146m GBP72,551m GBP72,925m stage 2
% of loans in stage 2 (a)/(b) 7.8% 14.1% 17.7% loans
------------------------------ ---------- ---------- ---------- as a
percentage
of overall
gross
loans and
advances
and
therefore
provides
insight
into the
asset
quality of
the
Group's
lending
portfolio
over
time.
---------- --- ---- ---- -------------------------------------------------------------------------------------------- -----------
% of loans No No N/a Stage 3 loans as a percentage of It allows
in Stage 3 gross loans and advances. 2022 2021 2020 period
------------------------------ ---------- ---------- ---------- on period
Stage 3 loans (a) GBP1,038m GBP957m GBP862m comparison
Gross loans and advances of
(b) GBP73,146m GBP72,551m GBP72,925m stage 3
% of loans in stage 3 (a)/(b) 1.4% 1.3% 1.2% loans
------------------------------ ---------- ---------- ---------- as a
percentage
of overall
gross
loans and
advances
and
therefore
provides
insight
into the
asset
quality of
the
Group's
lending
portfolio
over
time.
---------- --- ---- ---- -------------------------------------------------------------------------------------------- -----------
Total book No No N/a Total impairment provisions on It
coverage credit exposures as a percentage provides a
of total customer loans. 2022 2021 2020 measure
---------------------------- ---------- ---------- ---------- of the
Impairment provisions on level of
credit exposures (a) GBP457m GBP504m GBP735m provision
Gross loans and advances the Group
(b) GBP73,146m GBP72,551m GBP72,925m holds for
Total book coverage (a)/(b) 0.62% 0.70% 1.03% the total
---------------------------- ---------- ---------- ---------- lending
portfolio.
---------- --- ---- ---- -------------------------------------------------------------------------------------------- -----------
Stage 2 No No N/a Stage 2 impairment provisions as It
coverage a percentage of stage 2 gross loans provides a
and advances. 2022 2021 2020 measure
--------------------------------- --------- ---------- ---------- of the
Stage 2 impairment provisions level of
on credit exposures (a) GBP268m GBP302m GBP465m provision
Stage 2 gross loans and advances the Group
(b) GBP5,736m GBP10,178m GBP12,844m holds for
Total stage 2 book coverage the
(a)/(b) 4.72% 3.02% 3.66% lifetime
--------------------------------- --------- ---------- ---------- of the
Stage 2
lending
portfolio.
---------- --- ---- ---- -------------------------------------------------------------------------------------------- -----------
Additional information
Measuring the Group's performance
Asset quality continued (Basis - non-IFRS):
Metric KPI LTIP LTIP Definition/formula Why it
Year matters?
--------- --- ---- ----- ---------------------------------------------------------------------------- -----------
Stage 3 No No N/a Stage 3 impairment provisions as It
coverage a percentage of stage 3 gross loans provides a
and advances. 2022 2021 2020 measure
--------------------------------- --------- ------- ------- of the
Stage 3 impairment provisions level of
on credit exposures (a) GBP104m GBP91m GBP134m provision
Stage 3 gross loans and advances the Group
(b) GBP1,038m GBP957m GBP862m holds for
Total stage 3 book coverage the
(a)/(b) 11.24% 9.59% 15.73% lifetime
--------------------------------- --------- ------- ------- of the
Stage 3
lending
portfolio.
--------- --- ---- ----- ---------------------------------------------------------------------------- -----------
Additional information
Measuring the Group's performance
Capital (Basis - non-IFRS):
Metric KPI LTIP LTIP Definition/formula Why it
Year matters?
------------- --- ---- ---- ------------------------------------------------------------------------------------------- --------------
Announced Yes No N/a Dividends announced for the year It shows how
shareholder plus buybacks as a percentage of much
distributions statutory profit after tax attributable of our
to ordinary shareholders. 2022 2021 2020 profits
------------------------------------ ------- ------- --------- after tax and
Interim dividend (a) GBP36m n/a n/a distributions
Final dividend (b) GBP106m GBP14m n/a we are paying
Buybacks (c) GBP125m n/a n/a out
Statutory profit after tax to our
attributable to ordinary shareholders.
equity holders (d) GBP467m GBP395m GBP(220)m
Announced shareholder distributions
((a)+(b)+(c))/(d) 57% 4% n/a
------------------------------------ ------- ------- ---------
------------- --- ---- ---- ------------------------------------------------------------------------------------------- --------------
Common Equity No No N/a CET1 capital as a percentage of It's an
Tier 1 (CET1) RWAs, on an IFRS 9 transitional indicator
ratio (IFRS basis. 2022 2021 2020 of bank
9 ----------------------------------- ---------- ---------- ---------- solvency
transitional) CET1 capital (IFRS 9 transitional) that gauges
(a) GBP3,633m GBP3,616m GBP3,271m the
RWA (IFRS 9 transitional) strength of
(b) GBP24,148m GBP24,232m GBP24,399m the
CET1 ratio (IFRS 9 transitional) Group's CET1
(a)/(b) 15.0% 14.9% 13.4% capital
----------------------------------- ---------- ---------- ---------- relative to
risk
weighted
assets.
------------- --- ---- ---- ------------------------------------------------------------------------------------------- --------------
CET1 ratio No No N/a CET1 capital as a percentage of It's an
(IFRS 9 fully RWAs, on an IFRS 9 fully loaded indicator
loaded) basis. 2022 2021 2020 of bank
--------------------------- ---------- ---------- ---------- solvency
CET1 capital (IFRS 9 fully that gauges
loaded) (a) GBP3,519m GBP3,482m GBP2,961m the
RWA (IFRS 9 fully loaded) strength of
(b) GBP24,056m GBP24,156m GBP24,246m the
CET1 ratio (IFRS 9 fully Group's CET1
loaded) (a)/(b) 14.6% 14.4% 12.2% capital
--------------------------- ---------- ---------- ---------- without
adjusting
for temporary
IFRS
9 relief.
------------- --- ---- ---- ------------------------------------------------------------------------------------------- --------------
Tier 1 ratio No No N/a Tier 1 capital as a percentage It's an
of RWAs. indicator
2022 2021 2020 of bank
--------------------- ---------- ---------- ---------- solvency
Tier 1 capital (a) GBP4,299m GBP4,313m GBP4,186m that gauges
RWA (b) GBP24,148m GBP24,232m GBP24,399m the
Tier 1 ratio (a)/(b) 17.8% 17.8% 17.2% strength of
--------------------- ---------- ---------- ---------- the
Group's Tier
1
capital
relative
to risk
weighted
assets.
------------- --- ---- ---- ------------------------------------------------------------------------------------------- --------------
Additional information
Measuring the Group's performance
Capital continued (Basis - non-IFRS):
Metric KPI LTIP LTIP Definition/formula Why it
Year matters?
----------- --- ---- ---- -------------------------------------------------------------------------------- --------------
Total No No N/a Total capital resources as a percentage It's an
capital of RWAs. indicator
ratio 2022 2021 2020 of bank
---------------------------- ---------- ---------- ---------- solvency
Total capital (a) GBP5,319m GBP5,332m GBP4,935m that gauges
RWA (b) GBP24,148m GBP24,232m GBP24,399m the
Total capital ratio (a)/(b) 22.0% 22.0% 20.2% strength of
---------------------------- ---------- ---------- ---------- the
Group's total
capital
relative to
risk
weighted
assets.
----------- --- ---- ---- -------------------------------------------------------------------------------- --------------
Tangible No No N/a Tangible equity (total equity less It represents
net asset intangible assets and AT1) divided the
value by the number of ordinary shares value per
(TNAV) in issue at the year end (which share
per share includes deferred shares and excludes of the Group
own shares held). 2022 2021 2020 based
----------------------------- --------- --------- --------- on the
Tangible equity (a) GBP5,407m GBP4,185m GBP3,526m Group's
Number of ordinary shares tangible net
in issue (b) 1,409m 1,440m 1,439m assets
Deferred shares (c) 3m 5m 6m and can be
Own shares held (d) 0.3m 0.1m 0.2m used
Tangible net asset value as a
per share (a)/((b)+(c)-(d)) 383.0p 289.8p 244.2p comparison
----------------------------- --------- --------- --------- against the
current
market share
price.
----------- --- ---- ---- -------------------------------------------------------------------------------- --------------
Total No Yes 2022 Share price at the end of the financial The use of
shareholder period, less the share price at total
return the start of the financial period shareholder
(TSR) including dividends received over return
the period, divided by the share enables us to
price at the start of the financial target
period. a measure
2022 2021 2020 that
---------------------------------- ------- ------ ------- is directly
Share price at the end of linked
the financial period (a) 124.3p 204.4p 73.0p to an
Share price at the start investor's
of the financial period (b) 204.4p 73.0p 114.9p total return
Dividends (assuming reinvestment) on
(c) 3.2p n/a n/a a share,
Total shareholder return incorporating
((a)-(b)+(c))/(b) (37.6)% 180.1% (36.5)% both share
---------------------------------- ------- ------ ------- price
movement and
dividends
paid.
----------- --- ---- ---- -------------------------------------------------------------------------------- --------------
Additional information
Measuring the Group's performance
Non-financial performance metrics:
Metric KPI LTIP LTIP Definition and formula (where applicable) Why it matters?
Year
--------------- --- ---- ----- ------------------------------------------------------ ---------------------------
Colleague Yes No N/a Outcomes from the MyVoice colleague Measures our understanding
engagement engagement survey preceding the of employee sentiment
end of the financial year. noting our Purpose
of Making you happier
about money extends
to our colleagues
and ensures our
customers will
be supported by
delighted colleagues
working in a healthy,
flexible, digitally-led
environment.
--------------- --- ---- ----- ------------------------------------------------------ ---------------------------
Customer Yes No N/a In line with FCA regulations, number Provides a measure
complaints of complaints per thousand accounts to benchmark against
per 1,000 calculated asTotal number of complaints received peers and drives
accounts in 6 month period to reporting date accountability
---------------------------------------- within the Group
Total number of accounts as at reporting to improve customer
date x 1,000 service and ensure
we are making our
customers happier
Currently excludes complaints relating about money
to Insurance and Pure Protection
FCA reporting group given historically
skewed influence of legacy PPI
--------------- --- ---- ----- ------------------------------------------------------ ---------------------------
Digital primacy Yes No N/a It measures the proportion of active Measures the level
PCA and Card customers who are digital of digitisation
only in their engagement with Virgin across our customer
Money. To qualify, each customer journeys whilst
must: demonstrating the
1. be digitally adopted and active realisation of
(successfully logged in to the mobile our ambition 'to
app in the past 90 days); be the UK's best
2. signed up to our paperless proposition; digital bank.'
3. not transacted in stores within
the last 90 days; and
4. have not completed an authenticated
call with contact centres in the
past 90 days.
--------------- --- ---- ----- ------------------------------------------------------ ---------------------------
Group Yes No N/a % of interactions scored as a 'Smile'. It's a score that
Smile A 'Smile' is determined by our customers is used to supplement
score and only counted as a 'Smile' if NPS however we
they score the following three aspects use the Smile scores
at the highest ranking: as our key customer
* Whether the customer got what they wanted on an experience metric
interaction. given its ability
to capture the
role of emotion
* How easy the interaction was. in customer advocacy.
* How the interaction made them feel.
--------------- --- ---- ----- ------------------------------------------------------ ---------------------------
Total active Yes No N/a Active PCA, BCA and Card customer It's an indicator
relationship accounts where active is defined of how well the
customer as > GBP0 balance for Cards; transaction Group is performing
accounts in the last 12 months for PCA and against its 'pioneering
BCA customer accounts. growth' strategic
priority.
--------------- --- ---- ----- ------------------------------------------------------ ---------------------------
Additional information
Measuring the Group's performance
Non-financial performance metrics:
Metric KPI LTIP LTIP Definition and formula (where applicable) Why it matters?
Year
-------------- --- ---- ----- --------------------------------------------- ---------------------------
ESG scorecard No Yes 2022 Demonstrating progress against the Our ESG scorecard
Group's short, medium and long term tracks our progress
targets for: in creating a sustainable
1. Senior colleague gender representation future and the
(1) ; inclusion of an
2. Senior colleague ethnic minority ESG scorecard within
representation (1) ; our LTIP ensures
3. Group-wide ethnic minority representation that Executive
(1) ; Director remuneration
4. Carbon emissions, Scope 1 and is aligned with
2; the Group's aspiration
5. Net zero plan delivery (financed to drive positive
emissions reduction); and social and environmental
6. Colleague engagement. impact through
everything we do.
(1) As a percentage of the population
declared.
-------------- --- ---- ----- --------------------------------------------- ---------------------------
Risk scorecard No Yes 2022 Demonstrating progress against the Our Risk scorecard
Group's targets for customer complaints, demonstrates our
operational risk losses, cost of commitment to,
risk, Group risk profile and Group and monitoring
risk appetite. of, prudent risk
management within
the business, and
its inclusion within
our LTIP ensures
Executive Director
remuneration is
aligned with the
Group's aspirations
to deliver exceptional
customer experience
and ensure operations
and processes drive
resilience and
positive customer
outcomes.
-------------- --- ---- ----- --------------------------------------------- ---------------------------
Additional information
Underlying adjustments to the statutory view of performance
Management exclude certain items from the Group's statutory position to arrive at an underlying performance basis. Management's approach to underlying adjustments is aligned to the European Securities and Markets Authority (ESMA) guidelines on APMs and recommendations are subject to review and agreement by the Board Audit Committee. Additional detail on these items is provided below to help understand their exclusion from underlying performance.
Item 2022 2021 Reason for exclusion from the Group's current underlying
GBPm GBPm performance
----------------------------- ------- ------- ---------------------------------------------------------------------
Restructuring charges (82) (146) The current period costs relate to the Group's Digital-First
strategy.
The Group expects to incur c.GBP275m of restructuring charges
across
FY22-24. FY21 costs represented the Group's three year integration
plan following the acquisition of Virgin Money Holidays (UK) PLC
and comprised a number of one-off expenses that were required to
realise the anticipated cost synergies.
----------------------------- ------- ------- ---------------------------------------------------------------------
Acquisition accounting (35) (88) This consists principally of the unwind of the IFRS 3 fair value
unwinds adjustments created on the acquisition of Virgin Money Holdings
(UK) PLC in October 2018. These represent either one-off
adjustments
or are the scheduled reversals of the accounting adjustments that
arose following the fair value exercise required by IFRS 3. These
will continue to be treated as non -- underlying adjustments over
the expected three to five-year period until they have been fully
reversed.
----------------------------- ------- ------- ---------------------------------------------------------------------
Legacy conduct (8) (76) These costs are historical in nature and are not indicative of the
Group's current practices.
----------------------------- ------- ------- ---------------------------------------------------------------------
Other:
SME transformation - (1) These costs related to the transformation of the Group's Business
banking proposition and mainly comprised costs associated with the
RBS incentivised switching scheme.
UTM transition costs (9) (6) These costs relate to UTM's transformation costs principally for
the build of a new platform for administration and servicing.
VISA Shares 2 1 A one-off gain on conversion of Visa B Preference shares to Series
A preference shares.
Internally developed (62) (68) These costs relate to the write-off of WIP and intangible asset
software adjustments balances held on the balance sheet as a result of a reassessment
of the Group's practices on capitalisation against the backdrop
of the move to an Agile project delivery.
Total other (69) (74)
----------------------------- ------- ------- ---------------------------------------------------------------------
Total underlying adjustments (194) (384)
----------------------------- ------- ------- ---------------------------------------------------------------------
Additional information
Glossary
Term Definition
------------------------- -----------------------------------------------------------------
Additional Tier Securities that are considered AT1 capital in the context
1 (AT1) of CRD IV.
------------------------- -----------------------------------------------------------------
Agile Agile working is about bringing people, processes, connectivity
and technology, time and place together to find the
most appropriate and effective way of working.
------------------------- -----------------------------------------------------------------
arrears A customer is in arrears (or in a state of delinquency)
when they fail to adhere to their contractual payment
obligations resulting in an outstanding loan that is
unpaid or overdue. When a customer is in arrears, the
total outstanding loans on which payments are overdue
are said to be delinquent.
------------------------- -----------------------------------------------------------------
average assets Represents the average of assets over the year adjusted
for any disposed operations.
------------------------- -----------------------------------------------------------------
Bank Clydesdale Bank PLC.
------------------------- -----------------------------------------------------------------
Basel II The capital adequacy framework issued by the Basel Committee
on Banking Supervision (BCBS) in June 2004.
------------------------- -----------------------------------------------------------------
Basel III Reforms issued by the BCBS in December 2017 with subsequent
revisions.
------------------------- -----------------------------------------------------------------
basis points (bps) One hundredth of a percent (0.01%); meaning that 100
basis points is equal to 1%. This term is commonly used
in describing interest rate movements.
------------------------- -----------------------------------------------------------------
Board Refers to the Virgin Money UK PLC Board or the Clydesdale
Bank PLC Board as appropriate.
------------------------- -----------------------------------------------------------------
Bounce back loan A scheme implemented by the UK Government to provide
scheme financial support to businesses across the UK that were
losing revenue, and seeing their cash flow disrupted
as a result of COVID-19, enabling them to benefit from
GBP50,000 or less in finance.
------------------------- -----------------------------------------------------------------
Business lending Lending to non-retail customers, including overdrafts,
asset and lease financing, term lending, bill acceptances,
foreign currency loans, international and trade finance,
securitisation and specialised finance.
------------------------- -----------------------------------------------------------------
carbon related assets Assets tied to the energy and utilities sectors under
the Global Industry Classification Standard (mapped
to internal industry classifications), excluding water
utilities and independent power and renewable electricity
producer industries.
------------------------- -----------------------------------------------------------------
carrying value (also The value of an asset or a liability in the balance
referred to as carrying sheet based on either amortised cost or fair value principles.
amount)
------------------------- -----------------------------------------------------------------
cash and cash equivalents For the purposes of the statement of cash flows, cash
and cash equivalents comprise cash and non-mandatory
deposits with central banks and amounts due from other
banks with a maturity of less than three months.
------------------------- -----------------------------------------------------------------
Code The 2018 UK Corporate Governance Code.
------------------------- -----------------------------------------------------------------
collateral The assets of a borrower that are used as security against
a loan facility.
------------------------- -----------------------------------------------------------------
commercial paper An unsecured promissory note issued to finance short-term
credit requirements. These instruments have a specified
maturity date and stipulate the face amount to be paid
to the investor on that date.
------------------------- -----------------------------------------------------------------
Common Equity Tier The highest quality form of regulatory capital that
1 capital (CET1) comprises total shareholders' equity, less goodwill
and intangible assets and certain other regulatory adjustments.
------------------------- -----------------------------------------------------------------
Company Virgin Money UK PLC.
------------------------- -----------------------------------------------------------------
Coronavirus business A scheme implemented by the UK Government to provide
interruption loan financial support to smaller businesses across the UK
scheme that were losing revenue, and seeing their cash flow
disrupted, as a result of COVID-19.
------------------------- -----------------------------------------------------------------
Coronavirus large A scheme implemented by the UK Government to provide
business interruption financial support to mid-sized and larger businesses
loan scheme across the UK that were suffering disruption to their
cash flow due to lost or deferred revenues as a result
of COVID-19.
------------------------- -----------------------------------------------------------------
counterparty The other party that participates in a financial transaction,
with every transaction requiring a counterparty in order
for the transaction to complete.
------------------------- -----------------------------------------------------------------
Coverage ratio Impairment allowance as at the year end shown as a percentage
of gross loans and advances as at the year end.
------------------------- -----------------------------------------------------------------
covered bonds A corporate bond with primary recourse to the institution
and secondary recourse to a pool of assets that act
as security for the bonds on issuer default. Covered
bonds remain on the issuer's balance sheet and are a
source of term funding for the Group.
------------------------- -----------------------------------------------------------------
CRD IV European legislation to implement Basel III. It replaces
earlier European CRDs with a revised package consisting
of a new CRD and a new CRR. CRD IV sets out capital
and liquidity requirements for European banks and harmonises
the European framework for bank supervision. See also
'Basel III'.
------------------------- -----------------------------------------------------------------
credit conversion CCFs are used in determining the EAD in relation to
factor (CCF) a credit risk exposure. The CCF is an estimate of the
proportion of undrawn and off-balance sheet commitments
expected to be drawn down at the point of default.
------------------------- -----------------------------------------------------------------
Credit impaired A financial asset that is in default or has an individually
financial asset assessed provision. This is also referred to as a 'Stage
3' impairment loss and subject to a lifetime ECL calculation.
The Group considers 90 DPD as a backstop in determining
whether a financial asset is credit impaired.
------------------------- -----------------------------------------------------------------
Credit risk mitigation Techniques to reduce the potential loss in the event
that a customer (borrower or counterparty) becomes unable
to meet its obligations. This may include the taking
of financial or physical security, the assignment of
receivables or the use of credit derivatives, guarantees,
credit insurance, set-off or netting.
------------------------- -----------------------------------------------------------------
CRR II Capital Requirements Regulation (EU) 575/2013 and Directive
(EU) 2013/36, revised by Regulation (EU) 2019/876 and
Directive (EU) 2019/878, as implemented in the UK by
PRA Policy Statement 22/21 and incorporated into the
PRA Rulebook from 1 January 2022.
------------------------- -----------------------------------------------------------------
customer deposits Money deposited by individuals or corporate entities
that are not credit institutions, and can be either
interest bearing, non-interest bearing or term deposits.
------------------------- -----------------------------------------------------------------
days past due (DPD) The number of days a facility has borrowing in excess
of an agreed or expired limit or, where facilities are
subject to a regular repayment schedule, contractual
payments are not fully up to date.
------------------------- -----------------------------------------------------------------
Additional information
Glossary
Term Definition
------------------------ ---------------------------------------------------------------
default A customer is in default when either they are more than
90 DPD on a credit obligation to the Group, or are considered
unlikely to pay their credit obligations in full without
recourse to actions such as realisation of security
(if held).
------------------------ ---------------------------------------------------------------
delinquency See 'arrears'.
------------------------ ---------------------------------------------------------------
Demerger The demerger of the Group from NAB which took effect
on 8 February 2016 pursuant to which all of the issued
share capital of CYB Investments Limited was transferred
to the Company (formerly CYBG PLC) by NAB in consideration
for the issue and transfer of the Company (formerly
CYBG PLC) shares to NAB in part for the benefit of NAB
(which NAB subsequently sold pursuant to the Company's
IPO) and in part for the benefit of NAB shareholders
under a scheme of arrangement under part 5.1 of the
Australian Corporations Act.
------------------------ ---------------------------------------------------------------
derivative A financial instrument that is a contract or agreement
whose value is related to the value of an underlying
instrument, reference rate or index.
------------------------ ---------------------------------------------------------------
effective interest The rate used to calculate interest income or expense
rate (EIR) under the effective interest method.
------------------------ ---------------------------------------------------------------
encumbered assets Assets that have been pledged as security, collateral
or legally 'ring-fenced' in some other way which prevents
those assets being transferred, pledged, sold or otherwise
disposed.
------------------------ ---------------------------------------------------------------
exposure A claim, contingent claim or position which carries
a risk of financial loss.
------------------------ ---------------------------------------------------------------
exposure at default The estimate of the amount that the customer will owe
(EAD) at the time of default.
------------------------ ---------------------------------------------------------------
fair value The price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction
in the principal (or most advantageous) market at the
measurement date under current market conditions.
------------------------ ---------------------------------------------------------------
forbearance The term generally applied to the facilities provided
or changes to facilities provided to assist borrowers,
who are experiencing, or are about to experience, a
period of financial stress.
------------------------ ---------------------------------------------------------------
Gen Z The current generation of young people born between
the mid to late 1990s and the early 2010s.
------------------------ ---------------------------------------------------------------
Group Virgin Money UK PLC and its controlled entities.
------------------------ ---------------------------------------------------------------
hedge ineffectiveness Represents the extent to which the income statement
is impacted by changes in fair value or cash flows of
hedging instruments not being fully offset by changes
in fair value or cash flows of hedged items.
------------------------ ---------------------------------------------------------------
IFRS 9 The financial instrument accounting standard which was
adopted by the Group with effect from 1 October 2018.
------------------------ ---------------------------------------------------------------
IFRS 9 transitional That part of the transitional adjustments on regulatory
adjustments - dynamic capital arising from the increase in impairment provisions
(on non-credit impaired exposures) from the date of
initial adoption of IFRS 9 to the reporting date.
------------------------ ---------------------------------------------------------------
IFRS 9 transitional That part of the transitional adjustments on regulatory
adjustments - static capital arising from the increase in impairment provisions
on initial adoption of IFRS 9 from those calculated
under IAS 39.
------------------------ ---------------------------------------------------------------
impairment allowances An ECL provision held on the balance sheet for financial
assets calculated in accordance with IFRS 9. The impairment
allowance is calculated as either a 12-month or a lifetime
ECL.
------------------------ ---------------------------------------------------------------
impairment losses The ECL calculated in accordance with IFRS 9 and recognised
in the income statement with the carrying value of the
financial asset reduced by creating an impairment allowance.
Impairment losses are calculated as either a 12-month
or lifetime ECL.
------------------------ ---------------------------------------------------------------
Internal Capital The Group's assessment of the levels of capital that
Adequacy Assessment it needs to hold through an examination of its risk
Process (ICAAP) profile from regulatory and economic capital viewpoints.
------------------------ ---------------------------------------------------------------
Internal Liquidity The Group's assessment and management of balance sheet
Adequacy Assessment risks relating to funding and liquidity.
Process (ILAAP)
------------------------ ---------------------------------------------------------------
Internal Ratings-Based A method of calculating credit risk capital requirements
approach (IRB) using internal, rather than supervisory, estimates of
risk parameters.
------------------------ ---------------------------------------------------------------
investment grade The highest possible range of credit ratings, from 'AAA'
to 'BBB', as measured by external credit rating agencies.
------------------------ ---------------------------------------------------------------
Level 1 fair value Financial instruments whose fair value is derived from
measurements unadjusted quoted prices for identical instruments in
active markets.
------------------------ ---------------------------------------------------------------
Level 2 fair value Financial instruments whose fair value is derived from
measurements quoted prices for similar instruments in active markets
and financial instruments valued using models where
all significant inputs are observable.
------------------------ ---------------------------------------------------------------
Level 3 fair value Financial instruments whose fair value is derived from
measurements valuation techniques where one or more significant inputs
are unobservable.
------------------------ ---------------------------------------------------------------
lifetime ECL The ECL calculation performed on financial assets where
a SICR since origination has been identified. This can
be either a 'Stage 2' or 'Stage 3' impairment loss depending
on whether the financial asset is credit impaired.
------------------------ ---------------------------------------------------------------
Listing Rules Regulations applicable to any company listed on a UK
stock exchange, subject to the oversight of the UK Listing
Authority (UKLA). The Listing Rules set out mandatory
standards for any company wishing to list its shares
or securities for sale to the public.
------------------------ ---------------------------------------------------------------
loan to value ratio A ratio that expresses the amount of a loan as a percentage
(LTV) of the value of the property on which it is secured.
------------------------ ---------------------------------------------------------------
location-based emissions Calculated using the average emissions intensity of
the grids on which energy consumption occurs, using
mostly grid-average emission factor data.
------------------------ ---------------------------------------------------------------
loss-absorbing capacity The required level of MREL resources that the Group
(LAC) requirement is required to hold to meet its MREL requirement and
applicable capital buffers set by the BoE.
------------------------ ---------------------------------------------------------------
loss given default The estimate of the loss that the Group will suffer
(LGD) if the customer defaults (incorporating the effect of
any collateral held).
------------------------ ---------------------------------------------------------------
market-based emissions Calculated as the electricity that companies have purposefully
chosen to purchase. It derives emission factors from
contractual instruments, which include any type of contract
between two parties for the sale and purchase of energy
bundled with attributes about the energy generation,
or for unbundled attribute claims.
------------------------ ---------------------------------------------------------------
Additional information
Glossary
Term Definition
--------------------------- ----------------------------------------------------------------
medium-term notes Debt instruments issued by corporates, including financial
institutions, across a range of maturities.
--------------------------- ----------------------------------------------------------------
Minimum Requirement A minimum requirement for institutions to maintain equity
for Own Funds and and eligible debt liabilities, to help ensure that if
Eligible Liabilities an institution fails the resolution authority can use
(MREL) these financial resources to absorb losses and recapitalise
the continuing business.
--------------------------- ----------------------------------------------------------------
National Databank The National Databank provides free mobile data, texts
and calls to people in need via Good Things Foundation's
network of local community partners.
--------------------------- ----------------------------------------------------------------
net interest income The amount of interest received or receivable on assets,
(NII) net of interest paid or payable on liabilities.
--------------------------- ----------------------------------------------------------------
Net Promoter Score This is an externally collated customer loyalty metric
(NPS) that measures loyalty between a provider, who in this
context is the Group, and a consumer.
--------------------------- ----------------------------------------------------------------
Paris Climate Agreement Legally binding international treaty to limit global
warming to below 2 degrees Celsius, and preferably to
1.5 degrees Celsius above pre-industrial levels.
--------------------------- ----------------------------------------------------------------
Personal lending Lending to individuals rather than institutions excluding
mortgage lending which is reported separately.
--------------------------- ----------------------------------------------------------------
probability of default The probability that a customer will default over either
(PD) the next 12 months or lifetime of the account.
--------------------------- ----------------------------------------------------------------
Recovery loan scheme A scheme implemented by the UK Government to provide
(RLS) financial support to small and medium sized businesses
across the UK to promote growth and investment following
the disruption caused by COVID-19.
--------------------------- ----------------------------------------------------------------
regulatory capital The capital which the Group holds, determined in accordance
with rules established by the PRA.
--------------------------- ----------------------------------------------------------------
relationship deposits Current account and linked savings balances.
--------------------------- ----------------------------------------------------------------
residential mortgage-backed Securities that represent interests in groups or pools
securities (RMBS) of underlying mortgages. Investors in these securities
have the right to cash received from future mortgage
payments (interest and principal).
--------------------------- ----------------------------------------------------------------
ring-fencing A regime of rules which require banks to change the
way that they are structured by separating retail banking
services from investment and international banking.
This is to ensure the economy and taxpayers are protected
in the event of any future financial crises.
--------------------------- ----------------------------------------------------------------
risk appetite The level and types of risk the Group is willing to
assume within the boundaries of its risk capacity to
achieve its strategic objectives.
--------------------------- ----------------------------------------------------------------
risk-weighted asset On and off-balance sheet assets of the Group are allocated
(RWA) a risk weighting based on the amount of capital required
to support the asset.
--------------------------- ----------------------------------------------------------------
sale and repurchase A short-term funding agreement that allows a borrower
agreement (repo) to create a collateralised loan by selling a financial
asset to a lender. As part of the agreement, the borrower
commits to repurchase the security at a date in the
future repaying the proceeds of the loan. For the counterparty
(buying the security and agreeing to sell in the future)
it is a reverse repurchase agreement or a reverse repo.
--------------------------- ----------------------------------------------------------------
Scheme The Group's defined benefit pension scheme, the Yorkshire
and Clydesdale Bank Pension Scheme.
--------------------------- ----------------------------------------------------------------
Science based targets Science based targets provide a clearly defined pathway
for companies and financial institutions to reduce GHG
emissions, helping prevent the worst impacts of climate
change and future-proof business growth.
Targets are considered 'science based' if they are in
line with what the latest climate science deems necessary
to meet the goals of the Paris Agreement - limiting
global warming to 1.5degC above pre-industrial levels.
--------------------------- ----------------------------------------------------------------
Scope 1/2/3 emissions Scope 1, 2, and 3 emissions are a way of categorising
business emissions, accounting for both direct and indirect
emitted GHGs. Scope 1 emissions are GHGs released directly
from a business. Scope 2 emissions are indirect GHGs
released from the energy purchased by an organisation.
Scope 3 emissions are also indirect GHG emissions, accounting
for upstream and downstream emissions of a product or
service, and emissions across a business's value chain.
--------------------------- ----------------------------------------------------------------
secured lending Lending in which the borrower pledges some asset (e.g.
property) as collateral for the lending.
--------------------------- ----------------------------------------------------------------
securitisation The practice of pooling similar types of contractual
debt and packaging the cash flows from the financial
asset into securities that can be sold to institutional
investors in debt capital markets. It provides the Group
with a source of secured funding that can achieve a
reduction in funding costs by offering typically 'AAA'
rated securities secured by the underlying financial
asset.
--------------------------- ----------------------------------------------------------------
significant increase The assessment performed on financial assets at the
in credit risk (SICR) reporting date to determine whether a 12-month or lifetime
ECL calculation is required. Qualitative and quantitative
triggers are assessed in determining whether there has
been a SICR since origination. The Group considers 30
DPD as a backstop in determining whether a SICR since
origination has occurred.
--------------------------- ----------------------------------------------------------------
standardised approach In relation to credit risk, a method for calculating
credit risk capital requirements using External Credit
Assessment Institutions ratings and supervisory risk
weights. In relation to operational risk, a method of
calculating the operational capital requirement by the
application of a supervisory defined percentage charge
to the gross income of eight specified business lines.
--------------------------- ----------------------------------------------------------------
stress testing The term used to describe techniques where plausible
events are considered as vulnerabilities to ascertain
how this will impact the own funds or liquidity which
a bank holds.
--------------------------- ----------------------------------------------------------------
structured entity An entity created to accomplish a narrow well-defined
objective (e.g. securitisation of financial assets).
An SE may take the form of a corporation, trust, partnership
or unincorporated entity. SEs are often created with
legal arrangements that impose strict limits on the
activities of the SE. May also be referred to as an
SPV.
--------------------------- ----------------------------------------------------------------
subordinated debt Liabilities which rank after the claims of other creditors
of the issuer in the event of insolvency or liquidation.
--------------------------- ----------------------------------------------------------------
Term Funding Scheme A scheme launched in 2016 by the BoE to allow banks
(TFS) and building societies to borrow from the BoE at rates
close to base rate. This is designed to increase lending
to businesses by lowering interest rates and increasing
access to credit.
--------------------------- ----------------------------------------------------------------
Tier 1 capital A measure of a bank's financial strength defined by
CRD IV. It captures CET1 capital plus other Tier 1 securities
(as defined by CRD IV) in issue, subject to deductions.
--------------------------- ----------------------------------------------------------------
Additional information
Glossary
Term Definition
------------------- --------------------------------------------------------------
Tier 2 capital A component of regulatory capital, including qualifying
subordinated debt, eligible collective impairment allowances
and other Tier 2 securities as defined by CRD IV.
------------------- --------------------------------------------------------------
unsecured lending Lending in which the borrower pledges no assets as collateral
for the lending (such as credit cards and current account
overdrafts).
------------------- --------------------------------------------------------------
value at risk (VaR) A measure of the loss that could occur on risk positions
as a result of adverse movements in market risk factors
(e.g. rates, prices, volatilities) over a specified
time horizon and to a given level of confidence.
------------------- --------------------------------------------------------------
Additional information
Abbreviations
AFD Approaching financial difficulty
------ ----------------------------------
AGM Annual General Meeting
------ ----------------------------------
ALCO Asset and Liability Committee
------ ----------------------------------
APM Alternative Performance
Measure
------ ----------------------------------
ASX Australian Securities Exchange
------ ----------------------------------
AT1 Additional Tier 1
------ ----------------------------------
ATM Automated teller machine
------ ----------------------------------
BCA Business current account
------ ----------------------------------
BCBS Basel Committee on Banking
Supervision
------ ----------------------------------
BCR Banking Competition Remedies
------ ----------------------------------
BNPL Buy now, pay later
------ ----------------------------------
BoE Bank of England
------ ----------------------------------
bps Basis points
------ ----------------------------------
BTL Buy-to-let
------ ----------------------------------
CBES Climate Biennial Exploratory
Scenario
------ ----------------------------------
CBI Confederation of British
Industry
------ ----------------------------------
CCF Credit conversion factor
------ ----------------------------------
CCyB Countercyclical Capital
Buffer
------ ----------------------------------
CDI CHESS Depositary Interest
------ ----------------------------------
CDP Carbon Disclosure Project
------ ----------------------------------
CER Certified Emissions Reduction
------ ----------------------------------
CET1 Common Equity Tier 1 Capital
------ ----------------------------------
CIR Cost to income ratio
------ ----------------------------------
CMA Competition and Markets
Authority
------ ----------------------------------
CPI Consumer Price Index
------ ----------------------------------
CRD Capital Requirements Directive
------ ----------------------------------
CRR Capital Requirements Regulation
------ ----------------------------------
CSRBB Credit spread risk in the
banking book
------ ----------------------------------
CYBI CYB Investments Limited
------ ----------------------------------
DEP Deferred Equity Plan
------ ----------------------------------
DPD Days past due
------ ----------------------------------
DTR Disclosure Guidance and
Transparency Rules
------ ----------------------------------
EAD Exposure at default
------ ----------------------------------
EBA European Banking Authority
------ ----------------------------------
EBT Employee benefit trust
------ ----------------------------------
ECL Expected credit loss
------ ----------------------------------
EIR Effective interest rate
------ ----------------------------------
EPC Energy performance certificate
------ ----------------------------------
EPS Earnings per share
------ ----------------------------------
ESG Environmental, social and
governance
------ ----------------------------------
FCA Financial Conduct Authority
------ ----------------------------------
FIRB Foundation internal ratings-based
------ ----------------------------------
FPC Financial Policy Committee
------ ----------------------------------
FRC Financial Reporting Council
------ ----------------------------------
FTE Full time equivalent
------ ----------------------------------
FVOCI Fair value through other
comprehensive income
------ ----------------------------------
FVTPL Fair value through profit
or loss
------ ----------------------------------
GAAP Generally Accepted Accounting
Principles
------ ----------------------------------
GDIA Group Director Internal
Audit
------ ----------------------------------
GDP Gross Domestic Product
------ ----------------------------------
GDPR General Data Protection
Regulation
------ ----------------------------------
GHG Greenhouse Gases
------ ----------------------------------
G-SII Global Systemically Important
Institution
------ ----------------------------------
HMRC Her Majesty's Revenue and
Customs
------ ----------------------------------
HPI House Price Index
------ ----------------------------------
HQLA High Quality Liquid Asset
------ ----------------------------------
IAS International Accounting
Standard
------ ----------------------------------
IASB International Accounting
Standards Board
------ ----------------------------------
IBOR Interbank Offered Rate
------ ----------------------------------
ICAAP Internal Capital Adequacy
Assessment Process
------ ----------------------------------
IFRS International Financial
Reporting Standard
------ ----------------------------------
ILAAP Internal Liquidity Adequacy
Assessment Process
------ ----------------------------------
IPO Initial Public Offering
------ ----------------------------------
IRB Internal ratings-based
------ ----------------------------------
IRRBB Interest rate risk in the
banking book
------ ----------------------------------
ISA International Standards
on Auditing
------ ----------------------------------
ISDA International Swaps and
Derivatives Association
------ ----------------------------------
ISSB International Sustainability
Standards Board
------ ----------------------------------
JV Joint venture
------ ----------------------------------
KMP Key management personnel
------ ----------------------------------
KPI Key Performance Indicator
------ ----------------------------------
LAC Loss-absorbing capacity
------ ----------------------------------
LCR Liquidity coverage ratio
------ ----------------------------------
LDR Loan to deposit ratio
------ ----------------------------------
LGBTQ+ Lesbian, gay, bisexual,
transgender, queer (or
questioning) plus
------ ----------------------------------
LGD Loss Given Default
------ ----------------------------------
LIBOR London Interbank Offered
Rate
------ ----------------------------------
LSE London Stock Exchange
------ ----------------------------------
LTIP Long-term incentive plan
------ ----------------------------------
LTV Loan to value
------ ----------------------------------
MGC Model Governance Committee
------ ----------------------------------
MREL Minimum Requirement for
Own Funds and Eligible
Liabilities
------ ----------------------------------
MRT Material Risk Takers
------ ----------------------------------
NAB National Australia Bank
Limited
------ ----------------------------------
NII Net interest income
------ ----------------------------------
NIM Net interest margin
------ ----------------------------------
NPS Net promoter score
------ ----------------------------------
NSFR Net stable funding ratio
------ ----------------------------------
NZBA Net-Zero Banking Alliance
------ ----------------------------------
PBT Profit before tax
------ ----------------------------------
PCA Personal current accounts
------ ----------------------------------
PCAF Partnership for Carbon
Accounting Financials
------ ----------------------------------
Additional information
Abbreviations
PD Probability of Default
------ ---------------------------------
PIE Pension Increase Exchange
------ ---------------------------------
PMA Post model adjustment
------ ---------------------------------
POCI Purchased or originated
credit impaired
------ ---------------------------------
PPI Payment protection insurance
------ ---------------------------------
PRA Prudential Regulation Authority
------ ---------------------------------
RAF Risk Appetite Framework
------ ---------------------------------
RAS Risk Appetite Statement
------ ---------------------------------
RLS Recovery Loan Scheme
------ ---------------------------------
RMBS Residential mortgage-backed
securities
------ ---------------------------------
RMF Risk Management Framework
------ ---------------------------------
RoTE Return on Tangible Equity
------ ---------------------------------
RPI Retail Price Index
------ ---------------------------------
RWA Risk-weighted asset
------ ---------------------------------
SASB Sustainability Accounting
Standards Board
------ ---------------------------------
SAYE Save As You Earn
------ ---------------------------------
SDG Sustainable Development
Goal
------ ---------------------------------
SICR Significant increase in
credit risk
------ ---------------------------------
SIP Share Incentive Plan
------ ---------------------------------
SME Small or medium-sized enterprise
------ ---------------------------------
SMF Sterling Monetary Framework
------ ---------------------------------
SONIA Sterling Overnight Index
Average
------ ---------------------------------
SST Solvency Stress Test
------ ---------------------------------
STEM Science, Technology, Engineering
and Maths
------ ---------------------------------
STIP Short-term Incentive Plan
------ ---------------------------------
TCFD Task Force on Climate-related
Financial Disclosures
------ ---------------------------------
TFS Term Funding Scheme
------ ---------------------------------
TFSME Term Funding Scheme with
additional incentives for
SMEs
------ ---------------------------------
TNAV Tangible net asset value
------ ---------------------------------
TNFD Taskforce on Nature-related
Financial Disclosures
------ ---------------------------------
UN PRB United Nations' Principles
for Responsible Banking
------ ---------------------------------
UNEPFI United Nations Environment
Programme Finance Initiative
------ ---------------------------------
UTM Virgin Money Unit Trust
Managers Limited
------ ---------------------------------
VAA Virgin Atlantic Airways
Limited
------ ---------------------------------
VaR Value at risk
------ ---------------------------------
VIU Value-in-use
------ ---------------------------------
WIP Work-in-progress
------ ---------------------------------
YBHL Yorkshire Bank Home Loans
Limited
------ ---------------------------------
YoY Year-on-year
------ ---------------------------------
Additional information
Country by country reporting
The Capital Requirements (Country by Country Reporting) Regulations 2013 came into effect on 1 January 2014 and place certain reporting obligations on financial institutions that are within the scope of the European Union's CRD IV. The purpose of the Regulations is to provide clarity on the source of the Group's income and the locations of its operations.
The vast majority of entities that are consolidated within the Group's financial statements are UK registered entities. The activities of the Group are described in the Strategic report contained in the Group's Annual Report & Accounts.
2022
UK
--------------------------------- -----
Average FTE employees (number) 6,866
Total operating income (GBPm) 1,716
Profit before tax (GBPm) 595
Corporation tax paid (GBPm) 59
Public subsidies received (GBPm) -
-----
The only other non-UK registered entity of the Group is a Trustee company that is part of the Group's securitisation vehicles (Lanark and Lannraig). Lannraig Trustees Limited is registered in Jersey. This entity plays a part in the overall securitisation process by having the beneficial interest in certain mortgage assets assigned to it. This entity has no assets or liabilities recognised in its financial statements with the securitisation activity taking place in other UK registered entities of the structures. This entity does not undertake any external economic activity and has no employees. The results of this entity as well as those of the entire Lanark and Lannraig securitisation structures are consolidated in the financial statements of the Group.
Additional information
Other information
The financial information included in this results announcement does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 30 September 2022 were approved by the directors on 20 November 2022 and will be delivered to the Registrar of Companies following publication in December 2022. The auditor's report on those accounts was unqualified and did not include a statement under sections 498(2) (accounting records or returns inadequate or accounts not agreeing with records and returns) or 498(3) (failure to obtain necessary information and explanations) of the Companies Act 2006.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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