TIDMVMUK TIDM91XR
RNS Number : 5216G
Virgin Money UK PLC
27 July 2021
27 July 2021
Virgin Money UK PLC: Third Quarter 2021 Trading Update
Virgin Money UK PLC ("VMUK" or the "Group") confirms that
trading in the three months to 30 June 2021 was in line with the
Board's expectations.
David Duffy, Chief Executive Officer:
"Virgin Money performed well as our strategy continued to
translate into improved financial delivery in a strengthening
environment. We carried our momentum of relationship deposit growth
into the second half, reducing our cost of funds. Our asset quality
remained robust, while capital ratios improved further.
"The positive reaction to our switching incentives and product
launches reflects our focus on transforming customer experience,
backed by the unique advantages of one of the world's
most-recognised brands. We have also advanced our ESG agenda with
our first greener mortgage product and sustainability-linked
business loans.
"We have increased full-year NIM guidance and, while COVID
continues to impact the near-term, we have a strong capital
position and robust provisions. We see great opportunities from
further developing our digital capabilities to deliver an improved
customer experience and greater efficiencies. We are well placed to
grow profitably next year as we play our role to support the UK
economic recovery."
Q3 Summary - Continued financial & strategic momentum; improving
asset quality backdrop
Strong relationship deposit balance growth with stable lending balances
* Relationship deposits increased 3.7% to GBP29.8bn,
whilst overall deposits decreased by (0.8)% to
GBP68.0bn as the Group continued to manage the
deposit mix and reduce funding costs
* Mortgages increased 0.7% to GBP58.7bn benefitting
from strong activity around SDLT deadlines
* Personal lending grew 2.5% to GBP5.2bn driven by
growth in credit cards as activity picked up
* Business lending was (2.4)% lower at GBP8.7bn as BAU
activity remained subdued and Government-backed loans
reduced as anticipated
Continued Net Interest Margin (NIM) momentum
* NIM improved in Q3 to 168bps (Q2: 160bps) benefitting
from a lower cost of funds driven by improvements in
deposit mix and repricing as well as higher hedge
contributions, partially offset by a more competitive
lending backdrop
* Expect NIM to be modestly ahead of 160bps for FY21,
stabilising into Q4, as wholesale funding costs and
increasing competition offset the ongoing deposit
repricing benefits
Ongoing strategic progress; continuing to invest in our future potential
and digital capability
* Further growth in new PCA customers to c110k this
financial year, benefitting from Brighter Money
Bundles campaigns; positive response to credit card
cashback offers with 175k registrations and with
instalment payments launching later in the year
* Relaunched BCA awarded Moneyfacts 5* rating;
innovative Wellness Tracker and Working Capital
Solutions set to launch later this year, leveraging
the capabilities of our fintech partners
* ESG progress: Launched greener mortgage product and
first sustainability-linked business loans
Improving economic outlook and robust asset quality
* Robust credit quality maintained across key
portfolios with no significant specific provisions in
Q3; balance sheet credit provisions of GBP678m (H1
21: GBP721m); coverage of 94bps (H1: 100bps)
* Q3 impairment release of GBP19m driven by lower
modelled ECL from updated macro assumptions
* Quarterly cost of risk of (10)bps (H1 charge: 11bps);
year-to-date cost of risk now 4bps
* If the current strengthening in the economic backdrop
persists, the Group believes there may be an
opportunity for a further reduction in credit
provision levels alongside FY21 results
Improved CET1 ratio with FY outlook improved
* CET1 ratio increased c.40bps to 14.8% (including
c.45bps of software benefit); benefited from
continued strong profitability and benign RWA
backdrop; fully loaded CET1 ratio now 13.7%
* E xpect FY21 CET1 to be broadly stable against Q3
level, including the software benefit; RWA inflation
more likely in FY22
* Solvency Stress Test (SST) outcome and impairment
outlook remain key inputs into our approach to
considering shareholder returns; expect a further
update on our capital framework post-SST
Pioneering Growth
(GBPbn) 30 Sep-20 31 Mar-21 30 Jun-21 Q3 growth YTD annualised
--------------------- ---------- ---------- ---------- ---------- ---------------
Mortgages 58.3 58.3 58.7 0.7% 0.8%
Business 8.9 8.9 8.7 (2.4)% (4.0)%
o/w BBLS 0.8 1.0 0.9 (3.6)% 21%
o/w CBILS/CLBILS 0.4 0.4 0.4 (2.2)% 32%
Personal 5.2 5.1 5.2 2.5% (1.1)%
Customer lending 72.5 72.2 72.5 0.4% 0.1%
Customer deposits 67.5 68.5 68.0 (0.8)% 0.9%
o/w relationship
deposits 25.7 28.7 29.8 3.7% 21.5%
--------------------- ---------- ---------- ---------- ---------- ---------------
The Group continued to manage down the cost of deposits in a
supportive environment with an improvement in mix, as relationship
deposits grew 3.7% during the quarter. Overall deposits reduced
(0.8)% with more expensive term deposit balances declining in line
with expectations as we continued to reprice the portfolio
lower.
Mortgage balances increased in Q3 by 0.7% reflecting higher
volumes of new lending and buoyant market conditions ahead of the
SDLT changes. Spreads tightened during the period as anticipated
and the Group continues to be selective, balancing volumes and
pricing carefully.
Business lending declined (2.4)% in Q3 with a reduction in BAU
and Government-scheme volumes. The BAU book declined (2.2)% given
lower market activity which is expected to improve later in the
calendar year. Following the expiry of the one-year interest free
period for the majority of CBILs and BBLs customers, Government
backed balances declined (3.2)% to GBP1.4bn as some borrowers
started to repay.
Personal lending balances increased 2.5% in Q3. Aggregate credit
card spending levels have recovered to pre-COVID levels but with
more impacted sectors, such as travel, remaining subdued. Overall,
the cards book returned to growth driven by a recovery in both
transaction-based and balance transfer balances. The Personal Loan
and Salary Finance portfolios performed resiliently against
continued subdued market demand.
Group NIM improved 8bps in Q3 to 168bps (YTD: 160bps 9 months
annualised), as the benefit of the structural hedge contribution
and reductions in deposit pricing provided continued momentum,
offsetting a more competitive lending environment. The Group now
expects NIM to be modestly ahead of 160bps for FY21, stabilising
into Q4, as wholesale funding costs and increasing competition
offset the ongoing deposit repricing benefit.
Non-interest income performance remained subdued in the period,
given the timing of restrictions being eased, but with some early
signs of recovery in card spending fees towards the end of the
quarter.
The UK economic outlook improved further in Q3. The rollout of
the vaccination programme and the easing of restrictions supported
further positive revisions to expectations. Stronger GDP growth,
lower unemployment, a robust housing market and greater consumer
confidence are all positive indicators of the improving outlook for
the operating environment. Overall, while risks remain from the
increase in COVID case numbers driven by the new variants and the
impact of the removal of Government support schemes later in the
year, the strengthening backdrop gives scope for greater optimism
about the pace of the recovery.
Delighted Customers and Colleagues
We continued to attract new PCA customers in the quarter, with
accounts opened this financial year now approaching 110,000 in
total (H1: c.80,000) as our Brighter Money Bundles campaign was
launched in November. The third Bundle featuring GBP150 vouchers
for Virgin Experience days has recently been launched, continuing
to offer a differentiated proposition in the market. Credit card
cashback sign-ups have reached 175,000 (H1: 100,000) and we
continue to focus on delivering new propositions such as instalment
payments on credit cards in Q4 and additional rewards for debit
card customers. The Group is focused on delivering a market-leading
customer experience, which will be supported by further investment
in digitising the whole customer journey, driving up advocacy
levels and improving efficiency.
The Virgin Red reward programme continues to gather momentum,
with a growing number of users signed up and over 200 ways to earn
and spend Virgin points across Virgin Group companies and other
retailers. The offer for the Virgin Atlantic Credit Card was
recently launched on the app, to sit alongside the exclusive 15,000
points offer for Red users switching to our M Plus PCA. We are
currently exploring the potential to launch other attractive offers
for Virgin Money products through the Virgin Red programme.
Our new BCA proposition which launched during Q3 has been rated
5* by Moneyfacts. Switching volumes will be supported in the coming
quarters by the launch of our business Wellness Tracker and the
wider Working Capital Health proposition later this year, as well
as our recently launched partnership with Virgin StartUp. After the
end of the quarter, the Group also received notification that with
nearly 16k firms having switched their BCA to VMUK through the BCR
Incentivised Switching Scheme, the Group had been awarded an
additional GBP8.9m to encourage further account switching
activity.
The Group is also continuing to work on transforming its
operating model, launching the initial phase of our "Life More
Virgin" approach to working. As our colleagues have adapted to the
changing environment, the Group remains focused on enabling a more
flexible approach to work as we disrupt the status quo. The new
approach will support both productivity and wellbeing, improving
collaboration and innovation, driving a great experience for our
colleagues and customers.
In Q3 our ESG agenda continued to gather pace. We launched new
propositions including our first greener mortgage product which we
will develop further over the coming months. In Business banking,
we advanced our first Sustainability-linked loans for commercial
businesses, designed to support businesses whose core activities
proactively help the economy transition to a more sustainable
economic and environmental model. The Group also switched to Biogas
in Q3, saving an estimated c.9 tonnes of carbon emissions per day.
All the energy where the Bank is responsible for supply is now
sourced renewably.
Super Straightforward Efficiency
The Group has made further progress in reducing its cost base in
the third quarter as expected, and continues to anticipate
underlying operating expenses of less than GBP890m for FY21, and
less than GBP430m for H2. Exceptional items in Q3 totalled GBP(34)m
including Integration and Transformation costs of GBP(22)m and
acquisition accounting unwind of GBP(12)m.
As outlined at the interim results in May, the Group continues
to see increasing customer appetite for digital self-service and is
evaluating the opportunities to accelerate its digital strategy to
deliver an improved customer experience and drive additional
efficiencies over time. Our work continues to target (i) increased
customer digital adoption, (ii) greater flexibility in colleague
working arrangements through our "Life More Virgin" programme and
(iii) the potential for further automation. We will give more
detail of the potential benefits and incremental associated
investment required alongside FY21 results.
Discipline & Sustainability
Credit quality remained robust in the period, with the overall
portfolio performing well and no significant specific provisions.
Macroeconomic inputs used in the Group's IFRS9 modelling were fully
refreshed in the quarter with March data from our 3(rd) party
provider Oxford Economics. The Group continues to use a weighted
average of 3 scenarios: (i) Upside 20%, (ii) Base 50%, (iii)
Downside 30%; full details of the weighted average scenario are in
appendix 1. Positive revisions to the key economic inputs and a
more balanced selection for the 'Base' scenario contributed to the
overall reduction in aggregate credit provisions to GBP678m (H1:
GBP721m). The decline was primarily driven by a reduction in
modelled ECL which reduced to GBP327m in the period (H1: GBP462m)
across stage 1 and 2 loans, particularly in Personal and Business
banking.
The Group continues to supplement the modelled output with
expert credit risk judgement applied through post-model adjustments
(PMAs) to account for factors the models cannot incorporate or
where the sensitivity is not as would be expected under the
unprecedented economic stress scenario. Given the uncertain
outlook, the Group decided to increase PMAs, mainly in Business
Banking, taking overall PMAs held to GBP320m (H1: GBP222m). Overall
coverage remains robust, having reduced 6bps to 94bps*.
The Q3 impairment release of GBP19m equates to a net Q3 cost of
risk of (10)bps. The Group remains focused on any potential
implications for customers as Government support is fully removed.
Nonetheless, if the current strengthening in the economic backdrop
persists, the Group believes there may be an opportunity for a
further reduction in credit provision levels alongside FY21
results.
Credit provisions Credit provisions Gross lending Coverage Annualised
at 31 Mar-21 at 30 Jun-21 at 30 Jun-21 ratio (bps) net cost
(GBPm) (GBPm) of risk (bps)
(GBPbn)
Mortgages 132 131 59.0 22 0
Personal 293 261 5.6 528 43
Business 296 286 8.5 379* 6
Total 721 678 73.1 94* 4
o/w stage
2 480 446 9.6 462
o/w stage
3 101 93 0.9 954
------------ ------------------ ------------------ -------------- ------------- ---------------
* Government guaranteed lending balances excluded for purpose of
coverage ratio calculation
VMUK remains strongly capitalised and CET1 improved c.40bps to
14.8% on an IFRS9 transitional basis in the quarter, including
c.45bps of benefit from the treatment of software intangible
assets. Fully loaded CET1 also remained robust in the period
improving to 13.7% (H1: 13.2%). Underlying capital generation in
the quarter more than offset the increase in RWAs, which were 0.5%
higher at GBP24.3bn primarily reflecting the prudent application of
additional PMAs related to economic uncertainty and PD
recalibration, offset by lower RWAs in Business banking. VMUK's
Total Capital and UK Leverage ratios remained resilient at 22.8%
(H1: 21.2%) and 5.4% (H1: 5.2%) respectively. The Group remains
focused on its inaugural Solvency Stress Test participation, ahead
of the bank-by-bank results announcement in December.
Given the improved economic outlook, the Group has not seen
material RWA inflation as HPI increases have largely offset PD
recalibrations. Potential RWA migration continues to be delayed by
the levels of support available to customers, however the Group is
closely monitoring higher risk customers for any early signs of PD
deterioration. The removal of the c.45bps CET1 benefit from
software intangible treatment is now expected in H1 FY22. Hybrid
mortgage model implementation is currently anticipated in 2022.
Combined with the stronger economic outlook, the Group expects FY21
CET1 to be broadly stable at the Q3 level, including software
benefit; with RWA inflation more likely to occur in FY22.
The Group expects a tax credit for the year driven by the
reassessment of historical losses and reflecting the substantive
enactment of the corporation tax rate change from 19% to 25%,
effective 1 April 2023, although this is not anticipated to have a
material overall capital impact.
Funding and liquidity remain strong, with the LCR stable at 151%
as elevated deposit balances including a higher mix of relationship
deposits and further wholesale issuance in the period were offset,
primarily by TFS repayments. In May the Group successfully issued
EUR500m of MREL senior debt and GBP300m of Tier 2, achieving
significantly tighter pricing than prior issues, with further
tightening in the secondary market. After these transactions, the
IFRS9 transitional MREL ratio improved to 32.7% (H1: 29.3%). This
represents a prudent buffer of c.6% or cGBP1.5bn over the Group's
expected 1-Jan-22 MREL requirement of 26.4% with no further AT1,
Tier 2 or Senior Unsecured issuance anticipated over the remainder
of the calendar year 2021.
Given the improved outlook for the UK economy, since H1 both
S&P and Fitch revised their outlook on the Group's long-term
ratings to Stable, from Negative.
Appendix 1: Key macroeconomic assumptions
Scenario Economic measure 2021 2022 2023 2024 2025
----------- ------------------------ ------- ------- ------- ----- -------
Weighted
Scenario GDP (yoy %) 5.8% 5.1% 1.9% 1.5% 1.7%
-----------
Unemployment (average) 6.1% 5.7% 5.3% 4.9% 4.7%
HPI (Q4 (Dec) yoy
%) (3.0)% (8.6%) (2.3)% 2.4% 4.6%
------------------------------------ ------- ------- ------- ----- -----
Source: VMUK calculations, Oxford Economics March 2021 IFRS9
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
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
Citigate Dewe Rogerson
Andrew Hey +44 7903 028 448
Media (Australia)
P&L Communications
Ian Pemberton +61 402 245 576
Sue Frost +61 409 718 572
-------------------------------------
Announcement authorised for release by Lorna McMillan, Group
Company Secretary.
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employees, agents, advisers or affiliates have independently
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competitive position data contained in this document and the
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Virgin Money UK PLC is registered in England and Wales (company
number: 09595911) and as a foreign company in Australia (ARBN 609
948 281) and has its registered office at Jubilee House, Gosforth,
Newcastle upon Tyne, NE3 4PL
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