TIDMVM.
RNS Number : 9862F
Virgin Money Holdings (UK) PLC
27 February 2018
27 February 2018
Pursuant to Listing Rule 9.6.1, the Annual Report and Accounts
2017 has been submitted to the UK Listing Authority and will
shortly be available for inspection at the UK Listing Authority's
Document Viewing Facility, via the National Storage Mechanism,
which is located at: www.hemscott.com/nsm.do.
A copy of the Annual Report and Accounts 2017, Pillar 3
Disclosures 2017 and an investor presentation are available within
the Investor Relations section of our website located at
www.virginmoney.com.
This announcement also contains additional information for the
purposes of compliance with the Disclosure Guidance and
Transparency Rules.
Reference to pages and numbers refer to page numbers and notes
to the financial statements in the Annual Report and Accounts
2017.
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION
Virgin Money Holdings (UK) plc
Full year Results
BASIS OF PRESENTATION
This report covers the results of Virgin Money Holdings (UK) plc
together with its subsidiaries ("Virgin Money" or "the Group") for
the year ended 31 December 2017.
Statutory basis
Statutory information is set out in the Financial Statements
section of this announcement.
Underlying results
In order to present a more meaningful view of business
performance, the results of the Group are presented on an
underlying basis of reporting as described below. The following
items have been excluded from underlying profits:
-- IPO share based payments;
-- Strategic items;
-- Simplification costs;
-- Fair value losses on financial instruments.
Unless otherwise stated, income statement commentaries
throughout this document compare the year ended 31 December 2017 to
the year ended 31 December 2016, and the balance sheet analysis
compares the Group balance sheet as at 31 December 2017 to the
Group balance sheet as at 31 December 2016.
Alternative performance measures
The Group uses a number of alternative performance measures, in
the discussion of its business performance and financial position.
Further information on these measures is set out on page 262 of the
Annual Report and Accounts 2017.
Financial Information
Financial information contained in this document does not
constitute statutory accounts within the meaning of section
434 of the Companies Act 2006 ('the Act'). The statutory
accounts for the year ended 31 December 2017 will be
published on the Group's website. The report of the auditor on
those statutory accounts was unqualified, did not draw
attention to any matters by way of emphasis and did not contain
a statement under section 498(2) or (3) of the Act. The
statutory accounts for the year ended 31 December 2017 will be
filed with the Registrar of Companies.
Forward looking statements
This document contains certain forward looking statements with
respect to the business, strategy and plans of Virgin Money and its
current goals and expectations relating to its future financial
condition and performance. Statements that are not historical
facts, including statements about Virgin Money's or its directors'
and/or management's beliefs and expectations, are forward looking
statements. By their nature, forward looking statements involve
risk and uncertainty because they relate to events and depend upon
circumstances that will or may occur in the future. Factors that
could cause actual business, strategy, plans and/or results to
differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward looking
statements made by the Group or on its behalf include, but are not
limited to: general economic and business conditions in the UK and
internationally; inflation, deflation, interest rates and policies
of the Bank of England, the European Central Bank and other G8
central banks; fluctuations in exchange rates, stock markets and
currencies; the ability to access sufficient sources of capital,
liquidity and funding when required; changes to Virgin Money's
credit ratings; the ability to derive cost savings; changing
demographic developments, including mortality, and changing
customer behaviour, including consumer spending, saving and
borrowing habits; changes in customer preferences; changes to
borrower or counterparty credit quality; instability in the global
financial markets, including Eurozone instability, the exit by the
UK from the European Union (EU) and the potential for one or more
other countries to exit the Eurozone or EU, and the impact of any
sovereign credit rating downgrade or other sovereign financial
issues; technological changes and risks to cyber security; natural
and other disasters, adverse weather and similar contingencies
outside Virgin Money's control; inadequate or failed internal or
external processes, people and systems; terrorist acts and other
acts of war or hostility and responses to those acts; geopolitical,
pandemic or other such events; changes in laws, regulations,
taxation, accounting standards or practices, including as a result
of the exit by the UK from the EU, regulatory capital or liquidity
requirements and similar contingencies outside Virgin Money's
control; the policies and actions of governmental or regulatory
authorities in the UK, the EU, the US or elsewhere including the
implementation and interpretation of key legislation and
regulation; the ability to attract and retain senior management and
other employees; the extent of any future impairment charges or
write-downs caused by, but not limited to, depressed asset
valuations, market disruptions and illiquid markets; market
relating trends and developments; exposure to regulatory scrutiny,
legal proceedings, regulatory investigations or complaints; changes
in competition and pricing environments; the inability to hedge
certain risks economically; the adequacy of loss reserves; the
actions of competitors, including non-bank financial services and
lending companies; and the success of Virgin Money in managing the
risks of the foregoing.
Any forward-looking statements made in this document speak only
as of the date they are made and it should not be assumed that they
have been revised or updated in the light of new information of
future events. Except as required by the Prudential Regulation
Authority, the Financial Conduct Authority, the London Stock
Exchange plc or applicable law, Virgin Money expressly disclaims
any obligation or undertaking to release publicly any updates of
revisions to any forward-looking statements contained in this
document to reflect any change in Virgin Money's expectations with
regard thereto or any change in events, conditions or circumstances
on which any such statement is based.
VIRGIN MONEY GROUP RESULTS FOR 2017
Full year highlights
* Underlying profit before tax increased by 28 per cent
to GBP273.3 million
* Return on tangible equity strengthened to 14.0 per
cent
* Common Equity Tier 1 ratio of 13.8 per cent with
potential for risk-weighted asset model improvement
* Strategic initiatives on track - SME deposit
gathering commenced in January; digital bank
beta-testing expected in H2 2018
-------------------------------------------------------------
-- Disciplined approach to lending growth and consistently high
underwriting standards delivered a 14 per cent increase in total
customer loan balances and a low and stable cost of risk at 13
basis points
-- Total income increased by 13.5 per cent to GBP666.0 million,
from GBP586.9 million in 2016
-- Cost:income ratio improved to 52.3 per cent, from 57.2 per
cent in 2016. Exited 2017 with a ratio of 49.4 per cent in the
fourth quarter
-- Statutory profit after tax increased by 37 per cent to
GBP192.1 million, compared to GBP140.0 million in 2016
-- Profit attributable to equity shareholders increased to
GBP167.3 million, from GBP130.0 million in 2016
-- Statutory basic earnings per share increased to 37.8 pence,
compared to 29.4 pence in 2016
-- Recommended final dividend of 4.1 pence per ordinary share,
resulting in a total dividend for the year of 6.0 pence per
ordinary share - an increase of 17.6 per cent compared to 2016
-- Total capital ratio of 18.1 per cent and leverage ratio of
3.9 per cent
-- Tangible net asset value per share increased by 9 per cent to
GBP2.97, from GBP2.73 in 2016
-- Total net interest margin (NIM) of 157 basis points as
guided; banking NIM of 172 basis points as guided
-- Customer advocacy reached record highs with an overall Net
Promoter Score of +40, up from +29 in 2016
Jayne-Anne Gadhia, Chief Executive said:
"I am delighted to report that our customer-focused strategy of
growth, quality and returns continued to drive strong financial and
operational performance in 2017. We generated market-beating growth
across our core products as we continued to capture high-quality
market share in mortgages and credit cards. We maintained our
uncompromising focus on asset quality and we continued to improve
our operating leverage.
In doing so, we met or exceeded all of our financial targets for
the year. Underlying profit before tax increased by 28 per cent to
GBP273.3 million and return on tangible equity improved to 14.0 per
cent. We continue to experience robust customer demand and stable
customer behaviour in a resilient housing market, and we expect to
maintain solid double-digit returns in 2018.
We remain focused on providing our customers with good value,
straightforward products and achieved a significant increase in
overall customer advocacy in 2017. More customers than ever before
would recommend Virgin Money to their friends and family, with our
overall Net Promoter Score (NPS) increasing to +40, up from +29 in
2016. That continues to make Virgin Money one of the best-rated UK
retail banks.
We refreshed our strategy during the year to address and capture
the strategic opportunities arising from the technological and
regulatory changes shaping UK retail banking. Broadening our
customer appeal through the development of our SME and digital bank
propositions will provide access to a wider pool of UK retail
banking revenues and further diversify our funding base.
The strength of the business, our customer-focused strategy and
our new strategic initiatives position us well to continue growing
profitably while serving and growing our customer base."
Continued growth in customer balances
-- Retail deposit balances increased by 10 per cent to GBP30.8
billion, from GBP28.1 billion in 2016.
-- Mortgage balances increased by 13 per cent to GBP33.7
billion, from GBP29.7 billion in 2016.
-- Gross mortgage market share of 3.3 per cent, in the upper
half of our guided range, and net lending share of 8.9 per
cent.
-- Credit card balances increased to GBP3.0 billion, from GBP2.4
billion in 2016.
Maintained balance sheet strength and asset quality
-- Strong capital generation supported the growth of our lending
portfolios together with ongoing investment in both our core
business and the build of our digital bank. As a result, our Common
Equity Tier 1 (CET1) ratio was 13.8 per cent, our total capital
ratio was 18.1 per cent and our leverage ratio was 3.9 per cent at
the end of 2017.
-- During 2017, analysis of our mortgage risk-weight models
identified the potential for reductions to average risk-weights for
the portfolio. Any material changes would require regulatory
approval but the analysis reinforces the strength of current
capital ratios.
-- Customer lending continued to be underpinned by consistently
high underwriting standards and resulted in a low and stable cost
of risk at 13 basis points.
-- The high quality of our mortgage business continued to be
reflected in low arrears levels. Secured 3 month+ arrears levels
were 0.12 per cent, compared to 0.15 per cent in 2016, and
significantly below the latest UK Finance industry average of 0.82
per cent.
-- The cost of risk in our credit card business improved by 19
basis points to 1.51 per cent, from 1.70 per cent in 2016. This
reflected our continued focus on the highest quality customer
segment, a rigorous approach to underwriting and the relatively
benign economic environment.
Continued to deliver for all stakeholders
-- Customers: Total customer numbers increased to 3.34 million
and the proportion of new product sales to existing customers
increased to 12.2 per cent, compared to 10.7 per cent in 2016. We
further improved customer advocacy with our overall Net Promoter
Score (NPS) increasing to +40, up from +29 in 2016.
-- Colleagues: We maintained strong colleague engagement with an
overall engagement score of 76 per cent. We were accredited as a
Best Employer for Race by Business in the Community, and in January
2018 we entered Stonewall's Top 100 employer index for LGBT+
inclusivity. Our mean gender pay gap reduced by 10 per cent, to
32.5 per cent in 2017. As we make further progress towards
achieving 50:50 gender balance throughout the business by the end
of 2020, our gender pay gap will continue to reduce.
-- Communities: More than GBP600 million has been donated to
charities through Virgin Money Giving, our not-for-profit online
donation service, since its launch in 2009, GBP95 million of which
was donated in 2017. The Virgin Money Foundation awarded grants of
nearly GBP3 million in 2017 to organisations working in areas such
as housing, employability and financial inclusion.
-- Corporate partners: We continue to work closely with our
intermediary partners to drive our mortgage business and were
delighted to be awarded the prestigious 'Best Lender for
Partnership with Mortgage Club' at the L&G Mortgage Club annual
awards for the third year running. In 2017 we announced a new
partnership with BGL Group to provide our new life insurance
proposition, which has performed well in its first year since
launch.
2018 outlook and guidance
-- Our central planning scenario for the year assumes a
continuation of resilient economic conditions and modest economic
growth.
-- We expect to maintain solid double-digit returns and a
progressive dividend in 2018.
-- We expect to grow mortgage balances at a single digit
percentage rate during 2018.
-- The product mix of our credit card business will continue to
evolve more towards retail spend cards with the launch of Virgin
Atlantic Airways affinity products in 2018. Growth in credit card
balances will be in single digits for the year.
-- We anticipate a banking NIM in the range of 165-170 basis
points for the year. As a result of lower front book spreads in the
mortgage market our current expectation for banking NIM is at the
lower end of that range.
-- Since year end, the remaining Funding for Lending Scheme
(FLS) drawings of GBP2.0 billion were repaid in full and Term
Funding Scheme (TFS) drawings were extended to GBP6.4 billion.
-- Our lending discipline will support asset quality and,
including the impact of IFRS 9, we expect our cost of risk to be
less than 20 basis points in 2018.
-- Investment in our core business and strategic priorities will
total GBP100 million in 2018. Despite this investment, we will
maintain a CET1 ratio of around 13 per cent.
-- We will continue to manage costs tightly and drive operating
leverage through the business. As a result we expect a cost:income
ratio of no more than 50 per cent in 2018.
-- We are preparing our business case for the RBS alternative
remedies package. We have the brand, the relationships and the
capability to compete strongly in the SME market and look forward
to participating in the process.
-- We will continue to make progress with our SME banking
roll-out and the development of our digital bank. Over time, these
initiatives will significantly increase the breadth of our
proposition, drive enhanced returns and support sustainable value
creation for shareholders over the longer term.
CONSOLIDATED INCOME STATEMENT
2016
2017 GBP Change
GBP million million %
--------------------- ------------- --------- -------
Net interest income 594.6 519.0 14.6
Other income 71.4 67.9 5.2
---------------------- ------------- --------- -------
Total income 666.0 586.9 13.5
---------------------- ------------- --------- -------
Costs (348.5) (336.0) 3.7
Impairment (44.2) (37.6) 17.6
---------------------- ------------- --------- -------
Underlying profit
before tax 273.3 213.3 28.1
---------------------- ------------- --------- -------
CONSOLIDATED BALANCE SHEET
2017 2016 Change
GBP million GBP million %
------------------------ ------------- ------------- -------
Assets
Cash and balances
at central banks 2,579.0 786.3 228.0
Loans and receivables 37,099.9 33,003.4 12.4
Available-for-sale
financial assets 1,051.8 858.8 22.5
Other 377.1 407.1 (7.4)
----------------------- ------------- ------------- -------
Total assets 41,107.8 35,055.6 17.3
----------------------- ------------- ------------- -------
Liabilities and
equity
Deposits from banks 5,379.0 2,132.5 152.2
Customer deposits 30,808.4 28,106.3 9.6
Debt securities
in issue 2,736.9 2,600.0 5.3
Other 358.6 546.3 (34.4)
Total liabilities 39,282.9 33,385.1 17.7
----------------------- ------------- ------------- -------
Total equity 1,824.9 1,670.5 9.2
----------------------- ------------- ------------- -------
Total liabilities
and equity 41,107.8 35,055.6 17.3
----------------------- ------------- ------------- -------
KEY METRICS
2017 2016 Change
---------------------- ----- ----- ----- ---------
Banking net interest
margin % 1.72 1.75 (3)bps
Net interest margin % 1.57 1.60 (3)bps
Cost:income ratio % 52.3 57.2 (4.9)pp
Cost of risk % 0.13 0.13 -
---------------------- ------- ----- ----- ---------
Statutory basic 8.4
earnings per share p 37.8 29.4 pence
Tangible net asset
value per share GBP 2.97 2.73 24 pence
Total Capital Ratio % 18.1 20.4 (2.3)pp
Common Equity Tier
1 ratio % 13.8 15.2 (1.4)pp
Leverage ratio % 3.9 4.4 (0.5)pp
Return on tangible
equity % 14.0 12.4 1.6pp
---------------------- ------- ----- ----- ---------
(Key ratios are presented on an underlying basis except where
stated.)
RECONCILIATION TO STATUTORY PROFIT
2017 2016
GBP GBP Change
million million %
--------------------------- --------- --------- -------
Underlying profit
before tax 273.3 213.3 28.1
IPO share based payments (0.9) (2.0)
Strategic items (6.5) (2.4)
Simplification costs - (5.6)
Fair value losses
on financial instruments (3.3) (8.9)
----------------------------- --------- --------- -------
Statutory profit before
tax 262.6 194.4 35.1
----------------------------- --------- --------- -------
Chief Executive's review
We have delivered strong financial performance in 2017 and made
considerable progress against our strategic objectives. We met or
exceeded all of our financial targets for the year and we are
confident about the long term prospects for the company.
The strength of the business, our customer focused strategy, and
our new strategic initiatives, including SME and digital, position
us well to continue growing profitably while serving and growing
our customer base with good value, straightforward products and
outstanding customer service.
Overview
We have delivered strong financial performance in 2017 as we
continued to deliver on our customer focused strategy of growth,
quality and returns. As a result of continuing operational leverage
and our focus on maintaining excellent asset quality we met or
exceeded all of our financial targets for the year. Underlying
profit before tax increased to GBP273.3 million and return on
tangible equity improved to 14.0 per cent.
On an underlying basis, total income increased by 13.5 per cent
while cost growth was limited to 3.7 per cent. As a result, our
cost:income ratio improved to 52.3 per cent, from 57.2 per cent in
2016, and we exited 2017 with a ratio of 49.4 per cent in the
fourth quarter.
Statutory profit after tax increased by 37.1 per cent to
GBP192.1 million, generating 182 basis points of Common Equity Tier
1 (CET1) capital after distributions to Additional Tier 1 capital
holders. This strong capital generation supported the ongoing
growth of our lending portfolios together with ongoing investment
in both our core business and the build of our digital bank.
As a consequence, our Common Equity Tier 1 ratio was 13.8 per
cent at the end of 2017, while our total capital ratio was 18.1 per
cent and our leverage ratio was 3.9 per cent. The cost of risk
remained at 13 basis points, demonstrating continued high asset
quality as well as a benign economic environment.
As a result of our performance in 2017 the Board has recommended
a final dividend of 4.1 pence per ordinary share, bringing the
total dividend per share for the year to 6.0 pence. This represents
an increase of 17.6 per cent compared to 2016.
Over the course of the year, we announced new strategic
developments which will enable us to continue serving and growing
our customer base, while meeting the challenges of regulatory
change and an increasingly competitive market environment in the
key markets in which we operate.
The strength of the business combined with these new strategic
initiatives position us well to continue growing profitably and we
are confident about the long term prospects for the business.
Customers and distribution
We provide our customers with good value products, supported by
outstanding service with the aim of driving long lasting
relationships and deeper product engagement. By ensuring that
customers are at the heart of our strategy, the proportion of new
product sales to existing customers increased to 12.2 per cent,
compared to 10.7 per cent in 2016. We also further improved
customer advocacy across all areas of the business, with our
overall Net Promoter Score (NPS) increasing to +40, up from +29 at
2016.
Our customers continue to choose our digital channels. Our
website remains the most popular channel, with over 28 million
website visits, up from 22 million in 2016. 78 per cent of sales
were delivered digitally during the year and the use of mobile
devices to access products and services increased to 52 per cent of
all our digital interactions, up from 50 per cent in 2016.
Our Lounges complement our Store network and continue to be a
standout success. They deliver excellent customer satisfaction with
an NPS score of +87 matching best in class peers in the retail
sector. As a result, we will be opening a new Lounge in Cardiff in
2018. Our Store network continues to play an important role for
customers with a 25 per cent increase in new accounts opened
in-Store year-on-year.
As a result of improving the Virgin Money Giving (VMG) customer
journey we now have 1.4 million registered users of our
not-for-profit online donation service. GBP95 million was donated
to charities from 2.2 million individual donations in 2017. We will
aim to build deeper relationships with our VMG customer base by
engaging them beyond charitable donations and exploring ways to
meet more of their financial needs.
Business performance
We offer good value, straightforward and transparent products
and our multi-channel distribution model supports cost effective
growth in our deposit business. We continue to offer our savings
customers both good value and sustainable savings rates in the
context of the market. Our approach delivered further improvements
to our average cost of retail funds and supported strong retention
levels. We increased deposit balances by 9.6 per cent year-on-year,
while reducing our cost of funds to 59 basis points from 80 basis
points in 2016. In a competitive overall market for retail
deposits, we were delighted that customers continue to recognise
the value of our proposition with 89 per cent retention of fixed
rate maturities.
Our mortgage business remains high quality and performance
continues to benefit from strong retention of maturing balances and
an award-winning intermediary proposition. Improvements in our
intermediary proposition drove a further increase in our
intermediary NPS to +61 from +55 in 2016 and supported mortgage
balance growth of 13 per cent to GBP33.7 billion in 2017. During
the year we extended our mortgage proposition to help more people
onto the housing ladder and launched custom build and shared
ownership products. Overall we achieved a market share of gross
lending of 3.3 per cent despite lowering volumes towards the end of
the year to manage margins and protect returns in an increasingly
competitive market. Further progress in our direct channel saw the
number of mortgage applications increase by 12 per cent from 2016
with the value of direct mortgages exceeding GBP1 billion for the
first time.
In our credit card business our focus has always been on
delivering strong and sustainable risk-adjusted returns through a
first-rate card proposition for customers in the prime segment of
the market. We now have 1.2 million customers and I am pleased to
report that we reached our target of GBP3.0 billion high-quality
credit card balances by the end of 2017. As a result of our
stringent underwriting criteria we recruited 98 per cent of new
balance transfer customers from the highest quality customer
segment. Customer engagement increased as we improved our online
service for mobile usage and Virgin Money Back, our customer
cashback platform, supported an 8 per cent increase in average
retail spend per active account.
Our straightforward and transparent investment funds continue to
support growing funds under management of GBP3.7 billion. New money
inflows increased by 27 per cent year-on-year and, supported by the
increased ISA savings allowance to GBP20,000, transfers of ISA
balances into stocks and shares ISAs were strong during the
year.
Our new life insurance proposition performed well in its first
year since launch with sales, policies in force and income all
exceeding previous life insurance partnerships. The contribution
from travel insurance and currency services was flat year-on-year
as we focused on higher margin travel insurance business at lower
volumes.
Regulatory developments
From 1 January 2019 UK banks will be required to establish
ring-fenced operations separating retail from wholesale activities.
All of Virgin Money's activities will be within the ring-fence and
we are on track to meet the relevant requirements. As the high
street banks may seek to deploy excess ring-fenced deposits into
the market, this could lead to heightened competition. We remain
well-placed to continue competing for mortgage market share despite
this competitive backdrop.
The second Payment Services Directive (PSD2), which took effect
from 13 January 2018, together with Open Banking, allows customers
to choose to share data from their banking products with third
parties. This will increase competition in money transmission by
allowing new entrants, including new financial technology
companies, to compete with the established clearing banks. Although
the impact is likely to be felt most strongly and immediately in
the personal current account (PCA) market, in which we are not
currently a material participant, in the long-term we believe Open
Banking and PSD2 represent an opportunity for us to attract
customers from the high street banks.
Refreshed strategy
At IPO we set out a number of ambitious targets to maintain a
high quality balance sheet while growing income and driving
shareholder returns. We have successfully delivered on those
initial targets, and we are confident about the next phase in
Virgin Money's strategy.
To ensure that we continue to meet the changing needs of our
customers and navigate the wider changes in the market, we are
investing in our digital future and have updated our
customer-focused strategy of growth, quality and returns to provide
a strong platform for us to continue to grow responsibly and
profitably in the years ahead.
As part of this strategy, we are developing a data-driven,
customer-centric digital bank which will allow us to take advantage
of the significant technological and regulatory changes shaping UK
retail banking, broaden our customer appeal and provide access to a
wider pool of UK retail banking revenues.
The new strategy will also diversify our funding through both
Small and Medium Enterprises (SMEs) deposits and increased reach
into the current accounts and savings markets. We launched an SME
deposit product in January 2018 and plan to launch a Business
Current Account (BCA) by the end of 2018.
The Virgin Money digital bank will be underpinned by next
generation technology and architecture, offering customers a
Universal Account that can be personalised to create a unique
proposition tailored to individual needs. In addition to our
current presence in the mortgage, credit card and retail deposit
markets, the digital bank will allow us to expand into the current
account and linked primary savings markets.
As such, we will provide an attractive proposition for customers
that will enable us to compete against the incumbent banks for
lower cost current account balances. The operating cost per
customer of the digital bank will also be lower than in our core
bank, improving our cost-efficiency once operating at scale.
Overall, we expect that our strategy will not only result in
enhanced returns for shareholders in the longer term, but also
enable us to continue delivering innovative products and
outstanding service to our customers.
Colleagues
Our goal is to nurture a high performing, diverse and committed
workforce. We aim to ensure that all colleagues can reach their
full potential, feel valued and are empowered to thrive in a truly
inclusive business. To achieve this we have extended our use of
technology to support flexible working and invested in the
development of our people managers to make sure they both value and
support a diverse workforce. Our latest colleague survey results
showed that we achieved a strong staff engagement score of 76 per
cent, which compares well against industry standards.
Outlook
Our central planning scenario for 2018 assumes a continuation of
relatively benign economic conditions, modest economic growth and
heightened competition as the market readjusts to a rising interest
rate environment and regulatory changes. The macro and political
environment, including the impact of the UK leaving the European
Union, remains uncertain which adds a degree of caution to our
outlook.
The Bank of England increased interest rates for the first time
in a decade in November 2017 and has indicated that the pace of
interest rate increases is expected to be gradual.
Our natural long term share of the UK mortgage market remains at
3 to 3.5 per cent. In 2018 we expect to grow our mortgage and cards
lending at a single digit percentage rate with banking NIM towards
the lower end of a 165 to 170 basis points range. Cost discipline
will continue as we invest in our strategic developments and we
expect the 2018 cost:income ratio to be no higher than 50 per
cent.
Our lending discipline will support asset quality and, including
the impact of IFRS 9, we expect our cost of risk to be no higher
than 20 basis points and to maintain a CET1 ratio towards 13 per
cent at the end of 2018.
We expect to maintain a solid double-digit return on tangible
equity in 2018.
We will continue to make progress with our SME roll-out and the
development of our digital bank over the course of 2018.
Over time, these initiatives will significantly increase the
breadth of our proposition, drive new sources of income and reduce
operating costs. A broader proposition, lower cost to serve and new
sources of funding will drive enhanced returns and support
sustainable value creation for shareholders over the longer
term.
Jayne-Anne Gadhia CBE
Chief Executive
FINANCIAL results
Summary of Group results
Our 2017 financial performance demonstrated continued
progression across the three pillars of our strategy - Growth,
Quality and Returns:
-- Growth - our market share of new lending continued to
outstrip our share of stock resulting in continued growth in
balances, with loans and advances to customers increasing by 13.5
per cent. This growth was funded predominantly by the continued
strength of the retail deposit franchise with customer deposits
growing 9.6 per cent;
-- Quality - we maintained a disciplined approach to managing
balance sheet growth with consistently high underwriting standards
leading to our low and stable cost of risk. Growth in retail
deposits was supported by further diversification of our long-term
wholesale funding, including additional RMBS and drawings from the
Term Funding Scheme (TFS). Capital resources grew through retained
earnings and enabled us to absorb additional investment in the
build of our new digital bank; and
-- Returns - higher balances drove income growth which, combined
with disciplined cost control, resulted in strong operational
leverage. As a consequence our cost:income ratio improved by 4.9
percentage points to 52.3 per cent for the year. Combined with our
growth and low cost of risk, this resulted in a 28.1 per cent
increase in underlying profit before tax with return on tangible
equity (RoTE) increasing to 14.0 per cent, compared to 12.4 per
cent in the prior year. Statutory profit after tax was GBP192.1
million, a 37.1 per cent increase on 2016.
Gross mortgage lending of GBP8.4 billion was combined with
strong retention performance to deliver mortgage balances of
GBP33.7 billion at year end. Lending was carefully managed to
optimise returns in an increasingly competitive mortgage market.
New business mortgage spreads were 19 basis points lower than 2016
at 168 basis points.
Credit card balances increased by 23.6 per cent to GBP3.0
billion. This was in line with our expected growth and continued to
demonstrate the strength of the franchise. We continued to closely
monitor the performance of our credit card book, with the latest
observed customer behaviour reflected in the assumptions underlying
the effective interest rate (EIR) accounting.
The growth in mortgage and credit card balances was funded
predominantly through growth in deposits as our retail savings
franchise performed well, with balances reaching GBP30.8 billion at
year end.
Our operating platforms continued to support increasing scale of
customer activity which, in turn, enhanced Group operational
leverage. Underlying income growth of 13.5 per cent significantly
exceeded the 3.7 per cent growth in underlying costs, resulting in
favourable JAWS of 9.8 per cent.
This continued improvement in operational leverage also
reflected our disciplined cost management and helped to create the
capacity for increased investment in the business. Total investment
in the core business was GBP52.8 million, of which GBP41.8 million
was capital expenditure. A further GBP38.3 million of capital
expenditure was invested in the development of our new digital
banking platform.
The quality of our lending continued to be underpinned by the
consistent application of our risk appetite. This was reflected in
a cost of risk of 13 basis points which was in line with the prior
year, despite a slightly greater proportion of credit card
balances. Whilst our low cost of risk benefits in part from the
benign economic environment in the UK, it undoubtedly reflects the
consistent application of our risk appetite and our disciplined
approach to credit risk management across both our mortgage and
credit card portfolios. The application of strict affordability
requirements, robust credit decisioning and prudent underwriting
standards across our portfolios ensured asset quality performance
was ahead of our expectations. Balance growth has therefore been
achieved without any deterioration in the quality of new lending or
the credit characteristics of the portfolios as a whole. Across
both portfolios all key credit metrics remain strong and this is
reflected in low arrears experience.
Leverage and total capital ratios remained above regulatory
requirements with higher retained earnings supporting lending
growth and investment. The Common Equity Tier 1 (CET1) ratio
remained well above our internal minimum required CET1 ratio of
12.0 per cent at 13.8 per cent, with average mortgage risk weight
density at 17.2 per cent. The liquidity and funding profile
benefitted from another successful issuance from our established
Gosforth Residential Mortgage Backed Security (RMBS) programme and
we continued to access the TFS. Additionally, we have received
approval for a regulated covered bonds programme, and expect our
inaugural issuance to follow in 2018.
Our commercial agility during a year which saw strong
competition on both sides of the balance sheet allowed us to manage
asset pricing and the cost of funds, which reduced to 59 basis
points (2016: 80 basis points). This resulted in a Banking NIM of
172 basis points compared to 175 basis points for the prior year,
in line with our expectations.
The combination of strong lending growth, improved operational
leverage and our low cost of risk delivered a 28.1 per cent
increase in underlying profit before tax, to GBP273.3 million.
As a consequence of this continued progression measures of
shareholder returns were materially improved. Return on tangible
equity increased to 14.0 per cent and underlying basic earnings per
share rose by 21.7 per cent to 39.8 pence. Unburdened by legacy
issues, growth in underlying profit before tax flowed to statutory
profit before tax, which increased by 35.1 per cent to GBP262.6
million.
Our effective tax rate in 2017 was 26.8 per cent. The overall
tax rate for UK banks increased by 8 percentage points in 2016 as a
result of the bank tax surcharge, adding GBP18.9 million to the
Group's tax charge in 2017. The Group recognised a corporation tax
charge of GBP70.5 million for the year. Statutory profit after tax
was therefore GBP192.1 million, a 37.1 per cent increase on 2016.
After distributions to AT1 holders, the profit attributable to
equity shareholders increased by 28.7 per cent to GBP167.3
million.
As a result of this strong financial performance, the Board has
recommended a final dividend that takes the total dividend in 2017
to 6.0 pence per ordinary share, an increase of 17.6 per cent
compared to 2016.
Summary income statement
2017 2016 Change
GBPm GBPm
============================================ ======== ======== =======
Net interest income 594.6 519.0 14.6%
============================================ ======== ======== =======
Other income 71.4 67.9 5.2%
============================================ ======== ======== =======
Total income 666.0 586.9 13.5%
============================================ ======== ======== =======
Costs (348.5) (336.0) 3.7%
============================================ ======== ======== =======
Impairment (44.2) (37.6) 17.6%
============================================ ======== ======== =======
Underlying profit before tax 273.3 213.3 28.1%
============================================ ======== ======== =======
Reconciling items between underlying
and statutory profit before tax
(see page 48) (10.7) (18.9) (43.4)%
============================================ ======== -------- -------
Statutory profit before tax 262.6 194.4 35.1%
============================================ ======== -------- -------
Taxation (70.5) (54.3) 29.8%
============================================ ======== -------- -------
Statutory profit after tax 192.1 140.1 37.1%
============================================ -------- ======== =======
Distributions to Additional Tier
1 security holders (net of tax) (24.8) (10.1) 145.5%
-------------------------------------------- -------- -------- -------
Profit attributable to equity shareholders 167.3 130.0 28.7%
============================================ -------- ======== =======
Basic earnings per share - statutory
(pence) 37.8 29.4 28.6%
============================================ ======== ======== =======
Consolidated balance sheet
2017 2016
GBPm GBPm Change
===================================== ========= ========= ========
Assets
===================================== ========= ========= ========
Cash and balances at central banks 2,579.0 786.3 228.0%
===================================== ========= ========= ========
Loans and receivables 37,099.9 33,003.4 12.4%
===================================== ========= ========= ========
Available-for-sale financial assets 1,051.8 858.8 22.5%
===================================== ========= ========= ========
Other 377.1 407.1 (7.4)%
===================================== ========= ========= ========
Total assets 41,107.8 35,055.6 17.3%
===================================== ========= ========= ========
Liabilities and equity
===================================== ========= ========= ========
Deposits from banks 5,379.0 2,132.5 152.2%
===================================== ========= ========= ========
Customer deposits 30,808.4 28,106.3 9.6%
===================================== ========= ========= ========
Debt securities in issue 2,736.9 2,600.0 5.3%
===================================== ========= ========= ========
Other 358.6 546.3 (34.4)%
===================================== ========= ========= ========
Total liabilities 39,282.9 33,385.1 17.7%
===================================== ========= ========= ========
Total equity 1,824.9 1,670.5 9.2%
===================================== ========= ========= ========
Total liabilities and equity 41,107.8 35,055.6 17.3%
===================================== ========= ========= ========
Key metrics
2017 2016 Change
============================== ===== ===== ===== =========
Banking net interest margin % 1.72 1.75 (3)bps
============================== ===== ===== ===== =========
Net interest margin % 1.57 1.60 (3)bps
============================== ===== ===== ===== =========
Cost:income ratio % 52.3 57.2 (4.9)pp
============================== ===== ===== ===== =========
Cost of risk % 0.13 0.13 -
============================== ===== ===== ===== =========
Statutory basic earnings per 8.4
share p 37.8 29.4 pence
============================== ===== ===== ===== =========
Tangible net asset value per
share GBP 2.97 2.73 24 pence
============================== ===== ===== ===== =========
Total Capital Ratio % 18.1 20.4 (2.3)pp
============================== ===== ===== ===== =========
Common Equity Tier 1 ratio % 13.8 15.2 (1.4)pp
============================== ===== ===== ===== =========
Leverage ratio % 3.9 4.4 (0.5)pp
============================== ===== ===== ===== =========
Return on tangible equity % 14.0 12.4 1.6pp
============================== ===== ===== ===== =========
Key ratios are presented on an underlying basis except where
stated. Definitions, including bases of calculation, are set out on
page 262.
Balance sheet growth
At 31 At 31
Dec Dec
2017 2016
GBPm GBPm Change
==================================== ========= ========= =======
Loans and advances to customers 36,740.2 32,367.1 13.5%
==================================== ========= ========= =======
Customer deposits 30,808.4 28,106.3 9.6%
==================================== ========= ========= =======
Wholesale funding (including
government funding) 8,102.9 4,718.0 71.7%
==================================== ========= ========= =======
Wholesale funding <1 year maturity 855.0 575.0 48.7%
==================================== ========= ========= =======
Loan-to-deposit ratio 119.1% 114.5% 4.6pp
==================================== ========= ========= =======
High Quality Liquid Assets(1) 5,264.4 4,222.6 24.7%
==================================== ========= ========= =======
(1) These include Funding for Lending Scheme drawings
of GBP1.9 billion (2016: GBP2.7 billion) which are
held off balance sheet but are available for repo
and hence count towards liquidity resources.
The continuing strength of our lending franchise delivered 13.5
per cent growth in loans and advances to customers in 2017.
This lending was funded by continued growth in our retail and
wholesale funding franchises, as well as further drawings from the
TFS. Total customer deposits grew by 9.6 per cent to GBP30.8
billion at 31 December 2017, in excess of market growth of 3.5 per
cent. We repriced four tranches of existing deposits of
approximately GBP15 billion during 2017, and all were completed
with lower than expected attrition.
In September 2017 we completed a successful issuance of RMBS
through our established 'Gosforth' franchise. This included dollar
and sterling tranches and raised sterling equivalent funding of
approximately GBP750 million. The issuance was significantly
oversubscribed, delivering long-dated term funding whilst also
diversifying our investor base in the US.
We will continue to diversify and build out our funding sources
in the coming year in line with the long term aim of wholesale
funding providing up to 20 per cent of total funding. In July 2017
we received authorisation from the FCA for a regulated covered
bonds programme, and expect that our inaugural issuance will take
place this year. We also expect to access RMBS markets again during
2018.
As we work towards the full implementation of minimum
requirements for own funds and eligible liabilities (MREL) on 1
January 2022, during 2018 we will issue further unsecured funding
through our established Global Medium Term Note programme. The Bank
of England provided MREL guidance, including transitional
arrangements, in late 2016. This set an interim MREL requirement of
18 per cent of risk-weighted assets from 1 January 2020 until 31
December 2021. The BoE will advise the Group on its ultimate MREL
requirement in 2020. We therefore expect to issue further senior
debt gradually over the next four years to ensure compliance with
MREL requirements.
The balance sheet structure is managed within a clearly defined
risk appetite. The loan-to-deposit ratio increased to 119.1 per
cent at the end of 2017 from 114.5 per cent at the end of 2016, in
line with guidance of towards 120 per cent while we are
participating in the TFS.
We continued to make use of the TFS in 2017, with total drawings
at 31 December 2017 of GBP4.2 billion. The scheme provides the
Group with a cost effective source of funding, supporting lending
growth and further strengthening our liquidity position.
The Group's liquidity position remained strong throughout the
period, with high quality liquid assets at GBP5.3 billion at 31
December 2017. This reflects an increase in cash and balances held
at the central bank. The Group held increased levels of liquidity
at 31 December 2017, reflected in an increase in balances held at
the central bank in part due to the repayment of GBP650.2 million
of Funding for Lending Scheme (FLS) drawings which have been
replaced by on balance sheet liquidity. As a result our liquidity
coverage ratio (LCR) of 203 per cent was significantly above the
regulatory minimum of 90 per cent. From 1 January 2018 the
regulatory minimum has increased to 100 per cent. The high quality
liquid asset portfolio represented more than six times our
wholesale funding with a maturity of less than one year.
Income benefitted from growth in asset balances
2017 2016
GBPm GBPm Change
================================== ======= ======= =======
Net interest income 594.6 519.0 14.6%
================================== ======= ======= =======
Other income 71.4 67.9 5.2%
================================== ======= ======= =======
Total income 666.0 586.9 13.5%
================================== ======= ======= =======
Banking net interest margin 1.72% 1.75% (3)bps
---------------------------------- ------- ------- -------
Average interest earning banking
assets 34,536 29,691 16.3%
================================== ======= ======= =======
Net interest margin 1.57% 1.60% (3)bps
================================== ======= ======= =======
Average interest earning assets 37,991 32,521 16.8%
================================== ======= ======= =======
Net interest income increased by 14.6 per cent to GBP594.6
million, driven by balance growth across the mortgage and credit
card books and a Banking net interest margin (NIM) of 172 basis
points.
Mortgage spreads were at lower levels than 2016, driven by
competition as well as lower funding costs, in part as a result of
the TFS. As a result, new mortgage lending in 2017 was priced at an
average spread of 168 basis points, compared to 187 basis points in
2016.
However, further optimisation of our funding base continued to
support Banking NIM in a competitive environment. We successfully
repriced four tranches of deposits and this, along with drawings
from the TFS, contributed to a reduction in the cost of funds from
80 basis points in 2016 to 59 basis points in 2017.
Taken together, these factors reduced Banking NIM to 172 basis
points in 2017 from 175 basis points in 2016. Total NIM also
reduced by 3 basis points to 157 basis points.
Credit card income has benefitted from further growth in the
cards book, resulting in an increasing contribution to total net
interest income (NII) in the year. Credit card NII in the year
includes an accrual of GBP78.0 million (2016: GBP61.5 million)
arising from the credit card effective interest rate (EIR) method.
Credit card EIR is calculated over the expected card life, up to a
maximum of seven years. Historical evidence and data continue to
support our modelling assumptions and the use of a seven year
modelling life.
Other income increased by 5.2 per cent to GBP71.4 million
reflecting stable income from our Investments and Pensions business
together with small increases in credit card interchange and
foreign exchange income and sales of investment assets.
Other income included a gain of GBP6.1 million from the sale of
the investment in Vocalink in the first half of 2017. Excluding the
gain from the sale of Vocalink and the gain of GBP5.3 million on
the investment held in Visa Europe during the first half of 2016,
other income increased by 4.3 per cent.
Costs remained tightly controlled
2017 2016
GBPm GBPm Change
=================== ====== ====== ========
Costs 348.5 336.0 3.7%
=================== ====== ====== ========
Cost:income ratio 52.3% 57.2% (4.9)pp
=================== ====== ====== ========
Cost growth in 2017 was constrained to just 3.7 per cent. Set
against income growth of 13.5 per cent, this produced positive JAWS
of 9.8 per cent and reduced the cost:income ratio by 4.9 percentage
points to 52.3 per cent. This performance meant that we
successfully achieved our stated target of exiting 2017 with a
cost:income ratio of less than 50 per cent, delivering a ratio of
49.4 per cent for the fourth quarter.
This controlled growth in costs was achieved despite higher
depreciation and amortisation during the year. Efficiency
improvements continued across the business with our ongoing
programme of operational effectiveness and the ability to leverage
our central functions being key drivers.
Our strong cost performance helped to create the capacity for
increased investment in the business. Total investment in the core
business was GBP52.8 million, of which GBP41.8 million was capital
expenditure. A further GBP38.3 million of capital expenditure was
invested in the development of our new digital banking
platform.
Impairments reflected a resilient economy and rigorous credit
risk management
2017 2016
GBPm GBPm Change
========================================== ====== ====== ========
Mortgages
========================================== ====== ====== ========
Impairment charge 2.2 2.8 (21.4)%
========================================== ====== ====== ========
Cost of risk 0.01% 0.01% -
========================================== ====== ====== ========
Credit Cards
========================================== ====== ====== ========
Impairment charge 42.0 34.8 20.7%
========================================== ====== ====== ========
Cost of risk 1.51% 1.70% (19)bps
========================================== ====== ====== ========
Group
========================================== ====== ====== ========
Impairment charge 44.2 37.6 17.6%
========================================== ====== ====== ========
Cost of risk 0.13% 0.13% -
========================================== ====== ====== ========
Provisions as a % of arrears balances(1) 32.9% 29.4% 3.5pp
========================================== ====== ====== ========
Impaired loans as a % of loans and
advances 0.5% 0.4% 0.1pp
========================================== ====== ====== ========
Provisions as a % of impaired loans 33.5% 40.0% (6.5)pp
========================================== ====== ====== ========
(1) Arrears are defined in the risk report on page 140
We maintained a low cost of risk in 2017 through our established
risk appetite framework, ongoing focus on underwriting rigour and
the origination of high credit quality customers and prime
assets.
The cost of risk for mortgages was flat between 2016 and 2017 at
0.01 per cent and the impairment charge reduced by GBP0.6 million
compared to the prior year. This performance reflected the high
quality of the mortgage portfolio combined with the benign economic
environment, leading to a continuing low level of defaults. The
percentage of mortgages over three months in arrears was 0.12 per
cent at the end of 2017 (2016: 0.15 per cent).
In credit cards, set against growth of 23.6 per cent in
balances, the impairment charge for the portfolio increased by only
20.7 per cent to GBP42.0 million. The resulting cost of risk for
credit cards decreased by 19 basis points to 1.51 per cent in 2017.
This underlines the high credit quality of new and existing cards
which continue to have a low rate of default. Performance of new
cohorts of cards remained strong with all cohorts showing a cost of
risk lower than or in line with previous vintages. When accounts
under 18 months old are excluded the cost of risk remains low at
1.66 per cent.
Provisions as a percentage of balances in arrears increased to
32.9 per cent (2016: 29.4 per cent) as we retained appropriate
coverage of balances at risk of loss.
Impaired loans as a percentage of loans and advances for the
Group increased marginally to 0.5 per cent in 2017 compared to 0.4
per cent in 2016. This was due to an increase in secured balances
with qualitative impairment indicators, such as interest only
expired terms or fraud cases, which we prudently categorise as
impaired regardless of arrears status or expected recoverable
amount.
Expired term loans which are more than six months past their
maturity date have an average LTV of 25.8 per cent, and therefore
do not require increased impairment provisions given the high level
of collateral cover. The growth in these balances within the
impaired loans category is therefore reflected in the reduced
provision coverage of impaired loans.
Further information on the performance of our loan portfolios is
provided in the Risk Management Report, on pages 134 to 152.
Underlying profit before tax to statutory profit before tax
reconciliation
2017 2016
GBPm GBPm Change
====================================== ======= ======= =======
Underlying profit before tax 273.3 213.3 28.1%
====================================== ======= ======= =======
IPO share based payments (0.9) (2.0)
====================================== ======= ======= =======
Strategic items (6.5) (2.4)
====================================== ======= ======= =======
Simplification costs - (5.6)
====================================== ======= ======= =======
Fair value losses on financial
instruments (3.3) (8.9)
====================================== ======= ======= =======
Reconciling items between underlying
and statutory profit before tax (10.7) (18.9) (43.4)%
====================================== ======= ======= =======
Statutory profit before tax 262.6 194.4 35.1%
====================================== ======= ======= =======
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS). Aspects of the
results are adjusted for certain items, which are listed below, to
reflect how the Executive assesses the Group's underlying
performance without distortions caused by items that are not
reflective of the Group's ongoing business activities. These
reconciling items were 43.4 per cent lower in 2017, as the absence
of simplification costs, lower fair value losses on financial
instruments and a reduction in share based payments related to the
IPO more than offset the increased investment in strategic items.
The following items have been excluded from underlying profits:
-- IPO share based payments
These costs relate to share based payment charges triggered by
our successful IPO in 2014, which are recognised over their vesting
period. By their nature, these payments are not reflective of
ongoing trading performance and are not, therefore, considered part
of the underlying results. 2017 is the last year in which such
charges will be incurred.
-- Strategic items
We incurred strategic investment costs of GBP6.5 million in
2017, entirely due to the development of our digital banking
platform which is not, at this stage, considered part of our
underlying results. Included within this amount is a non-cash
impairment charge of GBP4.8 million in respect of previous software
development on an earlier digital project which has been
discontinued in light of the strategic decision taken in May 2017
to consolidate activities within the digital bank programme.
-- Simplification costs
In 2016 we took the opportunity to focus on simplification
activity, including de-layering our organisation structure. This
led to one-off costs incurred in 2016 including those in relation
to a number of senior leavers, which included accelerated share
based payment charges. These were not considered part of the
underlying results and were not repeated in 2017.
-- Fair value losses on financial instruments
Fair value gains and losses on financial instruments reflect the
results of hedge accounting and the fair value movements on
derivatives in economic hedges to the extent that they either do
not meet the criteria for hedge accounting or give rise to hedge
ineffectiveness. Where these derivatives are held to maturity, fair
value movements recorded in this heading represent timing
differences that will reverse over their lives and therefore
excluding these from underlying profit better represents the
underlying performance of the Group. Where derivatives are
terminated prior to maturity, this may give rise to fair value
movements that do not reverse.
The reconciliations of the Group's statutory and underlying
results are reported above and in note 2 to the consolidated
financial statements.
The Group uses a number of Alternative Performance Measures
(APMs), in addition to underlying profit, in the analysis and
discussion of its financial performance and financial position.
APMs do not have standardised definitions and may not be directly
comparable to measures defined within IFRS. A full list of APMs
used by the Group, including their bases of calculation, are set
out on page 262.
Continued strong progression in returns
2017 2016 Change
=========================== === ===== ===== =======
Return on tangible equity % 14.0 12.4 1.6pp
=========================== === ===== ===== =======
Return on assets % 0.46 0.44 2bp
=========================== === ===== ===== =======
Tangible net asset value
per share p 297 273 24p
=========================== === ===== ===== =======
The strength of income growth and improved operational leverage,
combined with our asset quality, has driven material enhancement to
returns in 2017.
Return on tangible equity increased by 1.6 percentage points to
14.0 per cent in 2017, from the 12.4 per cent achieved in 2016. At
the same time, the return on assets grew by 2 basis points to 0.46
per cent in 2017, from 0.44 per cent in 2016. On a statutory basis,
return on assets increased to 0.47 per cent from 0.40 per cent in
2016. This statutory measure excludes AT1 coupons and benefitted
from lower reconciling items in 2017.
Tangible net asset value per share also increased, by 24 pence
to 297 pence, as improving profitability flowed through to retained
earnings.
Capital strength whilst investing in the future
2017 2016 Change
============================================== ====== ======== ======== ========
Common Equity Tier 1 capital
(CET1) GBPm 1,264.2 1,172.7 7.8%
============================================== ====== ======== ======== ========
Risk-weighted assets (RWAs) GBPm 9,178.6 7,694.8 19.3%
============================================== ====== ======== ======== ========
* of which mortgage credit risk RWAs GBPm 5,790.5 4,764.5 21.5%
============================================== ====== ======== ======== ========
* of which credit card credit risk RWAs GBPm 2,282.9 1,847.4 23.6%
============================================== ====== ======== ======== ========
- of which all other RWAs GBPm 1,105.2 1,082.9 2.1%
============================================== ====== ======== ======== ========
Common Equity Tier 1 ratio % 13.8 15.2 (1.4)pp
============================================== ====== ======== ======== ========
Tier 1 ratio % 18.0 20.2 (2.2)pp
============================================== ====== ======== ======== ========
Total capital ratio % 18.1 20.4 (2.3)pp
============================================== ====== ======== ======== ========
Leverage ratio % 3.9 4.4 (0.5)pp
============================================== ====== ======== ======== ========
During the year we generated capital, after distributions to AT1
holders and before investment and dividends, of GBP167.3 million,
which was equivalent to 182 basis points of CET1 capital.
This was used to invest in the business, provide dividends for
shareholders and increase capital resources. The net investment in
intangible assets, including capital investment in our digital
banking platform, was GBP47.8 million. Accrued dividends for equity
shareholders amounted to GBP26.5 million.
After further small balancing items, this resulted in an
increase in CET1 capital of GBP91.5 million which was in turn used
to support customer lending.
Lending growth resulted in a 19.3 per cent increase in RWAs to
GBP9.2 billion. In mortgages, growth in credit risk RWAs of 21.5
per cent was higher than balance growth of 13.2 per cent as the
average mortgage risk weight density, as a percentage of balance
sheet assets, increased to 17.2 per cent from 16.0 per cent, in
line with expectations.
In credit cards, credit risk RWA growth was in line with asset
growth as our credit card RWAs are calculated using the
standardised approach.
Other RWAs increased by 2.1 per cent. This reflected growth in
operational risk RWAs in line with the standardised approach, where
the growth in average income over the past three years is
recognised in a higher level of operational RWAs. This was largely
offset by a reduction in exposure to higher risk-weighted
instruments and counterparties in our liquid asset portfolio.
As a result of the above movements, the CET1 ratio reduced to
13.8 per cent at 31 December 2017 compared with 15.2 per cent at
the end of 2016. This was in line with the expected development of
our business and is in excess of our internal minimum CET1 ratio of
12 per cent.
The total capital ratio of 18.1 per cent also reduced in line
with the movements described above, and remains significantly in
excess of our total regulatory requirements of 15.0 per cent:
The capital requirement of 15.0 per cent at 31 December 2017
comprised Pillar 1, Pillar 2A and the capital conservation buffer.
At 31 December 2017, as per our Individual Capital Guidance (ICG),
the Basel I floor was our binding constraint and equivalent to a
Pillar 2A capital add-on requirement of 5.71 per cent. Any PRA
buffer, if applicable, is a matter between the PRA and Virgin
Money. The PRA buffer also takes account of the capital
conservation buffer.
The leverage ratio was 3.9 per cent at the end of the year
compared to 4.4 per cent at the end of 2016. The reduction
reflected higher growth in leverage ratio eligible assets than in
capital resources. Growth in eligible assets was due to increased
customer balances and higher levels of on balance sheet liquidity
as FLS was repaid.
We manage our capital resources to support shareholder returns
and ensure that the bank is well capitalised to meet our current
and future business plans and our assessment of regulatory risks
and requirements.
Dividend
The strength of our profitability and our capital base continues
to give the Board confidence to recommend the payment of a final
dividend. In addition to the interim dividend for 2017 of 1.9 pence
per ordinary share, paid to shareholders in September 2017, the
Board has recommended a final dividend of 4.1 pence per ordinary
share in respect of 2017 which will be paid, subject to approval at
our AGM in May 2018. The total dividend per share for 2017 will
therefore be 6.0 pence, an increase of 17.6 per cent compared to
2016. Our intention is to maintain a progressive approach to
dividends and to pay an interim and final dividend for 2018,
subject to performance.
IFRS 9
We are well placed for the transition to the new accounting
requirements of IFRS 9. We estimate the transition to IFRS 9 will
reduce shareholders' equity by approximately GBP35 million after
deferred tax as at 1 January 2018. The most significant impact on
the Group arises from the changes to loan loss impairment with the
introduction of an expected credit loss approach. Given the low LTV
and high credit quality of the mortgage portfolio and high credit
ratings of the wholesale book, the main impact will arise from the
Group's credit card portfolio.
This impact would reduce the Group's CET 1 ratio by
approximately 1 basis point as at 1 January 2018 taking into
account the recently published capital transitional arrangements.
Excluding the transitional arrangements the reduction to the CET 1
ratio would be approximately 36 bps. These impacts remain within
expectation and are included within the Group's capital plans. We
continue to refine, monitor and validate certain elements of the
impairment models and related controls ahead of full reporting of
IFRS 9 impacts later in 2018.
Conclusion
2017 represented a further year of significant financial
progress for Virgin Money. High-quality lending growth combined
with further operational leverage has driven improved returns for
our shareholders across RoTE, earnings per share and tangible net
asset value. This has been achieved with no degradation of asset
quality, further diversification of the funding base and with
continued focus on the strength of the capital base and capital
ratios.
As the business has become increasingly capital generative we
have been able to invest in the next stage of our strategic
development with our initiatives to develop the digital bank and
our proposition for the SME market.
Peter Bole
Chief Financial Officer
Business Line results
Mortgages Credit Financial Central
& Savings Cards Services Functions Group
GBPm GBPm GBPm GBPm GBPm
========================= =========== ======== ========== =========== =========
2017
========================= =========== ======== ========== =========== =========
Net interest income 430.2 164.4 - - 594.6
========================= =========== ======== ========== =========== =========
Other income 3.1 19.4 37.2 11.7 71.4
========================= =========== ======== ========== =========== =========
Total income 433.3 183.8 37.2 11.7 666.0
========================= =========== ======== ========== =========== =========
Total costs (348.5) (348.5)
========================= =========== ======== ========== =========== =========
Impairment charge (2.2) (42.0) - - (44.2)
========================= =========== ======== ========== =========== =========
Net interest margin 1.35% 5.95% - - 1.57%
========================= =========== ======== ========== =========== =========
Cost of risk 0.01% 1.51% - - 0.13%
========================= =========== ======== ========== =========== =========
Key balance sheet items
at 31 December 2017
========================= =========== ======== ========== =========== =========
Loans and advances to
customers(1) 33,672.4 3,024.1 - - 36,696.5
========================= =========== ======== ========== =========== =========
Customer deposits 30,808.4 - - - 30,808.4
========================= =========== ======== ========== =========== =========
Total customer balances 64,480.8 3,024.1 - - 67,504.9
========================= =========== ======== ========== =========== =========
Risk-weighted assets 6,308.1 2,467.6 53.4 349.5 9,178.6
========================= =========== ======== ========== =========== =========
Mortgages Credit Financial Central
& Savings Cards Services Functions Group
GBPm GBPm GBPm GBPm GBPm
========================= =========== ======== ========== =========== =========
2016
========================= =========== ======== ========== =========== =========
Net interest income 383.0 136.0 - - 519.0
========================= =========== ======== ========== =========== =========
Other income 2.0 17.7 37.5 10.7 67.9
========================= =========== ======== ========== =========== =========
Total income 385.0 153.7 37.5 10.7 586.9
========================= =========== ======== ========== =========== =========
Total costs (336.0) (336.0)
========================= =========== ======== ========== =========== =========
Impairment charge (2.8) (34.8) - - (37.6)
========================= =========== ======== ========== =========== =========
Net interest margin 1.38% 6.69% - - 1.60%
========================= =========== ======== ========== =========== =========
Cost of risk 0.01% 1.70% - - 0.13%
========================= =========== ======== ========== =========== =========
Key balance sheet items
at 31 December 2016
========================= =========== ======== ========== =========== =========
Loans and advances to
customers(1) 29,740.8 2,447.1 - - 32,187.9
========================= =========== ======== ========== =========== =========
Customer deposits 28,106.3 - - - 28,106.3
========================= =========== ======== ========== =========== =========
Total customer balances 57,847.1 2,447.1 - - 60,294.2
========================= =========== ======== ========== =========== =========
Risk-weighted assets 5,204.5 2,012.3 50.4 427.6 7,694.8
========================= =========== ======== ========== =========== =========
(1) Excluding fair value of portfolio hedging
The Group allocates interest expense arising from retail and
wholesale funding activities between the Mortgage and Savings and
Credit Cards business lines.
Mortgages and Savings
We provide mortgages, savings and current accounts to almost 1.8
million customers. Mortgages are sold primarily through our
intermediary partners and retail deposits are largely originated
through our digital channel. Our Mortgages and Savings business
line is an important revenue driver for the Group, contributing
65.1 per cent of total income in 2017.
Mortgage Strategy
Our approach to mortgages is very straightforward. We offer a
wide range of mortgage products to prime credit quality customers.
Distribution is principally through our intermediary partners,
supplemented by direct distribution and supported by excellent
service.
We have continued to develop our mortgage proposition to broaden
our presence across segments of the market where we are
under-represented. These have been delivered within our existing
risk appetite.
We continued to strengthen our intermediary proposition to
enrich existing intermediary relationships, which have been a
driver of value for us during 2017. Additionally, we continue to
invest in the retention of our existing customers.
Key developments - Mortgages
We delivered gross lending of GBP8.4 billion in the year to 31
December 2017. This was achieved with a consistent risk profile,
with the average loan-to-value of new lending stable at 68 per
cent.
In an increasingly competitive environment and with the gross
lending market growing by 4 per cent to GBP257 billion, our
performance was in line with the prior year and represented a 3.3
per cent market share of gross lending.
Mortgage retention rates at product maturity remained strong
with 72 per cent of customers with maturing fixed rate or tracker
products being successfully retained during 2017, compared with 68
per cent in 2016.
The combined effect of new business and retention performance
resulted in net lending of GBP3.9 billion. This represented an 8.9
per cent market share of net lending. This steady progression
continued to bring our share of stock towards our share of flow,
within a stable credit risk appetite. In 2017 our share of stock
increased to 2.45 per cent from 2.23 per cent in 2016 as mortgage
balances increased by 13.2 per cent to GBP33.7 billion in 2017.
Prime residential balances grew by 12.5 per cent to GBP27.3
billion, representing 81.1 per cent of the overall mortgage book
and 81.7 per cent of new lending in 2017. Buy-to-let balances of
GBP6.4 billion represented 18.9 per cent of the overall mortgage
book at year end. The private rental sector remains a key component
of meeting UK housing demand and we retained a strong presence in
the buy-to-let market, particularly in the remortgaging
segment.
Completion spreads across the market trended downwards in 2017
as a result of competitive pressures. Both incumbents and new
entrants looked to build market share and the market was impacted
by lower funding costs, in part as a result of the TFS. Our dynamic
approach to adjusting pricing in response to competitor movements,
expanded reach into new customer segments, and strong intermediary
relationships enabled us to offset these pressures to a degree. We
ended 2017 with a completion spread of 168 basis points, down from
187 basis points in 2016.
Geographically our lending is broadly consistent with the
general distribution of balances across the UK. We retain a
consistent presence in more affluent areas such as London and the
South East where arrears are lower and our underwriting ensures a
lower loan-to-value of new business. This affords us protection
should house prices fall in the future.
We remain committed to helping customers to achieve their home
ownership aspirations and continue to develop our mortgage
franchise to this end. We launched a Shared Ownership proposition
to enhance customers' options and we became the first mainstream
bank to enter the Custom Build sector. The number of customers
using Virgin Money to buy a New Build property increased by 41 per
cent year on year. These developments enabled us to increase the
value of gross lending to First Time Buyers by 20 per cent. Lending
at a loan-to-value over 90 per cent remained low however, and
represented under 4 per cent of our new business loans. Customer
demographics were stable and performance remained robust.
We continued to deliver enhancements for mortgage brokers. Our
partnerships with key national intermediaries continued to develop
as we strengthened the intermediary proposition by expanding access
to our New Build offering and through entering new market segments
such as Shared Ownership. These initiatives, together with our
strong service levels, were recognised by our partners as our
intermediary NPS increased to +61 from +55 in 2016.
Thanks to developments in our innovative Mortgage Lab, we also
made progress on our proposition for customers who wish to use our
direct channel. As a result, the proportion of new mortgage
applications from direct customers increased to 12 per cent in 2017
from 10 per cent in 2016, and exceeded GBP1 billion for the first
time.
The quality of our mortgage franchise was recognised with
several industry awards over the course of the year: Legal &
General Best Lender for Partnership (for the third consecutive
year); Yourmoney Best Online Mortgage Provider; Mortgage Strategy
Awards Best Mortgage Lender and Sesame Bankhall Group Best
Innovative Lender.
Savings Strategy
We offer customers a range of instant access and fixed term
savings products, also making these available as ISAs. We also
offer a basic bank account. Savings products are sold primarily
through our digital channels supplemented by our Stores and contact
centres. We attract and retain customers with enduring, good value
offers and excellent service.
Key developments - Savings
We opened more than 370,000 new savings accounts in the year. At
the end of 2017 we had more than 1.3 million savings customers and
balances had grown to GBP30.8 billion, up from GBP28.1 billion at
31 December 2016.
This balance growth of 9.6 per cent compared to market growth of
3.5 per cent over the course of 2017. Our market share of savings
stock was 1.7 per cent at 31 December 2017.
Performance was underpinned by strong customer retention. We
retained 89 per cent of customers with maturing fixed rate balances
and successfully repriced GBP15 billion of funds on our existing
book across four phases of repricing. Attrition rates on each
reprice were consistently better than expectations.
Cash ISA performance was particularly strong in 2017 with
balances increasing by 27 per cent compared to a flat market,
reflecting the strong appeal of our proposition to ISA customers.
We had a market share of Cash ISA balances of 6.1 per cent at the
end of December 2017, up from 4.8 per cent at the end of 2016.
We continued to develop new propositions to broaden our access
to savings customers with differing needs. Our regular saver
product helps attract customers who are new to saving and had
attracted over 45,000 customers by the end of 2017. We were also
pleased to grow our savings products partnership with Manchester
United to reach 10,000 customer accounts during the year.
Our Essential Current Account continues to attract customers
looking for a straightforward transparent product, and is endorsed
as one of the best basic bank accounts in the market by Money
Saving Expert. We have maintained our account opening run rate at
the level experienced through 2016, opening 12,000 new accounts in
2017.
We continue to focus on providing best in class customer
service. Improvements to the customer proposition and journey are
reflected in our strong retention rates and continued growth in
customer advocacy, with Savings NPS increasing to +37 in 2017 from
+16 in 2016.
Ongoing active management of retail funding costs in the context
of competitive market conditions contributed to a reduction in the
total cost of funds from 80 basis points in 2016 to 59 basis points
in 2017.
2017 financial highlights - Mortgages and Savings
-- mortgage balances grew by 13.2 per cent to GBP33.7 billion,
driven by gross lending of GBP8.4 billion, and strong customer
retention. In a competitive marketplace, spreads on new business
reduced 19 basis points to 168 basis points;
-- deposit balances grew by 9.6 per cent to GBP30.8 billion.
With TFS helping to reduce market funding costs, our active
management of pricing enabled us to reduce spreads and partially
offset downward pressure on asset pricing;
-- NIM for the full year 2017 was 1.35 per cent in the mortgage
and savings business. The 3 basis point reduction in NIM relative
to 2016 reflects the dilutive effect of new lending and competitive
market conditions, partially mitigated by our active management of
pricing and mix in both the mortgage and savings markets;
-- net interest income increased by 12.3 per cent to GBP430.2
million, driven by growth in mortgage balances. Combined with a
GBP1.1 million increase in other income, total income in this
business line rose by 12.5 per cent to GBP433.3 million;
-- the high quality of our mortgage business continued to be
reflected in the cost of risk which remained stable at 1 basis
point for the year. Our already low arrears levels reduced further
in 2017. The percentage of loans over three months in arrears was
0.12 per cent at the end of 2017, compared to 0.15 per cent at the
end of 2016;
-- at GBP2.2 million, the impairment charge in 2017 was below
the GBP2.8 million incurred in 2016, reflecting our strong credit
management and resulting high-quality mortgage book, as well as
benign economic conditions; and
-- risk-weighted assets in this business line increased by 21.2
per cent to GBP6.3 billion, reflecting lending growth with new
business coming onto the book at risk weights higher than more
seasoned stock.
Performance summary - Mortgages and Savings
2017 2016
GBPm GBPm Change
==================================== ====== ====== ========
Net interest income 430.2 383.0 12.3%
==================================== ====== ====== ========
Other income 3.1 2.0 55.0%
==================================== ====== ====== ========
Total underlying income 433.3 385.0 12.5%
==================================== ====== ====== ========
Impairment charge (2.2) (2.8) (21.4)%
==================================== ====== ====== ========
Mortgages and savings net interest
margin 1.35% 1.38% (3)bps
==================================== ====== ====== ========
Cost of risk 0.01% 0.01% -
==================================== ====== ====== ========
2017 2016
GBPm GBPm Change
======================================== ============= ========= =======
Key balance sheet items at 31 December
======================================== ============= ========= =======
Loans and advances to customers 33,672.4 29,740.8 13.2%
======================================== ============= ========= =======
- of which prime residential 27,306.4 24,273.6 12.5%
======================================== ============= ========= =======
- of which buy-to-let 6,366.0 5,467.2 16.4%
======================================== ============= ========= =======
Customer deposits 30,808.4 28,106.3 9.6%
======================================== ============= ========= =======
Total customer balances 64,480.8 57,847.1 11.5%
======================================== ============= ========= =======
Risk-weighted assets 6,308.1 5,204.5 21.2%
======================================== ============= ========= =======
Credit Cards
We provide credit card products, predominantly online, to 1.2
million customers. Our portfolio is a mix of balance transfer and
retail credit cards, and our offering continues to develop with the
launch of our Virgin Atlantic Airways affinity products in the
first half of 2018. Our credit card business contributed 27.6 per
cent of total income in 2017.
Strategy
Our Credit Card business has continued to build on the
foundations laid by the successful migration of the book purchased
from MBNA onto our own platform in early 2015. The functionality of
our credit card platform has allowed us to continue to grow the
business through simple, transparent products offered to high
credit quality applicants, supported by strong risk management and
analytical capability.
The product portfolio has been expanded to cater for different
customer needs in the balance transfer and retail card segments. We
have achieved this with a range of products that focus on core
customer needs: debt consolidation, borrowing and everyday
spending.
Key developments
Balances grew by 23.6 per cent during 2017 as we achieved our
target of GBP3.0 billion of balances by the end of 2017, with a
stable customer profile and improving credit quality.
In 2017 we launched new customer initiatives such as 'Virgin
Money Back' offering cashback on purchases, together with
promotions to encourage contactless transactions. These supported
an 8 per cent increase in average retail spend per active account.
These initiatives, together with improvements in customer service
resulting from an upgrade to our online service platform, led to
credit card NPS improving to +46 (2016: +42)
We opened close to 300,000 customer accounts during 2017, in
line with the prior year. We continued to move the focus of
customer acquisition towards retail-led cards, which represented
over 40 per cent of new accounts in 2017 compared to 30 per cent in
2016. As a result of the ongoing diversification of our portfolio,
retail spend on our cards was 41 per cent higher than in 2016.
Our customer indebtedness scores remained significantly below
the market average, driven by strong affordability established at
the point of underwriting. The profile of newly acquired customers
remained broadly stable following additional tightening of criteria
for all customers.
In 2017 over 98 per cent of new balance transfer customers were
booked at an expected loss rate of less than 1 per cent. This
compared with 74 per cent of new balance transfer customers booked
at an expected loss rate of less than 1 per cent in the overall
market. We do not book customers outside our credit risk appetite,
and do not downsell to applicants who do not pass our initial
credit score assessment.
This all ensured that our early arrears continued to outperform
the industry, as did portfolio arrears levels.
We maintained our in-depth monthly review of customer spending,
borrowing and repayment behaviour. This demonstrated stable usage
and a highly consistent pattern of activity.
During the year, the first cohorts of business underwritten on
our own platform in 2015 reached the end of promotional terms.
These cohorts represented a relatively low volume of balances. In
2018 greater volumes of balances will reach the end of promotional
terms. In line with this, we will see a natural increase in balance
attrition which will result in lower levels of overall portfolio
balance growth. Our co-branded partnership with Virgin Atlantic
Airways (VAA) will help us to diversify the mix in our portfolio
further with a higher proportion of borrowing from retail spend and
reward based cards complementing our balance transfer offers. The
first VAA products will be launched in the first half of 2018.
The strength of our customer proposition and experience was
recognised by winning the British Bank Awards Best Credit Card
Provider and the Your Money Awards Best Online Credit Card Provider
for 2017.
2017 financial highlights - Credit Cards
-- credit card balances increased by 23.6 per cent to GBP3.0
billion at year end;
-- net interest income grew by 20.9 per cent to GBP164.4 million
reflecting growth in balances;
-- the performance of the book continued to be closely monitored
with the latest observed customer behaviour reflected in the
assumptions underlying our effective interest rate (EIR)
accounting. Historical evidence and data continue to support our
use of a seven year modelling life;
-- net interest margin decreased by 74 basis points to 5.95 per
cent reflecting book growth and the relatively lower yield on more
recent cohorts of lending;
-- other income increased by 9.6 per cent. This increase was
driven by higher interchange and foreign exchange income reflecting
an increase in retail volumes and a higher mix of retail
accounts;
-- as a result of the above factors total income increased by
19.6 per cent;
-- the impairment charge for credit cards increased by 20.7 per
cent to GBP42.0 million reflecting balance growth. The high credit
quality of new and existing cohorts, which continue to have a low
rate of default, meant the cost of risk for credit cards reduced by
19 basis points to 1.51 per cent in 2017, from 1.70 per cent in
2016; and
-- risk-weighted assets in the business line increased by 22.6
per cent from 2016, driven by the growth in balances.
Performance summary - Credit Cards
2017 2016
GBPm GBPm Change
================================== ======= ======= ========
Net interest income 164.4 136.0 20.9%
================================== ======= ======= ========
Other income 19.4 17.7 9.6%
================================== ======= ======= ========
Total income 183.8 153.7 19.6%
================================== ======= ======= ========
Impairment charge (42.0) (34.8) 20.7%
================================== ======= ======= ========
Credit cards net interest margin 5.95% 6.69% (74)bps
================================== ======= ======= ========
Cost of risk 1.51% 1.70% (19)bps
================================== ======= ======= ========
2017 2016
GBPm GBPm Change
======================================== ======== ======== =======
Key balance sheet items at 31 December
======================================== ======== ======== =======
Loans and advances to customers 3,024.1 2,447.1 23.6%
======================================== ======== ======== =======
Total customer balances 3,024.1 2,447.1 23.6%
======================================== ======== ======== =======
Risk-weighted assets 2,467.6 2,012.3 22.6%
======================================== ======== ======== =======
Financial Services
The Financial Services business line offers customers
investment, insurance and currency products and services. We work
in partnership with a number of specialist organisations to deliver
these products, which generate attractive returns and consume low
levels of capital. This business line contributed 5.6 per cent of
total income in 2017.
Strategy
Our Financial Services strategy is based on a partnership model.
We seek partners who share our commitment to straightforward,
transparent and good value customer propositions. We leverage their
capabilities with our brand and marketing expertise to access
profitable sectors and capital-light product lines, whilst limiting
our exposure to financial risk.
Key developments
The investment business performed well in 2017 as inflows
increased by 27 per cent compared to 2016. Stocks and Shares ISA
sales and transfers were a particular highlight, with annual growth
of 40 per cent and 160 per cent respectively. These were driven by
the increased ISA threshold in combination with strong Virgin
Atlantic Airways partnership sales and continued improvements to
the customer journey.
In the insurance business, we successfully re-launched our life
insurance product with our new partner BGL. This features a
straightforward proposition with a simple and transparent quotation
process, and has already delivered 4,000 policy sales.
The travel insurance market continues to be competitive. In
order to adapt to this environment we focused on attracting higher
volumes of direct customers. We achieved this by enhancing the
customer journey, including a new 'quick quote' facility. This
narrower focus resulted in lower volumes overall but increased
income per policy. We also saw the NPS of Travel Insurance
customers improve to +38 from +35 in 2016.
2017 financial highlights - Financial Services
-- income in the Financial Services business line continued to
be driven by our investment funds business, where income was up 0.9
per cent compared with 2016;
-- funds under management stood at GBP3.7 billion at 31 December
2017, an increase of 9.6 per cent from 2016 driven by increases in
the FTSE, and sales of stocks and shares ISAs. The Group mitigated
the risk associated with stock market movements and their impact on
earnings through the use of a FTSE hedge, and as a consequence
income growth did not fully benefit from the rise in the FTSE;
-- insurance and other income in 2017 decreased by 10.3 per
cent, reflecting continued competitive pressure in the travel
insurance market; and
-- as a result, total income from the Financial Services
business fell by 0.8 per cent year-on-year.
Performance summary - Financial Services
2017 2016
GBPm GBPm Change
========================== ====== =========================== ========
Investments and pensions 32.0 31.7 0.9%
========================== ====== =========================== ========
Insurance and other 5.2 5.8 (10.3%)
========================== ====== =========================== ========
Total income 37.2 37.5 (0.8%)
========================== ====== =========================== ========
2017 2016
GBPm GBPm Change
=============================== ====== ====== =======
Key balance sheet items at 31
December
=============================== ====== ====== =======
Risk-weighted assets 53.4 50.4 6.0%
=============================== ====== ====== =======
Central Functions
Our Central Functions provide shared support services to each of
our business lines. These services include Information Technology
and Property, together with functions such as Risk, Finance,
Treasury, Human Resources and the Group's Executive. It is not our
policy to allocate operating costs to each business line, as we
manage operating costs across the business as a whole. This has the
benefit of more effective cost management.
This part of our business contributed 1.8 per cent of total
income in 2017 from the sale of available-for-sale assets and debt
securities by our Treasury function.
Key developments
Management of operating expenses is a key discipline for the
business. We have continued to invest in our people and in
developing the long term future of the bank through digital
investment whilst stringently managing costs through further
simplification and efficiency activity. This approach has driven
continued improvements in operational leverage, delivering a
Cost:Income ratio of less than 50 per cent for the fourth
quarter.
Fixed costs were held broadly flat as the benefit of
simplification undertaken in 2016 and other operational
efficiencies offset inflationary and volume driven cost
increases.
Property and IT costs were tightly managed, whilst we worked
closely with strategic partners to create efficiencies.
We continued to optimise and prioritise our project delivery in
2017, investing GBP52.8 million effectively to deliver a wide range
of initiatives that helped grow and protect our business, as well
as meet key regulatory requirements. These included the delivery of
operational and customer efficiencies from our Mortgage and Savings
Lab, an upgrade of colleague IT equipment, investment in
Cyber-crime and Financial crime prevention as well as the build of
our IFRS 9 capability.
To support the evolution of our strategy, we have also invested
GBP38.3 million in the development of our new digital banking
platform.
During 2017 we actively managed the mix of our liquid asset
portfolio to reduce our exposure to higher risk-weighted
instruments and counterparties.
2017 financial highlights - Central Functions
-- interest income and expense incurred from Treasury funding
and liquidity operations is allocated to the Mortgage, Savings and
Credit Cards businesses;
-- other income is primarily driven by gains from the sale of
available-for-sale assets and debt securities. In 2017 this
included a gain of GBP6.1 million arising from the sale of our
investment in Vocalink. 2016 other income included a gain of GBP5.3
million on the investment held in Visa Europe;
-- operating costs remained tightly controlled with continuous
improvement across the organisation. In our savings operation the
implementation of additional automation led to a 21 per cent
improvement in new accounts opened per FTE.
-- an GBP8.5 million increase in depreciation and amortisation
arose from capital expenditure in prior years, as we continued to
invest in the future of the bank; and
-- an 18.3 per cent reduction in risk-weighted assets primarily
due to the reduction in higher risk-weighted instruments in the
liquidity portfolio.
Performance summary - Central Functions
2017 2016
GBPm GBPm Change
============== ======== ======== =======
Other income 11.7 10.7 9.3%
============== ======== ======== =======
Total income 11.7 10.7 9.3%
============== ======== ======== =======
Total costs (348.5) (336.0) 3.7%
============== ======== ======== =======
2017 2016
GBPm GBPm Change
======================================== ====== ====== ========
Key balance sheet items at 31 December
======================================== ====== ====== ========
Risk-weighted assets 349.5 427.6 (18.3)%
======================================== ====== ====== ========
Operating Costs
2017 2016
GBPm GBPm Change
=========================================== ====== ====== =======
Staff costs 190.7 188.9 1.0%
=========================================== ====== ====== =======
Premises and equipment 30.0 28.5 5.3%
=========================================== ====== ====== =======
Other expenses 97.4 96.7 0.7%
=========================================== ====== ====== =======
Depreciation, amortisation and impairment 30.4 21.9 38.8%
=========================================== ====== ====== =======
Total costs 348.5 336.0 3.7%
=========================================== ====== ====== =======
Research and development activities
During the ordinary course of business the Group invests in the
development of platforms, products and services. During 2017 the
Group has invested in the build of the Virgin Money digital
bank.
Responsibility statement of the Directors in respect of the
Annual Financial Report
The responsibility statement below has been prepared in
connection with the Group's full annual report for the year ending
31 December 2017. Certain parts thereof are not included within
this announcement.
Each of the Directors who currently is in office confirms 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 undertakings included in the consolidation
taken as a whole; and
-- the management report includes a fair review of the
development and performance of the business and the position of the
Group and Company together with a description of the principal
risks and uncertainties that they face.
This responsibility statement was approved by the board of
directors on 26 February 2018 and is signed on its behalf by:
Jayne-Anne Gadhia, Chief Executive
Glen Moreno, Chair of the Board
principal risks and uncertainties
Effective risk management is a core part of our strategy.
The Board-approved risk appetite reflects our tolerance for risk
in pursuit of our strategic objectives. It is designed to achieve
an appropriate balance between risk and reward. Risk appetite is
embedded in the business through delegation of authority from the
Board to the Executive. Our risk management approach is fully
aligned with Board risk appetite, regulatory requirements and
industry good practice. Risks are identified, managed and mitigated
using our risk management framework (see page 131). Our risk-aware
culture and strong, independent Risk function help to ensure
adherence to our risk management framework. An effective governance
structure, rapid escalation of threats and the sharing of
information across the Group results in a timely response to
emerging risks.
We use a 'Three Lines of Defence' model which describes clear
accountabilities, appropriate segregation of duties and effective
independent assurance. The principal risks which could impact the
delivery of our strategy are outlined on pages 36 to 37.
As a UK retail bank we are focused on serving domestic
customers. We are subject to risks arising from macro-economic
conditions in the UK, geopolitical uncertainty, the competitive
environment and new structural and regulatory changes which will
come into force over the next few years.
Our ongoing focus on maintaining a strong retail deposit
franchise and high-quality lending portfolios is supported by our
robust approach to both financial and non-financial risk
management.
Achievements in 2017
Our key achievements during 2017 included continued rigorous
focus on credit quality, the strength of our capital and funding
bases, significant programmes of work addressing key regulatory
initiatives and further strengthening our framework for the
management of cyber-crime and financial crime risks.
Credit
The application of strict affordability requirements, robust
credit decisioning and prudent underwriting standards across our
mortgage and credit card portfolios ensured that asset quality
performance was ahead of our expectations. This is reflected in our
low overall cost of risk of 0.13 per cent (2016: 0.13 per cent). We
are responsive to the changing macro-economic environment and
regularly refine our credit risk management approaches.
Mortgage lending grew by 13.2 per cent to GBP33.7 billion during
2017, despite increased competition from incumbent lenders and new
entrants looking to enhance their market share. The mortgage
portfolio represents 91.6 per cent (2016: 92.3 per cent) of gross
loans and advances to customers. Prime residential lending grew to
GBP27.3 billion during 2017, representing 81.1 per cent (2016: 81.6
per cent) of total secured loans.
-- The high quality of our mortgage business is reflected in our
low arrears levels. Secured 3+ arrears levels were 0.12 per cent at
the end of 2017, compared to 0.15 per cent in 2016, substantially
below the latest UK Finance industry average of 0.82 per cent.
Additionally, the proportion of secured assets classified as
neither past due nor impaired remained stable during 2017 at 99.0
per cent (2016: 99.1 per cent);
-- The consistent application of our lending criteria and robust
underwriting gives us confidence that our mortgage book would be
resilient in the event of a downturn. In 2017, we further
strengthened our lending criteria in relation to buy-to-let
properties, which constitute 18.9 per cent (2016: 18.4 per cent) of
total secured loans;
-- The indexed portfolio LTV remained stable at 55.8 per cent at
the end of 2017 (2016: 55.4 per cent); and
-- Our low cost of risk for mortgages has remained stable at
0.01 per cent (2016: 0.01 per cent).
During 2017, our credit card book, net of impairments grew to
GBP3.0 billion, representing a market share of 4.1 per cent. The
credit card portfolio accounts for 8.4 per cent (2016: 7.7 per
cent) of total loans and advances to customers.
In February 2017, the Bank of England (BoE) noted that unsecured
lending standards had fallen across the market. In contrast, the
quality of our credit card lending has remained strong. Average
credit card behavioural scores have improved during the year as we
continue to focus on monitoring customer behaviour and book
performance closely. Application quality is strong and there is a
growing gap between our benchmarked asset quality and market
averages. However, we recognise the potential for economic
headwinds and during the first half of 2017 further tightened our
lending criteria.
-- Revised credit card scorecard cut-offs were implemented in
April 2017. Policy restrictions were made in May 2017 to reinforce
our focus on the acquisition of customers with low levels of
indebtedness. Growth in credit card balances continues to be driven
by targeting low risk customer segments. For instance, in 2017 over
98 per cent of new balance transfer customers were booked at an
expected loss rate of less than 1 per cent;
-- Credit card book quality remained stable with 98.6 per cent
(2016: 98.7 per cent) of the book currently classified as neither
past due nor impaired. Unsecured 2+ arrears levels remained low at
0.88 per cent (2016: 0.78 per cent) with the small increase during
2017 primarily due to expected increases in arrears levels on
balances originated during 2015 and 2016 as these cohorts mature.
Arrears levels remain well within our forecast position and compare
favourably to industry benchmarks; and
-- Our low cost of risk for credit cards of 1.51 per cent (2016:
1.70 per cent) reflects a rigorous approach to underwriting,
account management and credit decisioning, supported by the benign
economic environment.
Capital and funding
Maintaining a well-capitalised business supports balance sheet
growth, credit ratings and regulatory requirements. Our capital
base is managed to ensure that the business is well placed to react
to current and forecast economic, market and regulatory conditions,
as well as any material downturn in the economy.
-- As at 31 December 2017, our Common Equity Tier 1 (CET1) ratio
was 13.8 per cent (2016: 15.2 per cent), our total capital ratio
was 18.1 per cent (2016: 20.4 per cent), and our leverage ratio was
3.9 per cent (2016: 4.4 per cent). Movements in 2017 reflect the
utilisation of capital to support further lending growth and
investment in business development. All capital ratios remain
significantly above the regulatory minima.
Our funding strategy is retail deposit-led. We hold high-quality
liquid assets (HQLA) to address the liquidity needs of the business
and, in addition to retail deposits, we diversify our funding
through a number of wholesale funding programmes;
-- Retail deposits increased by 9.6 per cent during the year to
GBP30.8 billion, with a lower cost of funds. This was achieved
through close management of pricing and product mix. The retail
product mix included a higher proportion of fixed rate products,
increasing overall contractual tenor. Almost nine out of ten fixed
rate savings customers opted to stay with us at maturity,
highlighting the strength of our retention offering;
-- Our strong funding position is reflected in a liquidity
coverage ratio of 203 per cent (2016: 154 per cent) as at 31
December 2017;
-- Our loan-to-deposit ratio increased to 119.1 per cent during
2017, from 114.5 per cent at 31 December 2016, in line with
internal limits of up to 120 per cent;
-- In September, we successfully completed a further issuance of
Residential Mortgage Backed Securities (RMBS), raising GBP745.9
million in both USD and GBP tranches. Wholesale funding supplements
our core retail deposit base and cost of funding. Wholesale funding
also helps to extend tenor and ensures we have appropriate
diversification in the funding base;
-- During the year, we made further drawings from the BoE Term
Funding Scheme (TFS) taking overall drawings at 31 December 2017 to
GBP4.2 billion. In parallel, we repaid GBP650.2 million of Funding
for Lending Scheme (FLS) funding. This low-cost funding creates
additional lending capacity and supports our overall funding plan;
and
-- In July 2017, the Financial Conduct Authority (FCA) confirmed
that our Covered Bonds application had been approved. We expect to
make our inaugural issuance in 2018.
Regulatory initiatives
Our work during the year focused on the following regulatory
changes:
-- During 2017, the FCA published its approach to implementing
the revised Payment Services Directive (PSD2), which came into
force on 13 January 2018. As well as promoting innovation, PSD2
aims to improve consumer protection, increase the security of
payments, and reduce the cost of payment services;
-- The General Data Protection Regulation (GDPR) provides an
updated EU data protection framework to replace the existing 1995
Data Protection Directive (the Directive). GDPR will come into
force in May 2018;
During 2017 we made significant investment in undertaking the
required preparatory work in relation to the above change
programmes.
-- On 3 April 2017, the FCA published a consultation paper
setting out proposals for new rules and guidance to address
persistent credit card debt. These proposals complement the
remedies arising from the Credit Card Market Study published in
2016, which aim to reduce the number of customers with problem
credit card debt. While we have very limited exposure to such
customers, we are working with the FCA to trial strategies relating
to the identification of and support for customers in persistent
debt; and
-- The final report in relation to the FCA Asset Management
Market Study was published in June 2017. The package of remedies is
focused on providing increased investor protection, driving price
transparency and improving the effectiveness of intermediaries for
both retail and institutional investors. We endorsed these and will
implement the limited changes required to achieve full compliance
with the recommendations.
Cyber-crime and financial crime risk
We have a well-developed Cyber Security Strategy to manage the
increasing risk of cyber-crime. During 2017 we deployed a security
risk framework that enables us to manage exposures in line with
internationally recognised security standards. We improved our
network security controls to protect us against emerging security
threats and improved security advice to colleagues.
The FCA continues to emphasise the need for firms to ensure they
have adequate and effective systems and controls to manage
financial crime risk. In 2017 we continued to develop our strategic
financial crime programme. This programme is designed to enhance
our systems and controls and, during the year, delivered
improvements to client screening, transaction monitoring solutions
and due diligence procedures.
In addition, we implemented our approach to the EU's Fourth
Money Laundering Directive which was transposed into UK law on 26
June 2017 as the Money Laundering, Terrorist Financing and Transfer
of Funds (Information on the Payer) Regulations 2017.
Outlook
The macro-economic environment, strong credit management of our
lending portfolios, strength in capital and funding and proactive
engagement with forthcoming macro-structural and regulatory change
will be the key areas of focus in 2018.
Macro-economic environment
The UK economy and housing market remained resilient in 2017. We
continue to see strong customer demand and no evidence of material
changes in customer behaviour. However, potential risks could
crystallise if inflation remains higher than wage growth, causing a
reduction in households' real earnings. Lower real earnings could
in turn reduce consumer spending which, combined with a potentially
more uncertain macro environment, leads us to remain cautious in
our outlook. We will continue to monitor key exposures in light of
the prevailing economic outlook. We have implemented additional
oversight activities, alongside contingency plans, which are
designed to respond to and mitigate the impact of adverse
macro-economic conditions that may emerge.
The Bank of England increased interest rates from 0.25 per cent
to 0.50 per cent in November 2017. Our expectation is for gradual
further rate increases over the next three years. Low wage growth,
and higher inflation, may put pressure on some household budgets
and we remain alert to signs of financial strains on our customers.
Changes to central bank rates can represent a risk to future
financial performance. We have an ongoing programme of stress
testing to assess our resilience to changing macro-economic
conditions.
Maintaining strong credit quality
Our focus on asset quality will continue in 2018. Credit policy
and decision systems are regularly reviewed and tested to ensure
they respond to changes in customer and competitor behaviours,
maintaining the quality of the portfolios.
Management of the mortgage portfolio: Housing market changes
play a crucial part in the development of our business. During
2017, UK house prices remained resilient.
-- Low unemployment and record low mortgage rates support
consumer affordability while supply shortages continue to support
house prices. Although the potential for the weakening of regional
house prices exists, we have well-established early warning
indicators and will continue to monitor and manage our exposure to
regional house price variations and potential areas of
weakness;
-- A number of measures relating to the housing market were
announced in the Autumn Budget, including a permanent stamp duty
land tax relief for first-time buyers. We increased lending to
first-time buyers by 20 per cent during 2017 and this will continue
to be a focus in 2018;
-- The PRA introduced stricter stress testing for landlords with
four or more mortgaged buy-to let properties, effective from
September 2017. We have taken a conservative approach to applying
these minimum standards. Further information can be found in the
Risk Management Report on page 135; and
-- The mortgage market saw heightened competition in the second
half of 2017 and this may continue in 2018. We will continue to
focus on our competitive strengths and will manage volumes in order
to protect asset quality and returns.
Management of the credit card portfolio: We will continue to
focus on strong credit management of our credit card exposures. A
rise in unemployment or pressure on customer affordability could
lead to increased impairments. We will continue to monitor this
closely in 2018.
-- Our new co-branded partnership with Virgin Atlantic will
encourage high-quality credit card growth. It aims to materially
increase retail spend and provide further diversification of the
credit card customer base;
-- We will continue to grow our credit card portfolio in a
controlled manner, given our assessment of market conditions and
our view of risk and reward; and
-- The commercial performance of our credit card portfolio is
exposed to potential changes in expected consumer behaviour. We
will monitor this closely and take timely action to respond to any
observed or anticipated changes.
Capital and funding
We will continue to build on our core retail deposit base and
develop our SME offering which commenced in January 2018 with the
launch of our Business Deposit Account. We will also target new
sources of funding following the launch of our digital bank which
aims to increase our access to the current account and primary
savings markets.
Although we will remain a predominantly retail funded bank, we
do also have a well-established wholesale funding programme. With
the Bank of England funding schemes we have used coming to an end,
we have put in place a carefully structured funding plan to avoid
undue re-financing risk. We will continue to diversify and build
out our funding sources in the coming year in line with the long
term aim of wholesale funding providing up to 20 per cent of total
funding. In July 2017 we received authorisation from the FCA for a
regulated covered bonds programme, and expect that our inaugural
issuance will take place this year. We also expect to access RMBS
markets again during 2018. As we work towards the full
implementation of minimum requirements for own funds and eligible
liabilities (MREL) on 1 January 2022, we will begin to issue
further unsecured funding through our established Global Medium
Term Note programme.
We benefit from AIRB models in calculating Pillar 1 capital for
the mortgage portfolio. Ensuring that these models remain well
calibrated to portfolio performance and aligned to the most recent
regulatory guidance will be key in 2018.
Macro-structural changes
Our strategic planning addresses the new structural and
regulatory changes which come into force in the coming years:
-- A capital conservation buffer of 0.625 per cent was
introduced on 1 January 2016, and increased to 1.25 per cent on 1
January 2017. This will increase each year to a maximum of 2.5 per
cent in 2019. During 2017, the Bank of England increased the
countercyclical buffer from 0 per cent to 0.5 per cent of
risk-weighted assets. This will come into force in June 2018. A
further increase of 0.5 per cent, to 1.0 per cent, will come into
force in November 2018, subject to review in the first half of
2018. These changes are fully reflected in our capital and funding
plans;
-- Minimum Requirements for Own Funds and Eligible Liabilities
(MREL) will be fully phased in by 1 January 2022. The Bank of
England provided MREL guidance, including transitional
arrangements, in late 2016. Prior to 31 December 2019 our MREL
requirement will be equal to our minimum regulatory capital
requirements. From 1 January 2020 until 31 December 2021, our MREL
requirement will be equal to 18 per cent of our risk-weighted
assets. This guidance has been fully reflected in our capital and
funding plans;
-- The Financial Services Banking Reform Act 2013 will result in
the ring-fencing of retail banking operations to separate them from
investment banking activities. We are in the process of agreeing
our detailed ring-fence compliance plans with the PRA and do not
anticipate any material change to our structure or business model
as a result. We will, however, have to participate directly in
inter-bank payments systems and work is well advanced to achieve
this;
-- IFRS 9 will be implemented in 2018 and will result in a new
approach to provisioning and additional disclosure requirements. We
have developed new models and business practices to meet these
requirements. Additional information regarding IFRS 9 can be found
in note 37 to the financial statements; and
-- The Basel Committee published their final Basel III framework
in December 2017. A key objective of the revisions is to reduce
excessive variability of risk-weighted assets (RWAs) and improve
the comparability of banks' capital ratios. Implementation dates
range from 2022 to 2027 and transitional arrangements will be put
in place regarding the new standards. Our initial analysis suggests
that the impact of the new requirements will be broadly neutral for
us from a capital perspective.
Regulatory change
The delivery of the following regulatory change programmes will
be a core focus in 2018:
-- Open Banking, General Data Protection Regulation and Payment
Services Directive: PSD2 and Open Banking will have a material
impact on the competitive environment in which we operate, with
non-bank firms likely to enter the market by leveraging new
payments regulation and data sharing protocols. Although this may
intensify competition in the mortgage, credit card and savings
markets over time, the impact will be most significant for the
personal current account market, in which we are not currently a
material participant;
-- FCA Strategic Review of Retail Banking Business Models: The
FCA are reviewing the business models used in the retail banking
sector and evaluating the impact of changes on competition and
conduct. The FCA engaged with relevant financial service providers
during 2017 and will provide an update in the first half of
2018;
-- FCA Mortgage Market Study: In December 2016, the FCA
published the terms of reference of their Mortgage Market Study. We
responded to an information request in March 2017 and await the
findings of the interim report which is due to be published in
March 2018; and
-- FCA Interest Only Thematic Review: In January 2018 the FCA
published the findings of their Thematic Review into Interest Only
customers. Their response acknowledged the progress that lenders
had made and emphasised the need for customers to contact lenders
for further support. We were aware of all points raised by the FCA
and are addressing them within existing programmes of work.
Cyber-crime
Cyber-crime remains a material risk for all banks and we
recognise the pace of change in the external threat environment. We
will continue to monitor the external threat landscape and develop
our capability to protect against cyber-crime through ongoing
enhancement of our control environment and protections. We will
continue to develop our strategic financial crime programme in 2018
and further enhance our anti-money laundering capabilities.
Third party administration
Outsourced relationships with parties which support the credit
card, investment and insurance business lines, such as DST
(formerly IFDS) for unit trust management and TSYS/TMS for our
credit card business, are fundamental to the success of the
business and remain a significant area of management focus.
Reliance on key corporate partners and strategic suppliers involves
the potential risk of disruption to service arising from the
failure of a third party. Thorough risk assessment during the
on-boarding process, and robust ongoing oversight, are key to
managing these outsourced relationships.
Principal risks
Credit risk
Credit risk is the risk of loss resulting from a borrower or
counterparty failing to pay amounts due.
We provide residential and buy-to-let mortgages and credit cards
to customers across the UK. There is a risk that any adverse
changes in the macro-economic environment and/or the credit quality
or behaviour of borrowers results in additional impairment losses,
thereby reducing profitability.
Wholesale exposures arise through our liquid asset portfolio and
the use of derivative instruments to manage interest rate risk.
Key mitigating actions
-- credit risk is managed through risk appetite and risk limits
reflected in approved credit policy;
-- a robust credit risk framework helps ensure that the credit
quality and composition of the portfolios remain within risk
appetite limits. This is monitored and reported through governance
committees regularly;
-- stress and scenario testing allows us to confirm portfolio
resilience;
-- credit risk metrics are benchmarked against competitors and
industry averages;
-- customer behaviour is closely monitored with timely action
taken in response to any adverse change; and
-- credit risk arising from derivatives and from securities
financing transactions is mitigated by collateralising exposures on
a daily basis.
Commentary
Impaired loans as a percentage of overall balances increased but
remained at a low level in 2017.
Wholesale credit quality remains strong with 100.0% of debt
security counterparties rated AA or above.
Provisions as a percentage of impaired loans reduced reflecting
growth in secured loans with expired terms which do not require
increased impairment provisions given the high level of collateral
cover on these loans. Expired term loans which are more than six
months past their maturity date have an average LTV of 25.8 per
cent.
Future focus
We will continue to deliver strong asset quality aligned to
growth of the mortgage and credit card books.
We will maintain our 'no loss' position for the wholesale credit
portfolio.
Market risk
Market risk is the risk that unfavourable market movements lead
to a reduction in earnings or value. We do not trade or make
markets. Interest rate risk in the banking book is the only
material category of market risk.
Key mitigating actions
-- market risk is managed through Board-approved risk appetite
limits and policies;
-- exposures are mitigated through the use of natural offsets
and derivatives; and
-- stress and scenario testing focuses on the impacts of
differing interest rate environments.
Commentary
As a consequence of the increase in the size of the balance
sheet, Capital at Risk has increased in a positive rate shock
scenario. The interest rate risk exposure remains safely within
limits.
Future focus
We will look to refine our interest rate risk management systems
and approaches to reflect the evolving regulatory landscape.
Operational risk
Operational risk is the risk of loss resulting from inadequate
or failed internal processes, people and systems or from external
events, including legal risk. The management of third party
relationships, cyber-crime and information security remains a key
focus for Virgin Money.
Key mitigating actions
-- risk appetite is focused on maturing the control environment
and therefore managing operational risk;
-- an ongoing programme of investment in security infrastructure
is in place to mitigate threats including cyber-attack;
-- we will continue to invest in and develop risk management
frameworks, systems and processes which strengthen operational
resilience; and
-- we monitor external events impacting other financial services
companies to inform stress testing.
Commentary
The absolute amount of losses has developed in line with
business growth, but has remained low.
Future focus
We will continue to invest in cyber-crime defense, fraud and
anti-money laundering infrastructure.
Conduct risk and compliance
Conduct and compliance risk is defined as the risk that our
operating model, culture or actions result in unfair outcomes for
customers. This could result in regulatory sanction, material
financial loss or reputational damage if we fail to design and
implement effective operational processes, systems and controls
which maintain compliance with all applicable regulatory
requirements.
Key mitigating actions
-- compliance is maintained through an effective and timely
response to changes in the regulatory environment;
-- the customer is placed at the heart of decision-making by
ensuring fair outcomes through comprehensive risk assessment and
testing;
-- we continue to invest in and develop risk management
frameworks, systems and processes; and
-- we focus on training to ensure colleague performance is
aligned with the regulatory responsibilities and to enable an
awareness of good customer outcomes.
Commentary
Complaints per 1,000 accounts remained low at 4.91, compared to
3.65 in 2016.
Future focus
We will focus on our Complaints Transformation project to
continue to improve the volume of complaints resolved at first
point of contact.
Strategic and financial risk
Strategic risk is the risk of significant loss or damage arising
from business decisions that impact the long-term interests of
stakeholders or from an inability to adapt to external
developments.
Financial risk is focused primarily on concentration risk.
Credit concentration risk is managed for retail and wholesale
credit exposures at portfolio, product and counterparty levels.
Increased competition in our key lending markets is leading to a
reduction in asset spreads, creating additional financial risk.
There is also the potential for increased competition in the
deposit taking market as Bank of England funding schemes come to an
end.
Financial performance can be impacted by adverse changes in
customer behaviour.
Key mitigating actions
-- Board focus is on ensuring alignment of business development
and planning with risk appetite;
-- we invest in processes, systems, recruitment and training to
support new business developments;
-- we use robust risk and project management disciplines to
ensure that implementation is delivered safely;
-- we continually monitor customer behaviour metrics to identify
adverse trends;
-- active focus is on asset origination and portfolio management
to manage margins and eliminate inappropriate concentration
risk;
-- we will maintain pricing discipline across our product range,
ensuring that risk is appropriately rewarded within our Board
approved risk appetite; and
-- regular validation and review of models is performed.
Commentary
The development of the digital bank and SME propositions will
ensure we provide services that meet the future needs of customers
and further diversify our business and funding franchises.
In order to manage concentration risk we seek to spread the risk
in the areas in which we operate. This is done through the
controlled management of LTVs and the implementation of strict
counterparty limits to minimise wholesale industry exposures.
Our pricing discipline and management of the cost of funds
enabled us to mitigate pressure on asset spreads, as the Banking
NIM reduced to 172 basis points compared to 175 basis points for
the prior year.
Future focus
Focus will be on the development of the digital bank and SME
propositions, in addition to the ongoing development of wider
customer propositions and digital capability.
Funding and liquidity risk
Liquidity risk represents the inability to accommodate liability
maturities and withdrawals, fund asset growth, and otherwise meet
contractual obligations to make payments as they fall due.
Funding risk represents the inability to raise and maintain
sufficient funding in quality and quantity to support the delivery
of the business plan.
Key mitigating actions
-- Board-approved risk appetite and funding and liquidity
policies define a limit structure;
-- liquid resources are maintained in adequate quantity and
quality to meet stressed outflows;
-- a prudent mix of funding sources is maintained with a
maturity profile set in risk appetite and policy limits; and
-- stress and scenario testing considers threats to funding
plans and changes in consumer behaviour.
Commentary
Improved diversity of funding has been achieved through our
registration as a covered bonds issuer, and our entrance into the
SME market.
Future focus
We will continue to improve balance sheet efficiency and
resilience through measured diversification of wholesale funding
and building of the SME deposit base.
Capital risk
Capital risk is defined as the risk that we have a sub-optimal
amount or quality of capital or that capital is deployed
inefficiently across the Group.
Key mitigating actions
-- Board-approved risk appetite ensures we are holding
sufficient capital within regulatory requirements;
-- the capital management policy sets out minimum standards for
the management of capital;
-- capital procedures are subject to independent oversight;
and
-- stress and scenario testing assesses capital adequacy under a
range of severe market wide stress scenarios and idiosyncratic
stress events.
Commentary
Our total capital and leverage ratios have remained in line with
expectation and well in excess of regulatory requirements.
Future focus
We will continue to maintain a high-quality capital base with
ratios in excess of regulatory requirements.
Credit quality of assets
Loans and receivables
The Group defines three classifications of credit quality (low
risk, medium risk and higher risk) for all credit exposures.
Secured credit exposures are segmented according to the credit
quality classification and a point-in-time PD. The point-in-time PD
is an internal parameter used within the Group's AIRB capital
models which aims to estimate the probability of default over the
next 12 months based on account characteristics and customer
behavioural data. Default occurs where the borrower has missed six
months of mortgage repayments or the borrower is deemed to be
unlikely to repay their loan. Exposures are categorised as:
-- higher risk where assets are past due or have a point in time
PD greater than 2%;
-- medium risk where assets are not past due and have a PD
greater than 0.8% and less than or equal to 2%; and
-- low risk where assets are not past due and have a PD less
than or equal to 0.8%.
Unsecured exposures are categorised as:
-- higher risk where assets are past due;
-- medium risk where assets are currently not past due but are
benefiting from a forbearance solution; and
-- low risk where assets are neither past due nor in
forbearance.
Wholesale credit exposures are assessed by reference to credit
rating. The Group's wholesale exposures are investment grade and
therefore classified as low risk.
No wholesale credit exposures were past due or impaired as at 31
December 2017 and 31 December 2016.
Further asset quality categorisation is disclosed on page 140
which reflects the impairment status of assets.
Credit risk portfolio as at 31 December 2017
The tables below show the total credit risk exposure for the
Group's retail and wholesale portfolios.
Secured Unsecured Wholesale
========================== ===================== ======================
Residential
Residential buy-to-let
mortgage mortgage Credit Treasury Derivative
loans loans cards Overdrafts assets exposures Total
2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
==================== ============ ============ ======== =========== ========= =========== =========
Total gross
loans and
advances
to customers 27,317.2 6,367.3 3,071.3 0.1 - - 36,755.9
==================== ============ ============ ======== =========== ========= =========== =========
- of which
are low risk 26,770.5 6,322.5 3,025.2 0.1 - - 36,118.3
==================== ============ ============ ======== =========== ========= =========== =========
- of which
are medium
risk 220.0 11.7 3.5 - - - 235.2
==================== ============ ============ ======== =========== ========= =========== =========
- of which
are higher
risk 326.7 33.1 42.6 - - - 402.4
==================== ============ ============ ======== =========== ========= =========== =========
Loans and
advances
to banks - - - - 359.4 - 359.4
==================== ============ ============ ======== =========== ========= =========== =========
Cash and
balances
at central
banks - - - - 2,579.0 - 2,579.0
==================== ============ ============ ======== =========== ========= =========== =========
Debt securities
classified
as loans
and receivables - - - - 0.3 - 0.3
==================== ============ ============ ======== =========== ========= =========== =========
Available-for-sale
financial
assets - - - - 1,051.8 - 1,051.8
==================== ============ ============ ======== =========== ========= =========== =========
Gross positive
fair value
of derivative
assets - - - - - 78.8 78.8
==================== ============ ============ ======== =========== ========= =========== =========
Total 27,317.2 6,367.3 3,071.3 0.1 3,990.5 78.8 40,825.2
==================== ============ ============ ======== =========== ========= =========== =========
All of the Group's wholesale exposures are categorised as 'low'
risk.
Secured Unsecured Wholesale
========================== ===================== ======================
Residential
Residential buy-to-let
mortgage mortgage Credit Treasury Derivative
loans loans cards Overdrafts assets exposures Total
2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================= ============ ============ ======== =========== ========= =========== =========
Total gross
loans and
advances
to customers 24,283.0 5,468.4 2,486.5 0.1 - - 32,238.0
============================= ============ ============ ======== =========== ========= =========== =========
* of which are low risk 21,565.5 5,256.8 2,451.2 0.1 - - 29,273.6
============================= ============ ============ ======== =========== ========= =========== =========
- of which
are medium
risk 1,699.5 172.1 2.9 - - - 1,874.5
============================= ============ ============ ======== =========== ========= =========== =========
- of which
are higher
risk 1,018.0 39.5 32.4 - - - 1,089.9
============================= ============ ============ ======== =========== ========= =========== =========
Loans and
advances
to banks - - - - 635.6 - 635.6
============================= ============ ============ ======== =========== ========= =========== =========
Cash and
balances
at central
banks - - - - 786.3 - 786.3
============================= ============ ============ ======== =========== ========= =========== =========
Debt securities
classified
as loans
and receivables - - - - 0.7 - 0.7
============================= ============ ============ ======== =========== ========= =========== =========
Available-for-sale
financial
assets - - - - 858.8 - 858.8
============================= ============ ============ ======== =========== ========= =========== =========
Gross positive
fair value
of derivative
assets - - - - - 104.2 104.2
============================= ============ ============ ======== =========== ========= =========== =========
Total 24,283.0 5,468.4 2,486.5 0.1 2,281.4 104.2 34,623.6
============================= ============ ============ ======== =========== ========= =========== =========
In addition, the maximum credit risk exposure of the Group
includes off-balance sheet items. These items relate to
applications that have been approved and have not yet been drawn by
the customer, and undrawn loan commitments. These commitments
represent agreements to lend in the future and may be decreased or
removed by the Group, subject to product notice requirements. No
account is taken of any collateral held, other credit enhancements
or provisions for impairment. As at 31 December 2017, off-balance
sheet items totalled GBP6.2 billion (2016: GBP5.3 billion) and were
all classified as 'low' risk.
Interest rate risk
The Group quantifies the impact to economic value and earnings
arising from a shift to interest rates using stress scenarios.
These scenarios examine the interest rate re-pricing gaps, asset
and liability interest rate bases and product optionality.
The Group maintains IRRBB management practices in line with
applicable regulatory expectations.
Interest rate risk exposure is measured as follows:
-- Capital at Risk (CaR) is considered for assets and
liabilities in all interest rate risk re-pricing periods. This is
expressed as the present value of the negative impact of a
sensitivity test on the Group's capital position.
-- Earnings at Risk (EaR) is considered for assets and
liabilities on the forecast balance sheet over a 12 month period,
measuring the adverse change to net interest income from a change
in interest rates.
IRRBB is measured considering both positive and negative
instantaneous shocks to interest rates. The measurement is enhanced
with non-parallel stress scenarios (basis risk), swap spread risk
and behavioural volume stresses (pipeline and optionality risk).
Both EaR and CaR are controlled by a defined risk appetite limit
and supporting metrics.
CaR measurements are based on a 2% parallel stress over the
balance sheet horizon, for term mismatch. EaR measurements are
based on a 1% parallel stress over a 12 month period. The stress
scenarios capture the risk of negative interest rates. The
magnitude of stress used within the Group's internal risk appetite
differs from the standardised regulatory stress, based on observed
rate movements and internally defined exposure holding periods. In
the case of basis risk, the Group uses an internal stress test
outcome for CaR and EaR.
The Group has an integrated Asset and Liability Management
system which allows it to measure and manage interest rate
re-pricing profiles (including behavioural assumptions), perform
stress testing and produce forecasts.
Capital at Risk
CaR as at 31 December 2017 increased to GBP25.5 million from
GBP14.1 million at 31 December 2016 in a negative rate shock
scenario. In a positive rate shock scenario, it increased to
GBP52.2 million at 31 December 2017 from GBP34.2 million as at 31
December 2016. In both rate shock scenarios this was due to the
increase in the balance sheet, and the consequential increase in
interest rate mismatch risk, and optionality risk arising from the
increase in potential mortgage early repayments and savings
redemptions.
The table below shows CaR measurements, based on a 2% parallel
stress, over the balance sheet horizon.
2017 2016
===================== =====================
Positive Positive Negative
2% Negative 2% 2%
rate 2% rate rate rate
shock shock shock shock
GBPm GBPm GBPm GBPm
============================= ========= ========== ========= ==========
Interest rate mismatch risk (6.3) 0.4 1.6 0.7
============================= ========= ========== ========= ==========
Basis Risk (1.4) (1.4) - -
============================= ========= ========== ========= ==========
Pipeline risk (4.7) (5.5) (5.7) (7.1)
============================= ========= ========== ========= ==========
Optionality risk (39.8) (19.0) (30.1) (7.7)
============================= ========= ========== ========= ==========
Total interest rate risk -
Capital at Risk (52.2) (25.5) (34.2) (14.1)
============================= ========= ========== ========= ==========
Earnings at Risk
EaR has decreased over the year by GBP36.1 million in a positive
rate shock scenario and by GBP11.9 million in a negative shock
scenario. These improvements are due to the Group's savings pricing
strategy and changes in customer terms and conditions, which has
benefitted interest rate mismatch risk. Additionally, the further
utilisation of basis swapped positions has reduced the level of
basis risk arising in these rate shock scenarios.
The table below shows that, due to reductions in the structural
mismatches of assets and liabilities on the balance sheet across
the year, the Group's net interest income at 31 December 2017 is
significantly less likely to suffer from a large, sudden shock to
interest rates than it was at 31 December 2016.
2017 2016
===================== =====================
Positive Positive Negative
1% Negative 1% 1%
rate 1% rate rate rate
shock shock shock shock
GBPm GBPm GBPm GBPm
============================= ========= ========== ========= ==========
Interest rate mismatch risk 21.3 2.2 (1.7) (1.4)
============================= ========= ========== ========= ==========
Basis risk (0.1) (9.0) (10.4) (17.6)
============================= ========= ========== ========= ==========
Pipeline risk (2.5) (1.3) (3.0) (2.3)
============================= ========= ========== ========= ==========
Optionality risk (6.3) (1.6) (8.6) (0.3)
============================= ========= ========== ========= ==========
Total interest rate risk -
Earnings at Risk 12.4 (9.7) (23.7) (21.6)
============================= ========= ========== ========= ==========
Funding and liquidity management in 2017
During 2017, the Group maintained a strong funding and liquidity
position in excess of risk appetite and the short-term liquidity
stress metric, the Liquidity Coverage Ratio (LCR). The Group's LCR
as at 31 December 2017 was 203.1%, representing a material surplus
above the UK regulatory minimum requirement of 90%. The LCR
improved from 153.7% at 31 December 2016 due to strong deposit
raising activity throughout the year, net TFS drawings made during
the year, and an RMBS issuance in September 2017, increasing High
Quality Liquid Assets (HQLA). The Group monitors the NSFR based on
its own interpretations of current guidance available for CRD IV
NSFR reporting.
Wholesale funding is used to support balance sheet growth,
lengthen the contractual tenor of funding and diversify sources of
funding. The Group has made use of the TFS during the year, taking
overall drawings to GBP4.2 billion.
Cash flow profile
The tables below allocate the Group's non-derivative cash
outflows into relevant maturity groupings based on the remaining
period between the balance sheet date and the contractual maturity
date. The amounts disclosed are the contractual undiscounted cash
flows. These differ from balance sheet values due to the effects of
discounting on certain balance sheet items and due to the inclusion
of contractual future interest flows.
Within 3-6 6-12 1-5 Over
3 months months months years 5 years Total
2017 GBPm GBPm GBPm GBPm GBPm GBPm
===================== ========== ======== ======== ======== ========= =========
Deposits from banks 23.2 858.9 12.4 4,567.9 - 5,462.4
===================== ========== ======== ======== ======== ========= =========
Customer deposits 27,338.1 847.3 1,495.7 1,571.6 0.6 31,253.3
===================== ========== ======== ======== ======== ========= =========
Debt securities
in issue 169.4 169.7 335.4 2,102.3 - 2,776.8
===================== ========== ======== ======== ======== ========= =========
Total 27,530.7 1,875.9 1,843.5 8,241.8 0.6 39,492.5
===================== ========== ======== ======== ======== ========= =========
Within 3-6 6-12 1-5 Over
3 months months months years 5 years Total
2016 GBPm GBPm GBPm GBPm GBPm GBPm
===================== ========== ======== ======== ======== ========= =========
Deposits from banks 514.1 76.7 3.1 1,556.8 - 2,150.7
===================== ========== ======== ======== ======== ========= =========
Customer deposits 24,628.0 680.8 1,371.3 1,835.9 - 28,516.0
===================== ========== ======== ======== ======== ========= =========
Debt securities
in issue 158.7 161.2 297.3 2,056.5 - 2,673.7
===================== ========== ======== ======== ======== ========= =========
Total 25,300.8 918.7 1,671.7 5,449.2 - 33,340.4
===================== ========== ======== ======== ======== ========= =========
The following tables display future derivative cash flows in the
relevant maturity groupings in which they fall due. Cash flows for
the floating legs of derivative transactions are calculated using
the forward interest rate curve. These cash flows are not
discounted in the same way that derivative valuations are, and
totals will therefore not be identical to those reported on
derivatives in the notes to the financial statements.
Within 3-6 6-12 1-5 Over
3 months months months years 5 years Total
2017 GBPm GBPm GBPm GBPm GBPm GBPm
=========================== ========== ======== ======== ======== ========= ========
Settled on a net
basis
=========================== ========== ======== ======== ======== ========= ========
Derivatives in economic
and not accounting
hedges (1.5) (0.1) (1.5) (4.4) - (7.5)
=========================== ========== ======== ======== ======== ========= ========
Derivatives in accounting
hedge relationships (12.9) (8.1) (14.1) (32.3) (7.6) (75.0)
=========================== ========== ======== ======== ======== ========= ========
(14.4) (8.2) (15.6) (36.7) (7.6) (82.5)
=========================== ========== ======== ======== ======== ========= ========
Settled on a gross
basis
=========================== ========== ======== ======== ======== ========= ========
Outflows 30.0 28.9 54.7 224.9 - 338.5
=========================== ========== ======== ======== ======== ========= ========
Inflows (29.4) (28.4) (53.9) (230.0) - (341.7)
=========================== ========== ======== ======== ======== ========= ========
Total (13.8) (7.7) (14.8) (41.8) (7.6) (85.7)
=========================== ========== ======== ======== ======== ========= ========
Within 3-6 6-12 1-5 Over
3 months months months years 5 years Total
2016 GBPm GBPm GBPm GBPm GBPm GBPm
=========================== ========== ======== ======== ======== ========= ========
Settled on a net
basis
=========================== ========== ======== ======== ======== ========= ========
Derivatives in economic
and not accounting
hedges (1.8) (0.5) (4.5) (12.2) (0.3) (19.3)
=========================== ========== ======== ======== ======== ========= ========
Derivatives in accounting
hedge relationships (26.1) (21.2) (37.6) (110.0) (6.2) (201.1)
=========================== ========== ======== ======== ======== ========= ========
(27.9) (21.7) (42.1) (122.2) (6.5) (220.4)
=========================== ========== ======== ======== ======== ========= ========
Settled on a gross
basis
=========================== ========== ======== ======== ======== ========= ========
Outflows 1.4 2.6 2.5 23.3 - 29.8
=========================== ========== ======== ======== ======== ========= ========
Inflows (1.5) (3.0) (2.8) (26.6) - (33.9)
=========================== ========== ======== ======== ======== ========= ========
Total (28.0) (22.1) (42.4) (125.5) (6.5) (224.5)
=========================== ========== ======== ======== ======== ========= ========
Financial statements
Consolidated income statement
For the year ended 31 December
2017 2016
GBP GBP
Note million million
==================================== ===== ========= =========
Interest and similar income 958.0 948.1
==================================== ===== ========= =========
Interest and similar expense (363.4) (425.7)
==================================== ===== ========= =========
Net interest income 3 594.6 522.4
==================================== ===== --------- ---------
Fee and commission income 29.6 28.8
==================================== ===== ========= =========
Fee and commission expense - (1.2)
==================================== ===== ========= ---------
Net fee and commission income 4 29.6 27.6
==================================== ===== ========= =========
Other operating income 5 41.8 40.3
==================================== ===== ========= =========
Fair value losses on financial
instruments 13 (3.3) (8.9)
==================================== ===== --------- ---------
Other income 68.1 59.0
==================================== ===== ========= =========
Total income 662.7 581.4
==================================== ===== ========= =========
Operating expenses 6 (355.9) (349.4)
==================================== ===== ========= =========
Profit before tax from operating
activities 306.8 232.0
==================================== ===== ========= =========
Impairment 8 (44.2) (37.6)
==================================== ===== ========= =========
Profit before tax 262.6 194.4
==================================== ===== ========= =========
Taxation 9 (70.5) (54.3)
==================================== ===== ========= =========
Profit for the year 192.1 140.1
==================================== ===== ========= =========
Profit attributable to equity
owners 192.1 140.1
==================================== ===== ========= =========
Profit for the year 192.1 140.1
==================================== ===== ========= =========
Basic earnings per share (pence) 10 37.8 29.4
==================================== ===== ========= =========
Diluted earnings per share (pence) 10 37.5 29.1
==================================== ===== ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated statement of comprehensive income
For the year ended 31 December
2017 2016
GBP GBP
Note million million
========================================== ===== ========= =========
Profit for the year 192.1 140.1
========================================== ===== ========= =========
Other comprehensive income/(expense)
Items that may subsequently be
reclassified to profit or loss:
========================================== ===== ========= =========
Movements in revaluation reserve
in respect of available-for-sale
financial assets:
========================================== ===== ========= =========
Change in fair value 29 14.1 44.4
========================================== ===== ========= =========
Income statement transfers in respect
of disposals 29 (13.5) (38.3)
========================================== ===== ========= =========
Taxation 29 (0.1) (1.7)
========================================== ===== ========= =========
0.5 4.4
========================================== ===== ========= =========
Movements in cash flow hedge reserve:
========================================== ===== ========= =========
Effective portion of changes in
fair value taken to other comprehensive
income 29 (1.2) (36.1)
========================================== ===== ========= =========
Net income statement transfers 29 12.6 13.6
========================================== ===== ========= =========
Taxation 29 (2.6) 6.3
========================================== ===== ========= =========
8.8 (16.2)
========================================== ===== ========= =========
Other comprehensive income/(expense)
for the year, net of tax 9.3 (11.8)
========================================== ===== ========= =========
Total comprehensive income for
the year 201.4 128.3
========================================== ===== ========= =========
Total comprehensive income attributable
to equity owners 201.4 128.3
========================================== ===== ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated balance sheet
As at 31 December
2017 2016
GBP GBP
Note million million
======================================== ===== ========= =========
Assets
======================================== ===== ========= =========
Cash and balances at central banks 2,579.0 786.3
======================================== ===== ========= =========
Derivative financial instruments 13 78.8 104.2
======================================== ===== ========= =========
Loans and receivables:
======================================== ===== ========= =========
* Loans and advances to banks 14 359.4 635.6
======================================== ===== ========= =========
* Loans and advances to customers 15 36,740.2 32,367.1
======================================== ===== ========= =========
* Debt securities 0.3 0.7
======================================== ===== ========= =========
37,099.9 33,003.4
======================================== ===== ========= =========
Available-for-sale financial assets 16 1,051.8 858.8
======================================== ===== ========= =========
Intangible assets 19 128.4 80.6
======================================== ===== ========= =========
Tangible fixed assets 20 74.5 77.4
======================================== ===== ========= =========
Deferred tax assets 21 11.5 23.0
======================================== ===== ========= =========
Other assets 22 83.9 121.9
======================================== ===== ========= =========
Total assets 41,107.8 35,055.6
======================================== ===== ========= =========
Consolidated balance sheet
As at 31 December
2017 2016
GBP GBP
Equity and liabilities Note million million
================================== ===== ========= =========
Liabilities
================================== ===== ========= =========
Deposits from banks 23 5,379.0 2,132.5
================================== ===== ========= =========
Customer deposits 24 30,808.4 28,106.3
================================== ===== ========= =========
Derivative financial instruments 13 93.5 229.7
================================== ===== ========= =========
Debt securities in issue 25 2,736.9 2,600.0
================================== ===== ========= =========
Other liabilities 26 241.5 299.9
================================== ===== ========= =========
Current tax liabilities 23.6 16.7
================================== ===== ========= =========
Total liabilities 39,282.9 33,385.1
================================== ===== ========= =========
Equity
================================== ===== ========= =========
Share capital and share premium 27 654.6 654.6
================================== ===== ========= =========
Other equity instruments 28 384.1 384.1
================================== ===== ========= =========
Other reserves 29 (18.1) (27.4)
================================== ===== ========= =========
Retained earnings 30 804.3 659.2
================================== ===== ========= =========
Total equity 1,824.9 1,670.5
================================== ===== ========= =========
Total liabilities and equity 41,107.8 35,055.6
================================== ===== ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
The financial statements on pages 200 to 250 were approved and
authorised for issue by the Board and were signed on its behalf on
26 February 2018.
Glen Moreno, Chair
Jayne-Anne Gadhia CBE, Chief Executive
Consolidated statement of changes in equity
For the year ended 31 December 2017
Attributable to equity holders
Share
capital
and Other
share equity Other Retained Total
premium instruments reserves earnings equity
GBP GBP GBP GBP GBP
million million million million million
============================= ========= ============= ========== ========== =========
Balance at 1 January
2017 654.6 384.1 (27.4) 659.2 1,670.5
============================= ========= ============= ========== ========== =========
Comprehensive income
============================= ========= ============= ========== ========== =========
Profit for the year - - - 192.1 192.1
============================= ========= ============= ========== ========== =========
Other comprehensive income
======================================== ============= ========== ========== =========
Net movement in revaluation
reserve in respect
of available-for-sale
financial assets - - 0.5 - 0.5
============================= ========= ============= ========== ========== =========
Net movement in cash
flow hedge reserve - - 8.8 - 8.8
============================= ========= ============= ========== ========== =========
Total other comprehensive
income - - 9.3 - 9.3
============================= ========= ============= ========== ========== =========
Total comprehensive
income for the year - - 9.3 192.1 201.4
============================= ========= ============= ========== ========== =========
Transactions with
equity holders
============================= ========= ============= ========== ========== =========
Dividends paid to
ordinary shareholders - - - (23.9) (23.9)
============================= ========= ============= ========== ========== =========
Distribution to Additional
Tier 1 security holders - - - (32.7) (32.7)
============================= ========= ============= ========== ========== =========
Tax attributable to
Additional Tier 1
securities - - - 8.4 8.4
============================= ========= ============= ========== ========== =========
Purchase of own shares - - - (8.5) (8.5)
============================= ========= ============= ========== ========== =========
Share based payments
- charge for the year
(net of tax) - - - 9.9 9.9
============================= ========= ============= ========== ========== =========
Other distributions - - - (0.2) (0.2)
============================= ========= ============= ========== ========== =========
Total transactions
with equity holders - - - (47.0) (47.0)
============================= ========= ============= ========== ========== =========
Balance at 31 December
2017 654.6 384.1 (18.1) 804.3 1,824.9
============================= ========= ============= ========== ========== =========
The accompanying notes are an integral part of these
consolidated financial statements.
Further details of movements in the Group's share capital and
reserves are provided in notes 27 to 30.
Consolidated statement of changes in equity
For the year ended 31 December 2016
Attributable to equity holders
Share
capital
and Other
share equity Other Retained Total
premium instruments reserves earnings equity
GBP GBP GBP GBP GBP
million million million million million
=============================== ========= ============= ========== ========== =========
Balance at 1 January
2016 654.6 156.5 (15.6) 544.8 1,340.3
=============================== ========= ============= ========== ========== =========
Comprehensive income
=============================== ========= ============= ========== ========== =========
Profit for the year - - - 140.1 140.1
=============================== ========= ============= ========== ========== =========
Other comprehensive
income/(expense)
=============================== --------- ------------- ---------- ---------- ---------
Net movement in revaluation
reserve in respect
of available-for-sale
financial assets - - 4.4 - 4.4
=============================== ========= ============= ========== ========== =========
Net movement in cash
flow hedge reserve - - (16.2) - (16.2)
=============================== --------- ------------- ---------- ---------- ---------
Total other comprehensive
expense - - (11.8) - (11.8)
=============================== ========= ============= ========== ========== =========
Total comprehensive
(expense)/income for
the year - - (11.8) 140.1 128.3
=============================== ========= ============= ========== ========== =========
Transactions with equity
holders
=============================== ========= ============= ========== ========== =========
Dividends paid to ordinary
shareholders - - - (20.8) (20.8)
=============================== ========= ============= ========== ========== =========
Distribution to Additional
Tier 1 security holders - - - (12.6) (12.6)
=============================== ========= ============= ========== ========== =========
Tax attributable to
Additional Tier 1 securities - - - 2.5 2.5
=============================== ========= ============= ========== ========== =========
Purchase of own shares - - - (7.3) (7.3)
=============================== ========= ============= ========== ========== =========
Issue of Additional
Tier 1 securities - 227.6 - - 227.6
=============================== ========= ============= ========== ========== =========
Share based payments
- charge for the year - - - 12.8 12.8
=============================== ========= ============= ========== ========== =========
Deferred tax on share
based payments - - - (0.3) (0.3)
=============================== ========= ============= ========== ========== =========
Total transactions
with equity holders - 227.6 - (25.7) 201.9
=============================== ========= ============= ========== ========== =========
Balance at 31 December
2016 654.6 384.1 (27.4) 659.2 1,670.5
=============================== ========= ============= ========== ========== =========
The accompanying notes are an integral part of these
consolidated financial statements.
Further details of movements in the Group's share capital and
reserves are provided in notes 27 to 30.
Consolidated cash flow statement
For the year ended 31 December
2017 2016
GBP GBP
Note million million
=========================================== ====== ========== ==========
Profit before taxation 262.6 194.4
=========================================== ====== ========== ==========
Adjustments for:
=========================================== ====== ========== ==========
Changes in operating assets 34(a) (4,357.8) (5,387.3)
=========================================== ====== ========== ==========
Changes in operating liabilities 34(b) 5,806.6 3,957.3
=========================================== ====== ========== ==========
Non-cash and other items 34(c) 48.2 60.3
=========================================== ====== ========== ==========
Tax paid (45.1) (22.1)
=========================================== ====== ========== ==========
Net cash provided by/(used in) operating
activities 1,714.5 (1,197.4)
=========================================== ====== ========== ==========
Cash flows from investing activities
=========================================== ====== ========== ==========
Purchase of securities (541.5) (670.0)
=========================================== ====== ========== ==========
Proceeds from sale and redemption
of securities 497.1 1,150.0
=========================================== ====== ========== ==========
Purchase and investment in intangible
assets (74.3) (31.6)
=========================================== ====== ========== ==========
Purchase of tangible fixed assets (5.8) (8.6)
=========================================== ====== ========== ==========
Disposal of tangible fixed assets - 0.7
=========================================== ====== ========== ==========
Net cash (used in)/provided by investing
activities (124.5) 440.5
=========================================== ====== ========== ==========
Cash flows from financing activities
=========================================== ====== ========== ==========
Dividends paid to ordinary shareholders 11 (23.9) (20.8)
=========================================== ====== ========== ==========
Distributions to Additional Tier
1 security holders (32.7) (12.6)
=========================================== ====== ========== ==========
Other distributions (0.2) -
=========================================== ====== ========== ==========
Net proceeds from issue of debt
securities 25 746.2 1,278.9
=========================================== ====== ========== ==========
Repayments of debt securities in
issue 25 (608.3) (798.1)
=========================================== ====== ========== ==========
Purchase of own shares (8.5) (7.3)
=========================================== ====== ========== ==========
Issue of Additional Tier 1 securities
(net of costs) - 227.6
=========================================== ====== ========== ==========
Net cash provided by financing activities 72.6 667.7
=========================================== ====== ========== ==========
Change in cash and cash equivalents 1,662.6 (89.2)
=========================================== ====== ========== ==========
Cash and cash equivalents at beginning
of year 1,372.2 1,461.4
=========================================== ====== ========== ==========
Cash and cash equivalents at end
of year 34(d) 3,034.8 1,372.2
=========================================== ====== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
Notes to the consolidated financial statements
Note 1: Basis of preparation and accounting policies
1.1 Reporting entity
Virgin Money Holdings (UK) plc (the Company) is a public limited
company incorporated and registered in England and Wales. The
registered office is Jubilee House, Gosforth, Newcastle-Upon-Tyne,
NE3 4PL.
The Company was incorporated on 4 August 1995 as a private
limited company with registered number 03087587. On 24 July 2014
the Company was re-registered as a public limited company.
The Company is the parent entity and the ultimate controlling
party of the Virgin Money Group (the Group), which consists of the
Company and its subsidiaries.
1.2 Basis of preparation
The Group consolidated financial statements, which should be
read in conjunction with the Directors' Report, have been prepared
on a going concern basis in accordance with International Financial
Reporting Standards (IFRS) as adopted by the EU, including
interpretations issued by the IFRS Interpretations Committee, and
with those parts of the Companies Act 2006 applicable to companies
reporting under IFRS.
IFRS comprises accounting standards prefixed IFRS issued by the
International Accounting Standards Board (IASB) and those prefixed
IAS issued by the IASB's predecessor body as well as
interpretations issued by the IFRS Interpretations Committee (IFRS
IC) and its predecessor body. The EU endorsed version of IAS 39
'Financial Instruments: Recognition and Measurement' relaxes some
of the hedge accounting requirements; the Group has not taken
advantage of this relaxation, and therefore there is no difference
in application to the Group between IFRS as adopted by the EU and
IFRS as issued by the IASB.
The Directors have reviewed the strategic plan which shows the
financial position, cash flow, liquidity and capital forecasts for
the Group. The Directors are confident that the Group will have
sufficient resources to meet its liabilities as they fall due and
to continue to operate for a period of at least 12 months from the
date of approval of the financial statements. Accordingly the
Directors believe that it remains appropriate to prepare the
financial statements on a going concern basis.
1.3 Changes in accounting policy
New standards, amendments to standards and interpretations
adopted
In 2017, the Group adopted amendments to existing standards that
were endorsed for adoption by the EU and mandatory for annual
reporting periods beginning on or after 1 January 2017.
The adoption of the amendments to IAS 12 'Income Taxes' had no
impact on these financial statements or the accounting polices
applied in their preparation. In adopting the amendments to IAS 7
'Statement of cash flows' reconciliation disclosures have been
provided in the notes to these financial statements on liabilities
included within 'financing activities' in the consolidated and
parent cash flow statements.
New accounting standards issued by the IASB that are relevant to
the Group and effective in future periods are presented in note
37.
1.4 Presentation of information
Presentation of risk and capital management disclosures
Disclosures under IFRS 7 'Financial Instruments: Disclosure'
concerning the nature and extent of risks relating to financial
instruments and under IAS 1 'Presentation of financial statements'
concerning objectives, policies and processes for managing capital
have been included within the audited sections of the Risk
Management Report. Where marked as 'audited' these are covered by
the Independent Auditors' Report.
1.5 Basis of consolidation
The Group consists of the Company and its subsidiaries. The
subsidiaries are listed in note 2 of the parent company financial
statements. The consolidated financial statements comprise the
financial statements of the Group.
Entities are regarded as subsidiaries where the Group has the
power over an investee, exposure or rights to variable returns from
its involvement with the investee and the ability to affect those
returns. Inter-company transactions and balances are eliminated
upon consolidation. Subsidiaries are consolidated from the date on
which control is transferred to the Group and are de-consolidated
from the date that power over an investee, exposure or rights to
variable returns and the ability to affect these returns ceases.
Accounting policies are applied consistently across the Group.
Special Purpose Vehicles (SPV) are entities created to
accomplish a narrow and well defined objective. For the Group this
is the securitisation of mortgage assets. An SPV is consolidated if
the Group has control over the SPV, through its exposure to
variable returns from its involvement in the SPV and the ability to
affect those returns through its power over the entity. The Virgin
Money Foundation is classified as an associate.
1.6 Basis of measurement
The financial statements have been prepared under the historical
cost convention as modified by the revaluation of derivative
financial instruments and available-for-sale financial assets held
at fair value. A summary of the material accounting policies of the
Group are included within note 1.9. Policies which are relevant to
the financial statements as a whole are set out below.
The accounting policies have been applied consistently to all
periods presented in these financial statements.
1.7 Client money
The Group's unit trust management and investment intermediary
subsidiary administers money on behalf of some clients in
accordance with the Client Money Rules of the Financial Conduct
Authority. Client money is not recognised in the balance sheet or
in the notes to the financial statements as the Group is not the
beneficial owner.
1.8 Foreign currency translation
The Group's financial statements are presented in Sterling,
which is the functional currency of the Company, all of its
subsidiaries and the SPVs included within the consolidated
financial statements.
Foreign currency transactions are translated into functional
currency using the exchange rates prevailing at the dates of the
transactions. Monetary items denominated in foreign currencies are
translated at the rate prevailing at the balance sheet date.
Foreign exchange gains and losses resulting from the restatement
and settlement of such transactions are recognised in the income
statement, except when recognised in other comprehensive income if
relating to a qualifying cash flow hedge or available-for-sale
assets. Non-monetary items (which are assets or liabilities which
do not attach to a right to receive or an obligation to pay
currency) measured at historical cost and denominated in foreign
currencies are translated at the exchange rate at the date of the
transaction. Non-monetary items measured at fair value are
translated at the exchange rate at the date of valuation. Where
these are held at fair value through the income statement, exchange
differences are reported as part of the fair value gain or
loss.
1.9 Accounting policies
The accounting policies of the Group are set out below.
(a) Operating segments
The Group's chief operating decision maker (which has been
determined by the Group to be the Executive Committee) assesses
performance and makes decisions regarding the allocation of the
Group's resources, in accordance with IFRS 8 'Operating Segments'.
All of the Group's product lines are managed under a single
centralised commercial function, with the Group's performance
assessed, and resource allocation decisions made, on a centralised
basis. Therefore the Group has determined that it has only one
reportable segment.
The underlying basis is the basis on which financial information
is presented to the chief operating decision maker which excludes
certain items included in profit or loss determined under IFRSs as
adopted by the EU.
(b) Interest income and expense
Interest income and expense are recognised in the income
statement for all instruments measured at amortised cost using the
effective interest rate method.
This method calculates the amortised cost of a financial asset
or liability, and allocates the interest income or expense over the
relevant period. The effective interest rate is the rate that
exactly discounts estimated future cash receipts or payments
through the expected life of the financial instrument or, where
appropriate, a shorter period to the net carrying amount of the
financial asset or liability. The Group estimates cash flows
considering all contractual terms of the financial instrument (for
example prepayment options) but does not consider future credit
losses. The calculation includes all amounts received or paid by
the Group that are an integral part of the overall return, direct
incremental transaction costs related to the acquisition or issue
of a financial instrument, loan commitment fees and all other
premiums and discounts.
Once a financial asset or group of similar financial assets has
been written down as a result of an impairment loss, interest
income is recognised on the written down carrying value using the
asset's original effective interest rate, being the rate of
interest used to discount the future cash flows for the purpose of
measuring the impairment loss.
Interest receivable or payable on derivatives, whether in
economic or accounting hedges, is recorded on an accruals basis in
interest receivable or payable. Interest on available-for-sale
(AFS) debt securities is recorded in interest receivable using the
effective interest rate method.
(c) Fees and commissions
Where they are not included in the effective interest rate
calculation, fees and commissions are recognised on an accruals
basis when the service has been received or provided.
Income from general insurance and life insurance policies is
recognised in full on the effective date of commencement or renewal
of the related policies to reflect underlying contracts with
product providers.
(d) Other operating income
Other operating income comprises the fair value for services,
net of value added tax, rebates and discounts. Other operating
income is attributable to the sale and management of stocks and
shares ISAs, pensions, authorised unit trusts and other financial
services products.
Other operating income from sales of units in managed funds is
recognised daily based on the average volume of funds under
management.
Other income includes commission on donations and other sundry
income.
(e) Operating expenses
Operating expenses are recognised on an accruals basis as
services are provided. Included within the employee benefits
expense are employee share based payments. The accounting policy in
relation to share based payments is set out in policy (f).
Staff costs
The Group accounts for components of employee costs on the
following bases:
-- Short-term employee benefits
Short-term employee benefits include salaries and social
security costs and are recognised over the period in which the
employees provide the services to which the payments relate.
Cash bonus awards are recognised to the extent that the Group
has a present obligation to its employees that can be measured
reliably and are recognised over the period that employees are
required to provide services.
-- Other long-term employee benefits
Other long-term employee benefits include deferred cash bonus
awards. Deferred cash bonus awards are recognised at the present
value of the obligation at the reporting date. These costs are
recognised over the period that employees are required to provide
services.
-- Retirement benefit obligations
A defined contribution plan is a post-employment benefit plan
into which the Group pays fixed contributions and has no legal or
constructive obligation to pay further amounts. Contributions are
recognised as staff expenses in profit or loss in the periods
during which related employee services are fulfilled.
The Group operates defined contribution pension schemes for its
Directors and employees. The assets of the schemes are held
separately from those of the Group in independently administered
funds.
Leases
If the lease agreement in which the Group is a lessee transfers
the risks and rewards of the asset, the lease is recorded as a
finance lease and the related asset is capitalised. At inception,
the asset is recorded at the lower of the present value of the
minimum lease payments or fair value and is depreciated over the
estimated useful life. The lease obligations are recorded as
borrowings.
If the lease does not transfer the risks and rewards of the
asset, the lease is recorded as an operating lease.
Operating lease payments are charged to profit or loss on a
straight line basis over the lease term unless a different
systematic basis is more appropriate. Where an operating lease is
terminated before the lease period has expired, any payment
required to be made to the lessor in compensation is charged to
profit or loss in the period in which termination is made.
(f) Share based payments
The Group operates a number of equity settled share based
payment schemes in respect of services received from certain of its
employees.
The value of the employee services received in exchange for
awards granted under these schemes is recognised as an employee
expense with a corresponding increase in equity over the period
that the employees become unconditionally entitled to the awards
(the vesting period).
All awards granted under current schemes are conditional shares
which have service conditions. The Long Term Incentive Plan awards
also have non-market performance conditions. No awards have market
performance conditions and no share options have been granted in
the current or prior year.
The employee expense is determined by reference to the fair
value of the number of shares that are expected to vest. The fair
value of the shares granted is based on market prices at the date
of award. The determination of fair values excludes the impact of
service conditions and any non-market performance conditions, which
are included in the assumptions used to estimate the number of
shares that are expected to vest. At each balance sheet date, this
estimate is reassessed and if necessary revised. Any revision of
the original estimate is recognised in the income statement,
together with a corresponding adjustment to equity.
(g) Impairment losses
The Group assesses its financial assets or groups of financial
assets for objective evidence of impairment at each balance sheet
date. An impairment loss is recognised if a loss event (or events)
has occurred after initial recognition, and on or before the
balance sheet date, that has an impact on the estimated future cash
flows of the financial assets or groups of financial assets that
can be reliably measured. Losses incurred as a result of events
occurring after the balance sheet date are not recognised in these
financial statements.
Loans and receivables at amortised cost
The Group assesses whether objective evidence of impairment
exists individually for financial assets that are individually
significant. Financial assets that are not individually significant
are assessed on a collective basis, except for such assets where
there are specific circumstances indicating evidence of impairment
(for example loans that have entered possession or where fraud has
been committed).
Objective evidence that a financial asset is impaired includes
observable data that comes to the attention of the Group about the
following loss events:
-- there is evidence of the customer or issuer experiencing
financial difficulty;
-- there is a breach of contract, such as a default or
delinquency in repayments;
-- the customer is granted a concession that would otherwise not
be considered;
-- the borrower will enter bankruptcy or other financial
reorganisation;
-- the disappearance of an active market for that financial
asset because of financial difficulties; and
-- observable data indicating that there is a measurable
decrease in the estimated future cash flows from a portfolio of
assets since the initial recognition of those assets, although the
decrease cannot yet be identified with the individual financial
assets in the portfolio, including:
- there are adverse changes in the payment status of borrowers in the portfolio; and
- economic conditions that correlate with defaults on the assets in the portfolio.
If the Group determines that no objective evidence of impairment
exists for an individually assessed financial asset, whether
significant or not, it includes the asset in a group of financial
assets with similar credit risk characteristics and collectively
assesses them for impairment. In assessing collective impairment
for retail assets the Group uses statistical modelling of historic
trends to assess the probability of a group of financial assets
going into default and the subsequent loss incurred. Regular model
monitoring is performed to ensure model assumptions remain
appropriate.
Assets that are individually assessed and for which an
impairment loss is or continues to be recognised are not included
in a collective assessment of impairment.
If there is objective evidence that an impairment loss on loans
and receivables has been incurred, the amount of the loss is
measured as the difference between the asset carrying amount and
the present value of the estimated future cash flows (excluding
future credit losses that have not been incurred) discounted at the
financial asset's original effective interest rate. The carrying
amount of the asset is reduced through the use of an impairment
allowance and the amount of the loss is recognised in profit or
loss.
When a loan or receivable is uncollectible, it is written off
against the related allowance for loan impairment. 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 are recognised
directly in the income statement. If, in a subsequent period, the
amount of the impairment loss decreases and the decrease can be
related objectively to an event occurring after the impairment was
recognised (such as an improvement in the customer's credit
rating), the previously recognised impairment loss is reversed by
adjusting the impairment allowance. The amount of the reversal is
recognised in profit or loss.
An allowance is also made in the case of accounts which may not
currently be in arrears, where losses may have been incurred but
not yet recognised. An increased allowance is held for accounts
where an impairment trigger event has occurred which includes
accounts benefitting from forbearance and those in arrears. Refer
to the Risk Management Report for details of the forbearance
policy.
Available-for-sale financial assets
The Group assesses at each balance sheet date whether there is
objective evidence that a financial asset is impaired. The loss is
measured as the difference between the asset's acquisition cost
less principal repayments and amortisation and the current fair
value. The impairment loss is recognised in profit or loss. This
includes cumulative gains and losses previously recognised in other
comprehensive income which are recycled from other comprehensive
income to the income statement.
If, in a subsequent period, the fair value of a debt instrument
classified as available-for-sale increases and the increase can be
objectively related to an event occurring after the impairment loss
was recognised in profit or loss, the impairment loss is reversed
through profit or loss. Impairment losses recognised in profit or
loss on equity instruments are not reversed through profit and
loss.
(h) Taxation
Taxation comprises current tax and deferred tax. Current tax and
deferred tax are recognised in profit or loss except to the extent
that they relate to items recognised directly in equity or other
comprehensive income. Current tax is based on the taxable income or
loss for the year, using tax rates enacted or substantively enacted
at the reporting date, and any adjustment to tax payable in respect
of previous years. The Group has adopted the Code of Practice on
Taxation for Banks issued by HM Revenue and Customs.
Deferred tax is recognised in respect of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation
purposes. Deferred tax is measured at the tax rates that are
expected to be applied to temporary differences when they reverse,
based on the laws that have been enacted or substantively enacted
by the reporting date.
Deferred tax assets are recognised for unused tax losses, tax
credits and deductible temporary differences, to the extent that it
is probable that future taxable profits will be available against
which they can be utilised. Deferred tax assets are reviewed at
each reporting date and are reduced to the extent that it is no
longer probable that the related tax benefit will be realised.
(i) Earnings per share
Basic earnings per share is calculated by dividing the profit
attributable to ordinary shareholders of the parent company by the
weighted-average number of ordinary shares outstanding during the
period excluding own shares held in employee benefit trusts or held
for trading.
The diluted earnings per share is calculated by adjusting profit
or loss that is attributable to ordinary shareholders and the
weighted-average number of ordinary shares outstanding for the
effects of all dilutive potential ordinary shares, which comprise
share options and awards granted to employees.
For the calculation of diluted earnings per share the
weighted-average number of ordinary shares in issue is adjusted to
assume conversion of all dilutive potential ordinary shares, if
any, that arise in respect of share options and rewards granted to
employees. The number of shares that could have been acquired at
the average annual share price of the Company's shares based on the
monetary value of the subscription rights attached to outstanding
share options and awards is determined. This is deducted from the
number of shares issuable under such options and awards to leave a
residual bonus amount of shares which are added to the
weighted-average number of ordinary shares in issue, but no
adjustment is made to the profit attributable to equity
shareholders.
(j) Financial instruments
Financial assets
Management determines the classification of its financial
instruments at initial recognition.
In line with IAS 39 'Financial Instruments: Recognition and
Measurement', financial assets can be classified in the following
categories:
-- loans and receivables;
-- available-for-sale;
-- held to maturity; or
-- financial assets at fair value through profit or loss.
Purchases and sales of financial assets at fair value through
profit or loss, held to maturity and available-for-sale are
recognised on the trade date, the date on which the Group commits
to purchase or sell the asset.
Loans and receivables at amortised cost
The Group's loans and advances to banks and customers, and asset
backed securities for which there is no active market, are
classified as loans and receivables. Loans and receivables are
non-derivative financial assets with fixed or determinable payments
that are not quoted in an active market, whose recoverability is
based solely on the credit risk of the customer and where the Group
has no intention of trading the loan or receivable. Loans and
receivables are initially recognised at fair value including direct
and incremental transaction costs. Subsequent recognition is at
amortised cost using the effective interest rate method, less any
provision for impairment.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivative assets
that are either designated as available-for-sale or are assets that
do not meet the definition of loans and receivables and are not
derivatives or assets held at fair value through profit or loss.
These are principally, but not exclusively, investment securities
intended to be held for an indefinite period of time which may be
sold in response to a need for liquidity or changes in interest
rates, exchange rates or equity prices. They are initially measured
at fair value including direct and incremental transaction costs.
Fair values are obtained from quoted market prices in active
markets and, where these are not available, from valuation
techniques including discounted cash flow models (refer policy
(m)). With the exception of certain unquoted equity instruments
measured at cost less impairment because their fair value cannot be
measured reliably, subsequent measurement is at fair value, with
changes in fair value being recognised in other comprehensive
income except for impairment losses and translation differences,
which are recognised in profit or loss. Upon derecognition of the
asset, or where there is objective evidence that the investment
security is impaired, the cumulative gains and losses recognised in
other comprehensive income are removed from other comprehensive
income and recycled to profit or loss.
Held to maturity financial assets
Held to maturity financial assets are non-derivative financial
assets with fixed or determinable payments that the Group has the
ability and intention to hold to maturity. No financial assets were
classified as held to maturity during either the current or prior
year.
Financial assets at fair value through profit or loss
This category consists of derivative financial assets. Assets in
this category are carried at fair value. The fair values of
derivative instruments are calculated by discounted cash flow
models using yield curves that are based on observable market data
or are based on valuations obtained from counterparties. Gains and
losses arising from the changes in the fair values are recognised
in the income statement or other comprehensive income (refer policy
(n)).
Financial liabilities
The Group measures all of its financial liabilities at amortised
cost, other than derivatives and those instruments which have been
designated as part of a hedging relationship (refer policy (n)).
Borrowings, including deposits and debt securities in issue are
recognised initially at fair value, being the issue proceeds net of
premiums, discounts and transaction costs incurred. All borrowings
are subsequently measured at amortised cost using the effective
interest rate method. Amortised cost is adjusted for the
amortisation of any premiums, discounts and transaction costs. The
amortisation is recognised in interest expense and similar charges
using the effective interest rate method. The Group does not hold
any financial liabilities classified as held for trading.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount
reported in the balance sheet when there is a legally enforceable
right to offset the recognised amounts and there is an intention to
settle on a net basis, or realise the asset and settle the
liability simultaneously.
Sale and repurchase agreements
Securities sold subject to repurchase agreements (repos) are
reclassified in the financial statements as assets pledged when the
transferee has the right by contract or custom to sell or repledge
the collateral. The counterparty liability is included in deposits
from banks or customer deposits, as appropriate. Securities
purchased under agreements to resell (reverse repos) are recorded
as loans and advances to banks or customers as appropriate. The
difference between sale and repurchase price is treated as interest
and accrued over the life of the agreements using the effective
interest rate method. Securities lent to counterparties are also
retained in the financial statements.
Derecognition of financial assets and liabilities
Derecognition is the point at which the Group ceases to
recognise an asset or liability on its balance sheet. The Group's
policy is to derecognise financial assets only when the contractual
right to the cash flows from the financial asset expires or when
the Group transfers the financial assets to another party provided
the transfer of the asset also transfers the right to receive the
cash flows of the financial asset or where the Group has
transferred substantially all the risks and rewards of ownership.
Where the transfer does not result in the Group transferring the
right to receive the cash flows of the financial assets, but it
does result in the Group assuming a corresponding obligation to pay
the cash flows to another recipient, the financial assets are also
accordingly derecognised. The Group derecognises financial
liabilities only when the obligation specified in the contract is
discharged, converted to shares, cancelled or has expired or is
transferred to a third party. There were no transactions in the
year where the Group transferred financial assets that should have
been derecognised in their entirety.
(k) Loans and advances to banks
The Group's loans and advances to banks are classified as loans
and receivables.
(l) Loans and advances to customers
The Group's loans and advances to customers are classified as
loans and receivables.
(m) Available-for-sale financial assets
The Group's debt securities and equity instruments are
classified as available-for-sale assets. Equity instruments are
classified as available-for-sale because they do not meet the
definition of loans and receivables, have no defined maturity dates
and are not derivatives or assets held at fair value through profit
or loss.
(n) Derivative financial instruments and hedge accounting
The Group is authorised to undertake the following types of
derivative financial instrument transactions for non-trading
purposes: cross currency swaps, interest rate swaps, equity swaps,
interest rate caps, forward rate agreements, options, foreign
exchange contracts and similar instruments.
The Group's derivative activities are entered into for the
purpose of matching or eliminating risk from potential movements in
interest rates, foreign exchange rates and equity exposures
inherent in the Group's assets, liabilities and positions. All
derivative transactions are for economic hedging purposes and it is
decided at the outset which position the derivative will be
hedging. Derivatives are reviewed regularly for their effectiveness
as hedges and corrective action taken, if appropriate. Derivatives
are measured initially and subsequently at fair value. Fair values
are calculated by discounted cash flow models using yield curves
that are based on observable market data or are based on valuations
obtained from counterparties. Where derivatives are not designated
as part of an accounting hedge relationship, changes in fair value
are recorded in the income statement. Where derivatives are
designated within accounting hedge relationships, the treatment of
the changes in fair value depends on the nature of the hedging
relationship as explained below.
Hedge accounting is used for derivatives designated in this way
provided certain criteria are met. The Group documents at the
inception of the accounting hedge relationship the link between the
hedging instrument and the hedged item as well as its risk
management objective and strategy for undertaking various hedge
transactions. The Group also documents its assessment both at
inception and on an ongoing basis of whether the derivatives used
in hedging transactions are highly effective in offsetting changes
in the fair values or cash flows of hedged items. The Group
designates certain derivatives as either:
Cash flow hedges
A cash flow hedge is used to hedge exposures to variability in
cash flows, such as variable rate financial assets and liabilities.
The effective portion of changes in the derivative fair value is
recognised in other comprehensive income, and recycled to the
income statement in the periods when the hedged item will affect
profit and loss. Interest rate derivatives designated as cash flow
hedges primarily hedge the exposure to cash flow vulnerability from
forecast loans and advances to customers. The fair value gain or
loss relating to the ineffective portion is recognised immediately
in profit or loss.
Fair value hedges
A fair value hedge is used to hedge exposures to variability in
the fair value of financial assets and liabilities, such as fixed
rate loans. Changes in 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. If the hedge no longer meets the criteria for hedge
accounting, the adjustment to the carrying amount of the hedged
item is amortised to the income statement over the period to
maturity.
The most frequently used fair value hedges are:
-- hedging the interest rate risk of a portfolio of prepayable
fixed rate assets with interest rate derivatives. This solution is
used to establish a macro fair value hedge for derivatives hedging
fixed rate mortgages;
-- hedging the interest rate risk of a portfolio of
non-prepayable fixed rate liabilities with interest rate
derivatives. This solution is used to establish a macro fair value
hedge for derivatives hedging fixed rate savings;
-- hedging the interest rate risk of non-prepayable fixed rate
assets with interest rate derivatives. This solution is used to
establish a micro fair value hedge for fixed rate investments;
and
-- hedging the interest rate and foreign currency exchange risk
of non-prepayable, foreign currency denominated fixed rate assets
or liabilities on a one-for-one basis with fixed/floating or
floating/fixed cross currency interest rate swaps. This solution is
used to establish micro fair value hedges for foreign currency
denominated fixed rate investments.
(o) Securitisation transactions
Certain Group companies have issued debt securities in order to
finance specific loans and advances to customers. Both the debt
securities in issue and the loans and advances to customers remain
on the Group balance sheet within the appropriate balance sheet
headings unless:
-- a fully proportional share of all or of specifically
identified cash flows have been transferred to the holders of the
debt securities, in which case that proportion of the assets are
derecognised;
-- substantially all the risks and rewards associated with the
assets have been transferred, in which case the assets are fully
derecognised; and
-- a significant proportion of the risks and rewards have been
transferred, in which case the assets are recognised only to the
extent of the Group's continuing involvement.
The Group has also entered into self-issuance of securitised
debt which may be used as collateral for repurchase or similar
transactions. Investments in self-issued debt and the equivalent
deemed loan, together with the related income, expense and cash
flows, are not recognised in the financial statements.
Debt securities in issue
Issued securities are classified as financial liabilities where
the contractual arrangements result in the Group having an
obligation to deliver either cash or another financial asset to the
security holder, or to exchange financial instruments under
conditions that are potentially unfavourable to the Group. Issued
securities are classified as equity where they meet the definition
of equity and confer a residual interest in the Group's assets on
the holder of the securities.
Financial liabilities are carried at amortised cost using the
effective interest rate method. Equity instruments are initially
recognised at net proceeds, after deducting transaction costs and
any related income tax. Appropriations to holders of equity
securities are deducted from equity, net of any related income tax,
as they become irrevocably due to the holders of the
securities.
Securitisation is a means used by the Group to fund an element
of its mortgage portfolio. These securitised advances are subject
to non-recourse finance arrangements. These advances have been
transferred at their principal value to Special Purpose Vehicles
(SPV) and have been funded through the issue of amortising mortgage
backed securities to investors.
In accordance with note 1.5, the Group has assessed that it
controls the SPVs and therefore consolidates the assets and
liabilities of the SPVs, on a line by line basis.
(p) Funding for Lending Scheme
The Group participates in the Bank of England's Funding for
Lending Scheme (FLS). The scheme allows the Group to receive
Treasury bills in return for eligible collateral, including
approved portfolios of loans and advances to customers.
Receipt of Treasury bills under the FLS does not involve the
substantial transfer of the risks and rewards on the collateral, or
the right to receive its related cash flows, hence the
derecognition criteria outlined in policy (j) are not satisfied.
Therefore the collateral assets will continue to be recognised in
the financial statements and the Treasury bills are not separately
recognised.
In the event that Treasury bills are utilised for repo
transactions, the related collateral assets are categorised as
pledged assets and the associated liability to the counterparty is
recognised in the financial statements.
(q) Intangible assets and amortisation
Intangible assets purchased separately from a business
combination are capitalised at their cost and amortised from the
date from which they become available for use over their useful
economic life which is generally 3 to 10 years. Intangible assets
acquired as part of an acquisition are capitalised at their fair
value where this can be measured reliably in accordance with IFRS
13 'Fair Value Measurement'.
Expenditure incurred in relation to scoping, planning and
researching the build of an asset as part of a project is expensed
as incurred.
Development expenditure incurred on a project is capitalised
only if the following criteria are met:
-- an asset is created that can be identified;
-- it is probable that the asset created will generate future
economic benefits; and
-- the development cost of the asset can be measured
reliably.
Following the initial recognition of development expenditure,
the cost is amortised over the estimated useful lives of the assets
created. Amortisation commences on the date that the asset is
brought into use.
Internally generated intangible assets relate to computer
software and core banking platforms.
Computer software
Costs incurred in acquiring and developing computer software for
internal use are capitalised as intangible assets where the
software leads to the creation of an identifiable non-monetary
asset and it is probable that the expected future economic benefits
that are attributable to the asset will flow to the Group from its
use for a period of over one year. The software is classified as an
intangible asset where it is not an integral part of the related
hardware and amortised over its estimated useful life on a straight
line basis which is generally 3 to 10 years.
Costs associated with maintaining software are expensed as they
are incurred.
Banking platforms
Banking platforms primarily represent the construction of
operating platforms, which are internally generated. Banking
platforms are amortised on a straight line basis over 3 to 10
years.
Impairment of intangible assets
Intangible assets are assessed for indications of impairment at
each balance sheet date, or more frequently where required by
events or changes in circumstances. If indications of impairment
are found, these assets are subject to an impairment review. The
impairment review compares the carrying value of the assets with
their recoverable amounts, which are defined as the higher of the
fair value less costs to sell and their value in use. Fair value
less costs to sell is the amount at which the asset could be sold
in a binding agreement in an arm's length transaction. Value in use
is calculated as the discounted cash flows generated as a result of
the asset's continued use including those generated by its ultimate
disposal, discounted at a market rate of interest on a pre-tax
basis.
Where impairments are indicated, the carrying values of
intangible assets are written down by the amount of the impairment
and the charge is recognised in the income statement in the period
in which it occurs. A previously recognised impairment charge on an
asset may be reversed in full or in part through the income
statement where a change in circumstances leads to a change in the
estimates used to determine its recoverable amount. The carrying
value will only be increased to the value at which it would have
been held had the impairment not been recognised.
(r) Tangible fixed assets and depreciation
Tangible fixed assets are stated at cost less accumulated
depreciation and provision for impairment, as appropriate. Cost
includes the original purchase price of the asset and the costs
attributable to bringing the asset to its working condition for its
intended use. Additions and subsequent expenditure are included in
the asset's carrying value or are recognised as a separate asset
only when they improve the expected future economic benefits to be
derived from the asset. All other repairs and maintenance are
charged to the income statement in the period in which they are
incurred.
Depreciation is provided using the straight line method to
allocate costs less residual values over estimated useful lives, as
follows:
Freehold property 50-100 years Computer equipment 3-5 years
Leasehold property Unexpired Office equipment 3-10 years
period of
the lease
Plant and leasehold 5-30 years Motor vehicles 4 years
improvements
The residual values and useful lives of assets are reviewed, and
adjusted if appropriate, at each balance sheet date. Where the cost
of freehold land can be identified separately from buildings, the
land is not depreciated.
Impairment of tangible fixed assets
Tangible fixed assets are assessed for indications of impairment
at each balance sheet date, or more frequently where required by
events or changes in circumstances. If indications of impairment
are found, these assets are subject to an impairment review. The
impairment review compares the carrying value of the assets with
their recoverable amount, which are defined as the higher of the
fair value less costs to sell and their value in use. Fair value
less costs to sell is the amount at which the asset could be sold
in a binding agreement in an arm's length transaction. Value in use
is calculated as the discounted cash flows generated as a result of
the asset's continued use including those generated by its ultimate
disposal, discounted at a market rate of interest on a pre-tax
basis.
Where impairments are indicated, the carrying values of fixed
assets are written down by the amount of the impairment and the
charge is recognised in the income statement in the period in which
it occurs. A previously recognised impairment charge on an asset
may be reversed in full or in part through the income statement
where a change in circumstances leads to a change in the estimates
used to determine its recoverable amount. The carrying value will
only be increased to the value at which it would have been held had
the impairment not been recognised.
(s) Other assets
Other assets include prepayments and other amounts the Group is
due to receive from third parties in the normal course of
business.
(t) Deposits from banks
Deposits from banks are initially measured at fair value, which
is normally the proceeds received net of any directly attributable
transaction costs incurred. Subsequent measurement is at amortised
cost, using the effective interest rate method.
(u) Customer deposits
Customer deposits are initially measured at fair value, which is
normally the proceeds received. Subsequent measurement is at
amortised cost, using the effective interest rate method.
(v) Provisions
Provisions are recognised for present obligations arising from
past events where it is more likely than not that an outflow of
resources will be required to settle the obligations and they can
be estimated reliably. Provisions for levies are recognised when
the conditions that trigger the payment of the levy are met.
(w) Other liabilities
Deferred income represents amounts received in advance of the
Group providing services, and will be recognised as income in
profit or loss when the services have been provided.
Trade creditors and accruals represent amounts the Group is due
to pay to third parties in the normal course of business. These
include expense accruals, which have been incurred, but not yet
billed. Accrued expenses are amounts that the Group is due to pay
to third parties in the normal course of business.
(x) Share capital and share premium
Share capital
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:
-- they include 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; and
-- 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.
Share issue costs
Incremental costs directly attributable to the issue of new
shares or options are shown in equity as a deduction, net of tax,
from the proceeds.
Dividends
Dividends are recognised in equity in the period in which they
are approved by the Company's shareholders or paid.
Share premium
Share premium substantially represents the aggregate of all
amounts that have ever been paid above par value to the Company
when it has issued Ordinary and Deferred Shares. Certain expenses
in relation to the issue of share capital can be offset against the
share premium account. These expenses must be the incremental
expenses arising on issue of the shares.
(y) Other equity instruments
Issued financial instruments are recognised as equity where
there is no contractual obligation to deliver either cash or
another financial asset. The proceeds are included in equity, net
of transaction costs. Distributions and other returns to equity
holders are treated as a deduction from equity.
(z) Other reserves
Revaluation reserve in respect of available-for-sale financial
assets
The revaluation reserve in respect of available-for-sale
financial assets represents the unrealised change in the fair value
of available-for-sale investments since initial recognition.
Cash flow hedge reserve
For derivatives designated in a cash flow hedge, the effective
portion of changes in fair value is recognised in the cash flow
hedge reserve and recycled to profit or loss in the periods when
the hedged item will affect profit or loss.
(aa) Contingent liabilities
Contingent liabilities are possible obligations whose existence
depends upon the outcome of uncertain future events or are present
obligations where the outflows of resources are uncertain or cannot
be reliably measured. Contingent liabilities are not recognised in
the financial statements but are disclosed unless they are
remote.
(ab) Fair value of financial assets and liabilities
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 in
the principal, or in its absence, the most advantageous market to
which the Group has access at that date. The fair value of a
liability reflects its non-performance risk (the risk the Group
will not fulfil an obligation), including the Group's own credit
risk.
For the majority of instruments, fair value is determined with
reference to quoted prices in an active market. A market is
regarded as active if transactions for the asset or liability take
place with sufficient frequency and volume to provide pricing
information on an ongoing basis.
Where quoted prices are not available, fair value is based upon
cash flow models, which use wherever possible independently sourced
observable market parameters such as interest rate yield curves,
currency rates and option volatilities. The chosen valuation
technique incorporates all the factors that market participants
would take into account in pricing a transaction and is discounted
at a risk free rate.
Refer to note 32 for a description of different levels within
the fair value hierarchy. Levels are reviewed at each balance sheet
date and this determines whether transfers between levels are
required.
The best evidence of the fair value of a financial instrument at
initial recognition is normally the transaction price - i.e. the
fair value of consideration given or received. The Group does not
apply a credit valuation adjustment (CVA) or debit valuation
adjustment (DVA) to reflect the credit risk of its derivative
exposures as the Group's portfolio is fully collateralised.
If an asset or a liability measured at fair value has a bid
price and an ask price, the Group measures assets at bid price and
liabilities at ask price.
1.10 Critical estimates and judgements
The preparation of financial statements in conformity with IFRS
requires Management to make estimates and judgements in the
application of accounting policies that affect the reported amounts
of assets, liabilities, income and expense. Estimates and
judgements are based on historical experience and Management's best
knowledge of the amount. Due to the inherent uncertainty in making
estimates and judgements, actual results in future periods may be
based on amounts which differ from those estimates.
(a) Critical assumptions and sources of estimation
uncertainty
The following areas are the critical assumptions concerning the
future and the key sources of estimation uncertainty in the
reporting period. These areas may have a significant risk of
causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year:
Effective interest rates
For financial instruments recorded at amortised cost, IAS 39
requires interest to be measured under the effective interest rate
(EIR) method. For the Group this includes interest income earned on
mortgages and credit cards, as well as interest expense paid on
wholesale liabilities. The EIR rate is determined at inception
based upon Management's best estimate of the future cash flows of
the financial instrument.
In the event that these estimates are revised at a later date, a
present value adjustment may be recognised in profit and loss. This
adjustment includes an element that adjusts income previously
recognised, as well as an element that adjusts for future interest
not yet recognised. Such adjustments can introduce significant
volatility. As such the EIR method introduces a source of
estimation uncertainty. Management consider the most material risk
of adjustment to be in relation to the application of EIR to the
Group's credit card portfolio.
The Group offers a range of credit card products. Interest
income is recorded under the EIR method, which provides a level
yield over the life of the card. Management model expected future
cash flows over the estimated customer life, restricted to a
maximum of 7 years, which is supported by observed experience.
Income recognition can differ significantly from actual cash
receipts over that period. Similarly, the selection of expected
life for modelling purposes also has a material bearing on the EIR
rate used for each cohort. A shorter modelling period results in a
lower rate for income recognition. If the modelled period had been
restricted to five years at origination, the profit for the year
would have been reduced by approximately GBP25.2 million in 2017
and GBP15.8 million in 2016.
As at 31 December 2017 the EIR method gave rise to an adjustment
of GBP159.8 million (2016: GBP81.8 million) to the balance sheet
value of unsecured loans. This adjustment represented 5.3% (2016:
3.3%) of the balance sheet carrying value of unsecured loans. The
movement in the year of GBP78.0 million was recognised as interest
income.
In the calculation of EIR, Management uses estimates and
assumptions of future customer behaviour. These include the
estimation of utilisation of available credit, transaction and
repayment activity and the retention of the customer balance after
the end of a promotional period. Should Management's current
estimation of future cash flows be inaccurate to the extent that
the original effective interest rates on unsecured lending cohorts
were all reduced by 0.1%, the present value adjustment to interest
income, in relation to the revised future cash flows, would be
approximately GBP(10.2) million as at 31 December 2017.A
significant proportion of the Group's credit card portfolio
includes customers within promotional periods. The level of
repayment immediately 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
Management's estimate it can have a material impact on the revised
future cash flows.
To illustrate this, Management have undertaken a sensitivity on
post-promotion payment rates for all cohorts which have promotional
periods ending at the end of 2017. For these cohorts, should the
payment rate be 10% higher than forecast for the six months
following end of promotion, Management estimate this would result
in a negative present value adjustment to interest income of
approximately GBP(30.8) million as at 31 December 2017. In such an
adjustment, GBP(11.5) million would relate to write-off of income
previously recognised, and GBP(19.3) million would adjust for
future interest not yet recognised.
Impairment of loans and receivables
Management must make a best estimate of losses incurred at the
balance sheet date when determining the appropriate allowance for
impairment of loans and receivables. Judgement is required when
individually assessing loans for impairment and significant
estimation is required when using statistical models for collective
assessment. The key assumptions used within the statistical models
are based on behavioural and arrears status. These variables
include measurement of probability of default, probability that
default results in charge-off or possession, and any subsequent
loss incurred in that event. In relation to measuring incurred loss
the estimation of the period over which incurred losses emerge is
also an area of estimation uncertainty.
Management consider that the measurement of allowance for
impairment for a retail bank is a critical estimate. Whilst the
estimates used to determine the appropriate balance sheet allowance
are not currently considered to be a source of material
uncertainty, it is acknowledged that the Group has observed
historically low levels of customer arrears and default. Material
change in future customer behaviours and unanticipated changes in
the economic environment could result in higher losses being
incurred in future periods.
The most significant estimation within the measurement of the
secured impairment allowance is considered to be the estimation of
house prices. To the extent that house prices differed adversely or
positively by 10%, the impairment allowance would be an estimated
GBP1.7 million higher (2016: GBP1.3 million) or GBP3.2 million
lower (2016: GBP2.6 million) at 31 December 2017.
In relation to the measurement of the unsecured impairment
allowance, the estimation of the period over which incurred losses
emerge is considered to be the most significant estimation. To the
extent that the emergence period of 6 months differs by +/-3
months, the impairment allowance would be an estimated GBP7.1
million higher (2016: GBP5.9 million) or GBP7.1 million lower
(2016: GBP5.9 million) respectively.
Fair value of financial assets and liabilities
Management must use estimation when calculating the fair value
of financial instruments categorised as level 2 and level 3 (as
defined by IFRS 13). In these instances the necessary valuation
inputs are not observable and/or specific factors may need to be
considered. Details of the Group's level 2 and level 3 financial
instruments are included in note 32.
The most significant area of estimation uncertainty relates to
the Group's level 2 derivative financial instruments, where
valuations are not derived from quoted prices. The accuracy of fair
value calculations would be affected by unexpected market movements
and any inaccuracies within the discounted cash flow models used,
particularly use of incorrect interest yield curves. For example,
to the extent the interest yield curve differed by +/- 10 bps, the
net impact on fair values of derivative financial instruments would
be an estimated increase of GBP41.5 million (2016: GBP33.1 million)
or decrease of GBP41.7 million (2016: GBP33.3 million)
respectively.
(b) Critical judgements in applying accounting policies
The following are the critical judgements that have been made in
the process of applying the Group's accounting policies that have
the most significant effect on the amount recognised in the
financial statements:
Capitalisation of intangibles and assessment for impairment
Significant judgement is required when assessing whether the
conditions of IAS 38 have been met to allow the capitalisation of
project development costs as an intangible asset. During the
reporting period the Group has incurred significant costs in
relation to the development of the Group's digital banking
programme. Following a detailed review of the programme and the
nature of the costs incurred, Management have determined that the
amount of GBP38.3 million meets the recognition criteria for
capitalisation as an intangible asset.
Separately, Management judgement is required in assessing
whether capitalised intangible assets or assets not yet in use
exhibit any indicators of impairment at the reporting date. If
there are indicators of impairment, an estimate of the recoverable
amount is made which may indicate the need for an impairment charge
to be recognised. Management have assessed and reviewed intangible
assets for the existence of impairment indicators. This exercise
identified previous software development, with a carrying value of
GBP4.8 million, which was discontinued in the year in light of a
strategic decision to consolidate activities within the digital
banking programme. An impairment charge of GBP4.8 million was
recognised in the financial statements (2016: GBPnil).
Note 2: Segmental analysis and reconciliation to underlying
basis
The Group falls within the scope of IFRS 8 'Operating Segments'.
The Group's chief operating decision maker (which has been
determined to be the Executive Committee) assesses performance and
makes decisions based on the performance of the Group as a whole.
The Group has therefore determined that it has one reportable
operating segment and is therefore not required to produce
additional segmental disclosure.
The Group operates in a single geographic segment, being the UK.
The Group is not reliant on a single customer.
Reconciliation of statutory results to underlying basis
The underlying basis is the basis on which financial information
is presented to the chief operating decision maker which excludes
certain items included in the statutory results, of which further
information is provided on page 48. The table below reconciles the
statutory results to the underlying basis.
Adjusted for
======================== ========== ===================================
IPO Fair value
share losses
Statutory based Strategic on financial Underlying
results awards items instruments basis
GBPm GBPm GBPm GBPm GBPm
======================== ========== ======= ========== ============== ==========
Year ended 31 December
2017
======================== ========== ======= ========== ============== ==========
Net interest income 594.6 - - - 594.6
======================== ========== ======= ========== ============== ==========
Other income 68.1 - - 3.3 71.4
======================== ========== ======= ========== ============== ==========
Total income 662.7 - - 3.3 666.0
======================== ========== ======= ========== ============== ==========
Total operating
expenses (355.9) 0.9 6.5 - (348.5)
======================== ========== ======= ========== ============== ==========
Profit before tax
from operating
activities 306.8 0.9 6.5 3.3 317.5
======================== ========== ======= ========== ============== ==========
Impairment (44.2) - - - (44.2)
======================== ========== ======= ========== ============== ==========
Profit before tax 262.6 0.9 6.5 3.3 273.3
======================== ========== ======= ========== ============== ==========
Adjusted for
============================ ========== ===================================================== ===========
Fair
IPO value
share losses
Statutory based Strategic Simplification on financial Underlying
results awards items costs instruments basis
GBPm GBPm GBPm GBPm GBPm GBPm
============================ ========== ======== ========== =============== ============== ===========
Year ended 31 December
2016
============================ ========== ======== ========== =============== ============== ===========
Net interest income 522.4 - (3.4) - - 519.0
============================ ========== ======== ========== =============== ============== ===========
Other income 59.0 - - - 8.9 67.9
============================ ========== ======== ========== =============== ============== ===========
Total income 581.4 - (3.4) - 8.9 586.9
============================ ========== ======== ========== =============== ============== ===========
Total operating
expenses (349.4) 2.0 5.8 5.6 - (336.0)
============================ ========== ======== ========== =============== ============== ===========
Profit before tax
from operating activities 232.0 2.0 2.4 5.6 8.9 250.9
============================ ========== ======== ========== =============== ============== ===========
Impairment (37.6) - - - - (37.6)
============================ ========== ======== ========== =============== ============== ===========
Profit before tax 194.4 2.0 2.4 5.6 8.9 213.3
============================ ========== ======== ========== =============== ============== ===========
Note 3: Net interest income
2017 2016
GBPm GBPm
============================================== ======== ========
Interest and similar income:
============================================== ======== ========
Loans and advances to customers 945.2 933.1
============================================== ======== ========
Loans and advances to banks 0.9 2.3
============================================== ======== ========
Interest receivable on loans and receivables 946.1 935.4
============================================== ======== ========
Available-for-sale financial assets 5.6 8.9
============================================== ======== ========
Cash and balances at central banks 6.3 3.8
============================================== ======== ========
Total interest and similar income 958.0 948.1
============================================== ======== ========
Interest and similar expense:
============================================== ======== ========
Deposits from banks (16.5) (7.6)
============================================== ======== ========
Customer deposits (310.8) (370.7)
============================================== ======== ========
Debt securities in issue (31.0) (40.6)
============================================== ======== ========
Other (5.1) (6.8)
============================================== ======== ========
Total interest and similar expense (363.4) (425.7)
============================================== ======== ========
Net interest income 594.6 522.4
============================================== ======== ========
Interest accrued on impaired assets was GBP7.1 million (2016:
GBP5.8 million).
Note 4: Net fee and commission income
2017 2016
GBPm GBPm
==================================== ====== ======
Fee and commission income:
==================================== ====== ======
On loans and advances to customers 21.3 19.5
==================================== ====== ======
Other fee and commission income 8.3 9.3
==================================== ====== ======
Total fee and commission income 29.6 28.8
==================================== ====== ======
Fee and commission expense:
==================================== ====== ======
Other fee and commission expense - (1.2)
==================================== ====== ======
Net fee and commission income 29.6 27.6
==================================== ====== ======
Note 5: Other operating income
2017 2016
GBPm GBPm
=============================================== ====== ======
Investment and pension income 32.0 31.7
=============================================== ====== ======
Gains on sale of available-for-sale financial
assets 8.4 6.8
=============================================== ====== ======
Other 1.4 1.8
=============================================== ====== ======
Total other operating income 41.8 40.3
=============================================== ====== ======
Note 6: Operating expenses
2017 2016
GBPm GBPm
============================================ ====== ======
Staff costs:
============================================ ====== ======
Wages and salaries 161.9 160.7
============================================ ====== ======
Social security costs 15.5 14.6
============================================ ====== ======
Other pension costs 10.9 10.7
============================================ ====== ======
Employee share schemes 9.9 12.8
============================================ ====== ======
198.2 198.8
============================================ ====== ======
Premises and equipment:
============================================ ====== ======
Hire of equipment 4.6 4.6
============================================ ====== ======
Rent and rates 14.4 14.3
============================================ ====== ======
Other property costs 11.0 9.6
============================================ ====== ======
30.0 28.5
============================================ ====== ======
Other expenses:
============================================ ====== ======
Marketing costs 21.8 21.0
============================================ ====== ======
Telecommunications and IT 18.5 17.4
============================================ ====== ======
Professional fees 23.1 20.0
============================================ ====== ======
Other 29.1 42.7
============================================ ====== ======
92.5 101.1
============================================ ====== ======
Depreciation, amortisation and impairment:
============================================ ====== ======
Depreciation of tangible fixed assets 8.7 5.6
============================================ ====== ======
Amortisation of intangible assets 21.7 15.4
============================================ ====== ======
Impairment of intangible assets 4.8 -
============================================ ====== ======
35.2 21.0
============================================ ====== ======
Total operating expenses 355.9 349.4
============================================ ====== ======
Average headcount
The monthly average number of persons (including Directors)
employed by the Group during the year was as follows:
2017 2016
=========== ====== ======
Full time 2,413 2,394
=========== ====== ======
Part time 811 746
=========== ====== ======
Total 3,224 3,140
=========== ====== ======
Retirement benefit obligations
The Group operates defined contribution pension schemes for its
Directors and employees. The assets of the schemes are held
separately from those of the Group in independently administered
funds.
The Group made contributions of GBP10.9 million (2016: GBP10.7
million) during the year. There were no contributions overdue at
the year end (2016: GBPnil).
Fees payable to the auditors
During the year the Group obtained the following services from
the Group's auditors as detailed below:
2017 2016
GBPm GBPm
============================================= ====== ======
Fees payable for the audit of the Company's
current year Annual Report and Accounts 0.2 0.2
============================================= ====== ======
Audit of the subsidiaries pursuant to
legislation 1.1 0.7
============================================= ====== ======
Total audit fees 1.3 0.9
============================================= ====== ======
Audit-related assurance services 0.2 0.2
============================================= ====== ======
Total audit and audit-related fees 1.5 1.1
============================================= ====== ======
Other non-audit fees:
============================================= ====== ======
Other services 0.1 0.1
============================================= ====== ======
Total other non-audit fees 0.1 0.1
============================================= ====== ======
Total fees payable to the auditors by
the Group 1.6 1.2
============================================= ====== ======
All amounts are shown exclusive of VAT.
The following types of services are included in the categories
listed above:
Audit and audit-related fees
This category includes fees in respect of the audit of the
Group's Annual Report and Accounts and other services in connection
with regulatory filings and services for assurance and related
services that are reasonably related to the performance of the
audit or review of the financial statements.
Note 7: Share based payments
All share based payments charges relate to equity settled
schemes. The scheme details are summarised below.
Award Eligible Nature of Issue
plan employees award Vesting conditions(1) dates(2)
==== ============== ============== ============= ======================== ==========
(A) Long-term Selected Conditional Continuing employment 2015,
incentive senior share award or leavers in certain 2016
plan employees circumstances and & 2017
achievement of
performance conditions
==== ============== ============== ============= ======================== ==========
(B) Deferred Selected Deferred Continuing employment 2014,
bonus senior bonus - or leavers in certain 2015,
share employees conditional circumstances 2016
plan share award & 2017
==== ============== ============== ============= ======================== ==========
(C) Phantom Selected Deferred Continuing employment 2012
share senior bonus - or leavers in certain & 2013
award employees conditional circumstances
share award
==== ============== ============== ============= ======================== ==========
(D) IPO incentive Selected Conditional Continuing employment 2013
scheme senior share award or leavers in certain
employees circumstances
==== ============== ============== ============= ======================== ==========
(E) Recruitment Two senior Conditional Continuing employment 2013
award employees share award or leavers in certain
circumstances
==== ============== ============== ============= ======================== ==========
(F) IPO share All employees Conditional Continuing employment 2014
award excluding share award or leavers in certain
the Group's circumstances
Executive
Committee
==== ============== ============== ============= ======================== ==========
1 All awards have vesting conditions and therefore some may not
vest.
2 Issue dates show the year in which issues have been made under
the relevant scheme. There could be further issuances in future
years under the scheme.
(A) Long-term incentive plan (LTIP)
The LTIP introduced in 2014 is aimed at delivering shareholder
value by linking the receipt of shares to performance measures that
are based on delivering the Group's strategic objectives over a 3
year period. Awards are made within limits set by the rules of the
plan.
The performance period for the 2015 awards ended on 31 December
2017. Based on performance against the targets set, 65.3 per cent
of the 2015 awards will vest.
During 2017, selected senior employees of the Group were granted
up to a maximum of 1,382,905 Ordinary Shares under the LTIP scheme.
Awards granted under the LTIP have performance and service
conditions, with vesting dates prescribed for each participant.
The weighted-average fair value of awards granted during 2017
was GBP3.27 based on market prices at the date of grant.
(B) Deferred bonus share plan
The deferred bonus share plan is an equity settled scheme that
is operated in conjunction with the short-term incentive plan for
Executive Directors and other senior managers of the Group.
Share awards for the deferred element of 2017 bonuses will be
granted under this scheme in 2018.
During 2017, selected senior employees of the Group were granted
up to a maximum of 1,833,349 Ordinary Shares under the scheme. This
number includes an award granted to senior employees who joined the
Company in 2017 in recognition of outstanding awards over shares in
their previous employing company that lapsed on accepting
employment with the Group. Awards granted under the scheme have
service conditions, with vesting dates prescribed for each
participant.
The weighted-average fair value of awards granted during 2017
was GBP3.26 based on market prices at the date of grant.
(C) - (F) Phantom share award, IPO incentive scheme, Recruitment
award and IPO share award
These schemes relate to awards issued in previous years. No
awards were granted under these schemes in 2017 (2016: none).
Movement in share options and conditional shares
Ordinary Shares
====================== ==================================================================
Deferred
Interest Long-term bonus Phantom
in share incentive share share IPO share
options(1) plan plan award award
====================== ============= =========== ============ ============ ==========
Shares in existence
at 1 January
2017 625,328 2,651,338 2,098,649 2,044,480 68,920
====================== ============= =========== ============ ============ ==========
Granted in year - 1,382,905 1,833,349 - -
====================== ============= =========== ============ ============ ==========
Exercised or
vested in year - (47,021) (1,105,235) (1,480,940) (66,304)
====================== ============= =========== ============ ============ ==========
Forfeited in
year - (153,464) (124,782) - (2,616)
====================== ============= =========== ============ ============ ==========
Outstanding 31
December 2017 625,328 3,833,758 2,701,981 563,540 -
====================== ============= =========== ============ ============ ==========
Of which exercisable 625,328 - - - -
====================== ============= =========== ============ ============ ==========
Ordinary Shares
====================== ============================================================================================
Deferred
Interest Long-term bonus Phantom IPO IPO
in share incentive share share incentive Recruitment share
options(1) plan plan award scheme award award
====================== ============ ============ ============ ============ =========== ============ =========
Shares in
existence
at 1 January
2016 625,328 1,399,453 1,157,800 3,061,820 332,334 175,810 139,041
====================== ============ ============ ============ ============ =========== ============ =========
Granted in
year - 1,572,717 1,695,266 - - - -
====================== ============ ============ ============ ============ =========== ============ =========
Exercised
or vested
in year - (98,349) (754,417) (950,550) (305,676) (175,810) (68,885)
====================== ============ ============ ============ ============ =========== ============ =========
Forfeited
in year - (222,483) - (66,790) (26,658) - (1,236)
====================== ============ ============ ============ ============ =========== ============ =========
Outstanding
31 December
2016 625,328 2,651,338 2,098,649 2,044,480 - - 68,920
====================== ============ ============ ============ ============ =========== ============ =========
Of which exercisable 625,328 - - - - - -
====================== ============ ============ ============ ============ =========== ============ =========
1 This scheme was set up for Sir David Clementi, who was
Chairman for the period from October 2011 to May 2015. All share
options granted under the scheme had vested prior to 1 January
2016. No share options have been exercised during 2017 or 2016. The
weighted-average exercise price for options outstanding at 1
January 2017 and 31 December 2017 was GBP2.15. The options
outstanding will expire 10 years from the date of listing if not
exercised.
Note 8: Allowance for impairment losses on loans and
receivables
2017 2016
====================== =================================== ===================================
On secured On unsecured On secured On unsecured
loans loans Total loans loans Total
GBPm GBPm GBPm GBPm GBPm GBPm
====================== =========== ============= ======= =========== ============= =======
At 1 January 10.6 39.5 50.1 8.7 31.2 39.9
====================== =========== ============= ======= =========== ============= =======
Advances written
off (0.7) (34.2) (34.9) (0.8) (26.6) (27.4)
====================== =========== ============= ======= =========== ============= =======
Charge to the income
statement 2.2 42.0 44.2 2.7 34.9 37.6
====================== =========== ============= ======= =========== ============= =======
As at 31 December 12.1 47.3 59.4 10.6 39.5 50.1
====================== =========== ============= ======= =========== ============= =======
Of the total allowance in respect of loans and advances to
customers, GBP57.5 million (2016: GBP49.4 million) was assessed on
a collective basis.
Note 9: Taxation
(A) Analysis of the tax charge for the year
2017 2016
GBPm GBPm
============================================= ======= =======
UK corporation tax
============================================= ======= =======
Current tax on profit for the year (63.5) (40.3)
============================================= ======= =======
Adjustments in respect of prior years (0.6) 0.4
============================================= ======= =======
Current tax charge (64.1) (39.9)
============================================= ======= =======
Deferred tax (refer note 21)
============================================= ======= =======
Origination and reversal of temporary
differences (6.9) (14.0)
============================================= ======= =======
Adjustments in respect of prior years 0.9 (0.2)
============================================= ======= =======
Reduction in UK corporation tax rate (0.4) (0.2)
============================================= ======= =======
Deferred tax charge to the income statement (6.4) (14.4)
============================================= ======= =======
Tax charge (70.5) (54.3)
============================================= ======= =======
Analysis of tax charge recognised in Other Comprehensive
Income:
2017 2016
GBPm GBPm
====================================================== ====== ======
Current tax
====================================================== ====== ======
Cash flow hedge reserve 2.4 4.9
====================================================== ====== ======
Deferred tax
====================================================== ====== ======
Revaluation reserve in respect of available-for-sale
financial assets (0.1) (1.7)
====================================================== ====== ======
Cash flow hedge reserve (5.0) 1.4
====================================================== ====== ======
Total (charge)/credit (2.7) 4.6
====================================================== ====== ======
(B) Factors affecting the tax charge for the year
A reconciliation of the charge that would result from applying
the standard UK corporation tax rate to the profit before tax to
the actual tax charge for the year is given below:
2017 2016
GBPm GBPm
=========================================== ======= =======
Profit before tax 262.6 194.4
=========================================== ======= =======
Tax charge at standard tax rate of 19.25%
(2016: 20%) (50.5) (38.9)
=========================================== ======= =======
Factors affecting charge:
=========================================== ======= =======
Disallowed items (1.0) (1.8)
=========================================== ======= =======
Bank corporation tax surcharge (18.9) (12.5)
=========================================== ======= =======
UK corporation tax rate change (0.4) (0.2)
=========================================== ======= =======
Deferred tax charge in respect of share
schemes - (1.1)
=========================================== ======= =======
Adjustments in respect of prior years 0.3 0.2
=========================================== ======= =======
Total tax charge (70.5) (54.3)
=========================================== ======= =======
The main rate of corporation tax reduced from 20% to 19% on 1
April 2017, and will reduce further to 17% on 1 April 2020 in
accordance with the Finance Act 2016.
The charge in respect of the corporation tax surcharge for banks
which was introduced from 1 January 2016 is GBP18.9 million in the
year ended 31 December 2017. The surcharge imposes an 8% charge on
the banking profits of the Group (less a GBP25 million allowance
against those profits).
Note 10: Earnings per share
2017 2016
GBPm GBPm
============================================= ======= =======
Profit attributable to equity owners
- basic and diluted 192.1 140.1
============================================= ======= =======
Distributions to Additional Tier 1 security
holders (net of tax) (24.8) (10.1)
============================================= ======= =======
Profit attributable to equity shareholders
for the purposes of basic and diluted
EPS 167.3 130.0
============================================= ======= =======
2017 2016
Number Number
of shares of
(million) shares
(million)
============================================ =========== ===========
Weighted-average number of ordinary shares
in issue - basic 442.1 442.8
============================================ =========== ===========
Adjustment for share options and awards 3.8 4.7
============================================ =========== ===========
Weighted-average number of ordinary shares
in issue - diluted 445.9 447.5
============================================ =========== ===========
Basic earnings per share (pence) 37.8 29.4
============================================ =========== ===========
Diluted earnings per share (pence) 37.5 29.1
============================================ =========== ===========
Basic earnings per share has been calculated after deducting 2.8
million (2016: 1.7 million) ordinary shares representing the
weighted-average of the Group's holdings of own shares in respect
of employee share schemes.
Of the total number of employee share options and share awards
at 31 December 2017 none were anti-dilutive (2016: nil).
Note 11: Dividends
An interim dividend of 1.9 pence (2016: 1.6 pence) per Ordinary
Share, amounting to GBP8.4 million (2016: GBP7.1 million), was paid
in September 2017 and a final dividend in respect of the year ended
31 December 2016 of 3.5 pence (31 December 2015: 3.1 pence) per
Ordinary Share amounting to GBP15.5 million (31 December 2015:
GBP13.7 million), was paid in May 2017. These dividends were
deducted from retained profits in the current year.
The Directors have recommended for approval at the 2018 AGM the
payment of a final dividend in respect of the year ended 31
December 2017 of 4.1 pence per ordinary share, amounting to GBP18.1
million. If approved, this final dividend will be paid on 16 May
2018 to shareholders on the register at close of business on 6
April 2018. The financial statements for the year ended 31 December
2017 do not reflect this final dividend, which will be accounted
for in shareholders' equity as an appropriation of retained profits
in the year ending 31 December 2018.
Under the trust deed of the Employee Benefit Trust (EBT), a
standing waiver is in force in respect of any dividends declared on
shares held by the EBT.
Note 12: Analysis of financial assets and financial liabilities
by measurement basis
Derivatives
designated
as hedging
instruments
======================================= ========== ============ =========== =========== ================= =========
Derivatives
Held not
at Loans Available- designated Fair Cash
amortised and for-sale as hedging value flow
cost receivables securities instruments hedges hedges Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
======================================= ========== ============ =========== =========== ======= ======== =========
As at 31 December
2017
======================================= ========== ============ =========== =========== ======= ======== =========
Financial assets
======================================= ========== ============ =========== =========== ======= ======== =========
Cash and balances
at central banks - 2,579.0 - - - - 2,579.0
======================================= ========== ============ =========== =========== ======= ======== =========
Derivative financial
instruments - - - 11.9 11.5 55.4 78.8
======================================= ========== ============ =========== =========== ======= ======== =========
Loans and receivables:
======================================= ========== ============ =========== =========== ======= ======== =========
* Loans and advances to banks - 359.4 - - - - 359.4
======================================= ========== ============ =========== =========== ======= ======== =========
* Loans and advances to customers - 36,740.2 - - - - 36,740.2
======================================= ========== ============ =========== =========== ======= ======== =========
* Debt securities - 0.3 - - - - 0.3
======================================= ========== ============ =========== =========== ======= ======== =========
Available-for-sale
financial assets - - 1,051.8 - - - 1,051.8
======================================= ========== ============ =========== =========== ======= ======== =========
Other assets - 55.0 - - - - 55.0
======================================= ========== ============ =========== =========== ======= ======== =========
Total financial
assets - 39,733.9 1,051.8 11.9 11.5 55.4 40,864.5
======================================= ========== ============ =========== =========== ======= ======== =========
Non financial
assets 243.3
======================================= ========== ============ =========== =========== ======= ======== =========
Total assets 41,107.8
======================================= ========== ============ =========== =========== ======= ======== =========
Financial liabilities
======================================= ========== ============ =========== =========== ======= ======== =========
Deposits from
banks 5,379.0 - - - - - 5,379.0
======================================= ========== ============ =========== =========== ======= ======== =========
Customer deposits 30,808.4 - - - - - 30,808.4
======================================= ========== ============ =========== =========== ======= ======== =========
Derivative financial
instruments - - - 10.7 82.5 0.3 93.5
======================================= ========== ============ =========== =========== ======= ======== =========
Debt securities
in issue 2,736.9 - - - - - 2,736.9
======================================= ========== ============ =========== =========== ======= ======== =========
Other liabilities 215.1 - - - - - 215.1
======================================= ========== ============ =========== =========== ======= ======== =========
Total financial
liabilities 39,139.4 - - 10.7 82.5 0.3 39,232.9
======================================= ========== ============ =========== =========== ======= ======== =========
Non financial
liabilities 50.0
======================================= ========== ============ =========== =========== ======= ======== =========
Total liabilities 39,282.9
======================================= ========== ============ =========== =========== ======= ======== =========
Equity 1,824.9
======================================= ========== ============ =========== =========== ======= ======== =========
Total liabilities
and equity 41,107.8
======================================= ========== ============ =========== =========== ======= ======== =========
Derivatives
designated
as hedging
instruments
======================================= ========== ============ =========== =========== ================= =========
Derivatives
Held not
at Loans Available- designated Fair Cash
amortised and for-sale as hedging value flow
cost receivables securities instruments hedges hedges Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
======================================= ========== ============ =========== =========== ======= ======== =========
As at 31 December
2016
======================================= ========== ============ =========== =========== ======= ======== =========
Financial assets
======================================= ========== ============ =========== =========== ======= ======== =========
Cash and balances
at central banks - 786.3 - - - - 786.3
======================================= ========== ============ =========== =========== ======= ======== =========
Derivative financial
instruments - - - 18.5 21.0 64.7 104.2
======================================= ========== ============ =========== =========== ======= ======== =========
Loans and receivables:
======================================= ========== ============ =========== =========== ======= ======== =========
* Loans and advances to banks - 635.6 - - - - 635.6
======================================= ========== ============ =========== =========== ======= ======== =========
* Loans and advances to customers - 32,367.1 - - - - 32,367.1
======================================= ========== ============ =========== =========== ======= ======== =========
* Debt securities - 0.7 - - - - 0.7
======================================= ========== ============ =========== =========== ======= ======== =========
Available-for-sale
financial assets - - 858.8 - - - 858.8
======================================= ========== ============ =========== =========== ======= ======== =========
Other assets - 68.8 - - - - 68.8
======================================= ========== ============ =========== =========== ======= ======== =========
Total financial
assets - 33,858.5 858.8 18.5 21.0 64.7 34,821.5
======================================= ========== ============ =========== =========== ======= ======== =========
Non financial assets 234.1
======================================= ========== ============ =========== =========== ======= ======== =========
Total assets 35,055.6
======================================= ========== ============ =========== =========== ======= ======== =========
Financial liabilities
======================================= ========== ============ =========== =========== ======= ======== =========
Deposits from banks 2,132.5 - - - - - 2,132.5
======================================= ========== ============ =========== =========== ======= ======== =========
Customer deposits 28,106.3 - - - - - 28,106.3
======================================= ========== ============ =========== =========== ======= ======== =========
Derivative financial
instruments - - - 22.9 206.8 - 229.7
======================================= ========== ============ =========== =========== ======= ======== =========
Debt securities
in issue 2,600.0 - - - - - 2,600.0
======================================= ========== ============ =========== =========== ======= ======== =========
Other liabilities 189.5 - - - - - 189.5
======================================= ========== ============ =========== =========== ======= ======== =========
Total financial
liabilities 33,028.3 - - 22.9 206.8 - 33,258.0
======================================= ========== ============ =========== =========== ======= ======== =========
Non financial liabilities 127.1
======================================= ========== ============ =========== =========== ======= ======== =========
Total liabilities 33,385.1
======================================= ========== ============ =========== =========== ======= ======== =========
Equity 1,670.5
======================================= ========== ============ =========== =========== ======= ======== =========
Total liabilities
and equity 35,055.6
======================================= ========== ============ =========== =========== ======= ======== =========
Note 13: Derivative financial instruments
The fair values and notional amounts of assets and liabilities
recognised within Derivative financial instruments are set out in
the following table.
As at 31 December As at 31 December
2017 2016
======================= ================================= =================================
Contract Asset Liability Contract Asset Liability
/ notional fair fair / notional fair fair
amount value value amount value value
GBPm GBPm GBPm GBPm GBPm GBPm
======================= ============ ======= ========== ============ ======= ==========
Derivatives in accounting hedge relationships
=============================================================================================
Derivatives designated
as fair value hedges:
===================================== ======= ========== ============ ======= ==========
Interest rate
derivatives
(gross) 23,314.7 61.7 (91.0) 21,584.8 34.7 (219.8)
======================= ============ ======= ========== ============ ======= ==========
Less: contracts
centrally cleared (17,360.6) (50.2) 8.5 (8,194.1) (13.7) 13.0
======================= ============ ======= ========== ============ ======= ==========
Interest rate
derivatives
(net) 5,954.1 11.5 (82.5) 13,390.7 21.0 (206.8)
======================= ============ ======= ========== ============ ======= ==========
Derivatives designated
as cash flow hedges:
===================================== ======= ========== ============ ======= ==========
Interest rate
derivatives
(gross) 1,199.0 - (2.9) 1,287.0 3.5 (2.2)
======================= ============ ======= ========== ============ ======= ==========
Less: contracts
centrally cleared (1,199.0) - 2.9 (1,287.0) (3.5) 2.2
======================= ============ ======= ========== ============ ======= ==========
Interest rate - - - - - -
derivatives
(net)
======================= ============ ======= ========== ============ ======= ==========
Currency derivatives 705.6 55.4 (0.3) 520.3 64.7 -
======================= ============ ======= ========== ============ ======= ==========
Total derivative
assets/(liabilities)
-
in accounting
hedge relationships 6,659.7 66.9 (82.8) 13,911.0 85.7 (206.8)
======================= ============ ======= ========== ============ ======= ==========
Derivatives in economic hedging relationships but
not in accounting hedge relationships
=============================================================================================
Interest rate
derivatives
(gross) 7,205.6 9.6 (10.4) 7,549.6 15.7 (24.0)
======================= ============ ======= ========== ============ ======= ==========
Less: contracts
centrally cleared (2,830.7) (0.8) 2.8 (3,665.1) (2.5) 9.2
======================= ============ ======= ========== ============ ======= ==========
Interest rate
derivatives
(net) 4,374.9 8.8 (7.6) 3,884.5 13.2 (14.8)
======================= ============ ======= ========== ============ ======= ==========
Currency derivatives 76.0 3.0 (3.1) 56.0 3.4 (3.8)
======================= ============ ======= ========== ============ ======= ==========
Equity and
other options 25.7 0.1 - 149.5 1.9 (4.3)
======================= ============ ======= ========== ============ ======= ==========
Total derivative
assets/(liabilities)
-
in economic
hedging relationship
but not in
accounting
hedge relationships 4,476.6 11.9 (10.7) 4,090.0 18.5 (22.9)
======================= ============ ======= ========== ============ ======= ==========
Total recognised
derivative
assets/(liabilities) 11,136.3 78.8 (93.5) 18,001.0 104.2 (229.7)
======================= ============ ======= ========== ============ ======= ==========
The notional amount of the contract does not represent the
Group's real exposure to credit risk which is limited to the
current cost of replacing contracts with a positive value to the
Group should the counterparty default. To reduce credit risk the
Group uses a variety of credit enhancement techniques such as
netting and collateralisation, where security is provided against
the exposure. Further details are provided in the Risk Management
Report on page 155.
The fair values and notional amounts shown in the line 'Total
recognised derivative assets/(liabilities)' above reflect amounts
relating only to contracts that are not centrally cleared.
Centrally cleared interest rate derivatives are set off in the
balance sheet as they meet the offsetting criteria under IAS 32
(refer note 33).
Hedged cash flows
For designated cash flow hedges the following table shows when
the Group's hedged cash flows are expected to occur and when they
will impact income:
2017 2016
GBPm GBPm
====================== ======= =======
Within one year (7.2) (9.2)
====================== ======= =======
In one to five years (15.5) (22.3)
====================== ======= =======
Total (22.7) (31.5)
====================== ======= =======
Fair value losses on financial instruments
2017 2016
GBPm GBPm
============================================ ======= =======
Fair value gains/(losses) from derivatives
designated as fair value hedges 104.8 (69.9)
============================================ ======= =======
Fair value (losses)/gains from underlying
hedged risk (99.4) 81.8
============================================ ======= =======
Fair value gain from fair value hedge
accounting(1) 5.4 11.9
============================================ ======= =======
Fair value losses from cash flow hedges (12.6) (13.6)
============================================ ======= =======
Fair value gains/(losses) from other
derivatives(2) 3.9 (7.2)
============================================ ======= =======
Fair value losses on financial instruments (3.3) (8.9)
============================================ ======= =======
1 Gains or losses from fair value hedges can arise where there
is an IAS 39 hedge accounting relationship in place and either: -
the fair value of the derivative was not exactly offset by the
change in fair value attributable to the hedged risk; or - the
derivative was designated in or dedesignated from the IAS 39 hedge
accounting relationship and in the following months leads to
amortisation of existing balance sheet positions.
2 Other derivatives are those used for economic hedging but
which are not in an IAS 39 hedge accounting relationship.
Note 14: Loans and advances to banks
2017 2016
GBPm GBPm
========================================= ====== ======
Balances within securitisation vehicles 201.0 354.3
========================================= ====== ======
Money market placements with banks 13.8 33.0
========================================= ====== ======
Cash collateral pledged to banks (refer
note 17) 93.0 181.1
========================================= ====== ======
Other lending to banks 51.6 67.2
========================================= ====== ======
Total loans and advances to banks 359.4 635.6
========================================= ====== ======
Note 15: Loans and advances to customers
2017 2016
GBPm GBPm
========================================== ========= =========
Advances secured on residential property
not subject to securitisation 21,878.7 19,375.2
========================================== ========= =========
Advances secured on residential property
subject to securitisation 5,438.5 4,907.8
========================================== ========= =========
27,317.2 24,283.0
========================================== ========= =========
Residential buy-to-let loans not subject
to securitisation 6,367.3 5,468.4
========================================== ========= =========
Total loans and advances to customers
secured on residential property 33,684.5 29,751.4
========================================== ========= =========
Unsecured receivables not subject to
securitisation 3,071.4 2,486.6
========================================== ========= =========
Total loans and advances to customers
before allowance for impairment losses 36,755.9 32,238.0
========================================== ========= =========
Allowance for impairment losses on loans
and receivables (refer note 8) (59.4) (50.1)
========================================== ========= =========
Total loans and advances to customers
excluding portfolio hedging 36,696.5 32,187.9
========================================== ========= =========
Fair value of portfolio hedging 43.7 179.2
========================================== ========= =========
Total loans and advances to customers 36,740.2 32,367.1
========================================== ========= =========
The fair value of portfolio hedging represents an accounting
adjustment which offsets the fair value movement on derivatives
designated in IAS 39 hedge accounting relationships with the
mortgage portfolio. Such relationships are established to protect
the Group from interest rate risk on fixed rate products.
For collateral held in respect of the values included in the
table above, refer to the Risk Management Report.
Note 16: Available-for-sale financial assets
2017 2016
GBPm GBPm
========================================= ======== ==========
At 1 January 858.8 1,296.9
========================================= ======== ==========
Additions 690.9 670.0
========================================= ======== ==========
Disposals (sales and redemptions) (483.2) (1,111.1)
========================================= ======== ==========
Exchange differences 1.2 0.1
========================================= ======== ==========
Changes due to amortisation and accrued
interest (5.0) (11.6)
========================================= ======== ==========
Net (losses)/gains on changes in fair
value (10.9) 14.5
========================================= ======== ==========
At 31 December 1,051.8 858.8
========================================= ======== ==========
Gains on sale of available-for-sale securities amounted to
GBP8.4 million (2016: GBP6.8 million).
Analysis of the composition of debt securities categorised as
available-for-sale financial assets is set out in the Risk
Management Report on page 154. All assets have been individually
assessed for impairment and following this assessment no write down
of assets was required.
Note 17: Collateral pledged and received
The Group receives and accepts collateral in the form of cash
and marketable securities in respect of derivatives, sale and
repurchase and reverse sale and repurchase agreements, and secured
loans.
Collateral in respect of derivatives is subject to the standard
industry terms of ISDA Credit Support Annex. This means that
securities received or given as collateral can be pledged or sold
during the term of the transaction but must be returned on maturity
of the transaction. The terms also give each counterparty the right
to terminate the related transactions upon the counterparty's
failure to post collateral.
At 31 December 2017 cash collateral of GBP101.5 million had been
pledged by the Group, comprising GBP93.0 million recognised within
loans and advances to banks and GBP8.5 million within other assets
(2016: GBP235.0 million, comprising GBP181.1 million recognised
within loans and advances to banks and GBP53.9 million within other
assets) and GBP53.9 million (2016: GBP14.0 million) has been
received as cash collateral by the Group, of which GBP13.0 million
is recognised within deposits from banks (2016: GBP14.0 million)
and GBP40.9 million within other liabilities (2016: GBPnil).
At 31 December 2017 available-for-sale financial assets of
GBPnil (2016: GBP10.6 million) are pledged as collateral in respect
of derivative transactions.
At 31 December 2017 loans and advances of GBP6,219.8 million
(2016: GBP2,302.3 million) are pledged as collateral in respect of
secured loans and sale and repurchase agreements under terms that
are usual and customary for such activities.
Note 18: Securitisation
Securitisation programmes
Loans and advances to customers include loans securitised under
the Group's Gosforth securitisation programmes, which have been
sold by Virgin Money plc to bankruptcy remote SPVs. The transfers
of the mortgage loans to the structured entities are not treated as
sales by the Group. No gain or loss has been recognised on pledging
the mortgages to the programmes.
The SPVs are principally engaged in providing long-term funding
to the Group through the issue of amortising mortgage backed
securities to investors on terms whereby the majority of the risks
and rewards of the loans and advances are retained by Virgin Money
plc. As a result, the SPVs are fully consolidated in these
financial statements and all of the loans and advances are retained
on the Group's balance sheet, with the related securities included
within debt securities in issue.
2017 2016
========================== ==========================
Loans Loans
and and
advances Securities advances Securities
securitised in issue securitised in issue
GBPm GBPm GBPm GBPm
================================= ============= =========== ============= ===========
Residential mortgage loans 5,438.5 5,132.7 4,907.8 4,616.7
================================= ============= =========== ============= ===========
Less: securities held by the
Group - (2,698.6) - (2,322.5)
================================= ============= =========== ============= ===========
Total securitisation programmes 5,438.5 2,434.1 4,907.8 2,294.2
================================= ============= =========== ============= ===========
The full liabilities associated with the securitisation
programme (excluding the proportion relating to securities
retained) are recognised within debt securities in issue. However,
the Group's obligations are limited to the cash flows generated
from the underlying securitised assets.
At the reporting date the Group had over-collateralised the
securitisation transactions, as set out in the table above, to meet
the terms of the transaction and to provide operational
flexibility. In addition, the Group held cash deposits and
permitted investments of GBP350.4 million (2016: GBP354.3 million)
supporting the securities issued. To satisfy transaction
requirements the Group may provide additional support to the SPV in
the form of increased cash reserves funded by further subordinated
loans.
Transfers of financial assets
There were no transactions in the year involving the transfer of
financial assets that were derecognised by the Group but with
ongoing exposure (2016: none). There were also no transactions in
the year where the Group transferred assets that should have been
derecognised in their entirety (2016: none).
As noted above, loans and advances transferred to SPVs do not
represent transfers of financial assets by the Group as all of the
SPVs are consolidated in these financial statements.
Note 19: Intangible assets
Core
deposit Banking
intangible Software platforms Total
GBPm GBPm GBPm GBPm
============================== ============ ========= =========== ======
Cost:
============================== ============ ========= =========== ======
At 1 January 2016 4.8 85.1 21.5 111.4
============================== ============ ========= =========== ======
Additions - 31.6 - 31.6
============================== ============ ========= =========== ======
Disposals - (2.1) - (2.1)
============================== ============ ========= =========== ======
At 31 December 2016 4.8 114.6 21.5 140.9
============================== ============ ========= =========== ======
Additions - 36.0 38.3 74.3
============================== ============ ========= =========== ======
Disposals - (5.7) - (5.7)
============================== ============ ========= =========== ======
At 31 December 2017 4.8 144.9 59.8 209.5
============================== ============ ========= =========== ======
Accumulated amortisation and
impairment:
============================== ============ ========= =========== ======
At 1 January 2016 3.4 40.7 2.9 47.0
============================== ============ ========= =========== ======
Charge for the year 1.4 10.4 3.6 15.4
============================== ============ ========= =========== ======
Disposals - (2.1) - (2.1)
============================== ============ ========= =========== ======
At 31 December 2016 4.8 49.0 6.5 60.3
============================== ============ ========= =========== ======
Charge for the year - 18.1 3.6 21.7
============================== ============ ========= =========== ======
Disposals - (5.7) - (5.7)
============================== ============ ========= =========== ======
Impairment - 4.8 - 4.8
============================== ============ ========= =========== ======
At 31 December 2017 4.8 66.2 10.1 81.1
============================== ============ ========= =========== ======
Balance sheet amount at 31
December 2017 - 78.7 49.7 128.4
============================== ============ ========= =========== ======
Balance sheet amount at 31
December 2016 - 65.6 15.0 80.6
============================== ============ ========= =========== ======
Within Banking platforms at 31 December 2017 is GBP38.3 million
of expenditure relating to the development of the Group's digital
banking programme.
The impairment charge of GBP4.8 million in the year represents
previous software development which has been discontinued in light
of a strategic decision to consolidate activities within the
digital banking programme.
Note 20: Tangible fixed assets
Plant,
equipment,
fixtures,
Land fittings
and and
buildings vehicles Total
GBPm GBPm GBPm
========================================== =========== ============ ======
Cost:
========================================== =========== ============ ======
At 1 January 2016 63.3 39.5 102.8
========================================== =========== ============ ======
Additions 1.8 6.8 8.6
========================================== =========== ============ ======
Disposals (0.6) (3.0) (3.6)
========================================== =========== ============ ======
At 31 December 2016 64.5 43.3 107.8
========================================== =========== ============ ======
Additions - 5.8 5.8
========================================== =========== ============ ======
Disposals - (0.1) (0.1)
========================================== =========== ============ ======
At 31 December 2017 64.5 49.0 113.5
========================================== =========== ============ ======
Accumulated depreciation and impairment:
========================================== =========== ============ ======
At 1 January 2016 9.5 18.7 28.2
========================================== =========== ============ ======
Depreciation charge for the year 0.1 5.5 5.6
========================================== =========== ============ ======
Disposals (0.5) (2.9) (3.4)
========================================== =========== ============ ======
At 31 December 2016 9.1 21.3 30.4
========================================== =========== ============ ======
Depreciation charge for the year 2.4 6.3 8.7
========================================== =========== ============ ======
Disposals - (0.1) (0.1)
========================================== =========== ============ ======
At 31 December 2017 11.5 27.5 39.0
========================================== =========== ============ ======
Balance sheet amount at 31 December
2017 53.0 21.5 74.5
========================================== =========== ============ ======
Balance sheet amount at 31 December
2016 55.4 22.0 77.4
========================================== =========== ============ ======
Note 21: Deferred tax
2017 2016
GBPm GBPm
====================================================== ====== ======
Deferred tax assets/(liabilities):
====================================================== ====== ======
Accelerated capital allowances 10.8 12.9
====================================================== ====== ======
Revaluation reserve in respect of available-for-sale
financial assets (2.1) (2.6)
====================================================== ====== ======
Cash flow hedge reserve 0.2 5.2
====================================================== ====== ======
Change in accounting basis on adoption
of IFRS (3.2) (4.0)
====================================================== ====== ======
Tax losses carried forward 0.6 7.3
====================================================== ====== ======
Other temporary differences 5.2 4.2
====================================================== ====== ======
Total deferred tax assets 11.5 23.0
====================================================== ====== ======
The Group has not recognised deferred tax assets in respect of
gross unused tax losses of GBP31.2 million (2016: GBP31.2
million).
The movement in the net deferred tax balance is as follows:
2017 2016
GBPm GBPm
============================================== ====== =======
At 1 January 23.0 38.0
============================================== ====== =======
Income statement (charge)/credit (refer
note 9):
============================================== ====== =======
Accelerated capital allowances (2.1) (2.2)
============================================== ====== =======
Tax losses carried forward (6.7) (10.7)
============================================== ====== =======
Other temporary differences 2.4 (1.5)
============================================== ====== =======
(6.4) (14.4)
============================================== ====== =======
Amounts (charged)/credited to equity:
============================================== ====== =======
Available-for-sale financial assets (0.1) (1.7)
============================================== ====== =======
Cash flow hedges (5.0) 1.4
============================================== ====== =======
Adjustments relating to share based payments - (0.3)
============================================== ====== =======
(5.1) (0.6)
============================================== ====== =======
At 31 December 11.5 23.0
============================================== ====== =======
Note 22: Other assets
2017 2016
GBPm GBPm
================================ ====== ======
Trade debtors 6.3 17.7
================================ ====== ======
Prepayments and accrued income 40.2 27.9
================================ ====== ======
Other 37.4 76.3
================================ ====== ======
Total other assets 83.9 121.9
================================ ====== ======
Included within 'Other' assets are amounts receivable from
clearing houses on centrally cleared derivative financial
instruments of GBP8.5 million (2016: GBP50.7 million) recorded on a
net basis.
Note 23: Deposits from banks
2017 2016
GBPm GBPm
====================================== ======== ========
Liabilities in respect of securities
sold under repurchase agreements 1,130.0 850.0
====================================== ======== ========
Secured loans 4,236.0 1,268.0
====================================== ======== ========
Other deposits from banks 13.0 14.5
====================================== ======== ========
Total deposits from banks 5,379.0 2,132.5
====================================== ======== ========
Secured loans relate to the Group's drawings from the Bank of
England's Term Funding Scheme.
Note 24: Customer deposits
2017 2016
GBPm GBPm
================================= ========= =========
Savings and investment accounts 30,393.0 27,762.7
================================= ========= =========
Personal current accounts 415.4 343.6
================================= ========= =========
Total customer deposits 30,808.4 28,106.3
================================= ========= =========
Note 25: Debt securities in issue
Medium
Securitisation term
programmes notes Total
GBPm GBPm GBPm
===================== =============== ======= ========
At 1 January 2016 1,741.9 297.5 2,039.4
===================== =============== ======= ========
Repayments (798.1) - (798.1)
===================== =============== ======= ========
Issues 1,278.9 - 1,278.9
===================== =============== ======= ========
Revaluations 73.0 - 73.0
===================== =============== ======= ========
Other movements (1.5) 8.3 6.8
===================== =============== ======= ========
At 31 December 2016 2,294.2 305.8 2,600.0
===================== =============== ======= ========
Repayments (608.3) - (608.3)
===================== =============== ======= ========
Issues 746.2 - 746.2
===================== =============== ======= ========
Revaluations 1.5 - 1.5
===================== =============== ======= ========
Other movements 0.5 (3.0) (2.5)
===================== =============== ======= ========
At 31 December 2017 2,434.1 302.8 2,736.9
===================== =============== ======= ========
Other movements comprise amortisation of issuance costs and
hedge accounting adjustments.
Securitisation programmes
On 25 September 2017, the Group raised GBP746.2 million from
institutional investors through the issuance of Residential
Mortgage Backed Securities (RMBS) in the Gosforth Funding 2017-1
transaction in US Dollars and Sterling.
In 2016, the Group also raised GBP1,278.9 million through the
issue of RMBS in the Gosforth Funding 2016-1 and Gosforth Funding
2016-2 transactions in Euro, US Dollars and Sterling.
For all RMBS funding raised in currencies other than Sterling,
the Group enters into cross-currency derivatives which swap the
foreign currency liabilities into Sterling.
Medium term notes
The Group's Medium Term Notes have a nominal value of GBP300
million at a coupon of 2.25% per annum and will be repayable on 21
April 2020. They were issued as part of the Group's GBP3 billion
Global Medium Term Note programme.
Note 26: Other liabilities
2017 2016
GBPm GBPm
============================== ====== ======
Trade creditors and accruals 66.3 59.0
============================== ====== ======
Provisions 7.5 8.5
============================== ====== ======
Deferred income 2.3 3.0
============================== ====== ======
Accrued interest 110.9 127.2
============================== ====== ======
Other liabilities 54.5 102.2
============================== ====== ======
Total other liabilities 241.5 299.9
============================== ====== ======
Deferred income represents income advanced from partners that
will be recognised in future periods.
Accrued interest primarily represents interest which has accrued
on savings and investment accounts.
Note 27: Share capital and share premium
2017 2016
GBPm GBPm
======================================= ====== ======
Share capital 0.1 0.1
======================================= ====== ======
Share premium 654.5 654.5
======================================= ====== ======
Total share capital and share premium 654.6 654.6
======================================= ====== ======
Issued and fully paid share capital
2017 2016
Number 2017 Number 2016
of shares GBP of shares GBP
======================== ============ ======= ============ =======
Ordinary Shares
of GBP0.0001 each
======================== ============ ======= ============ =======
At 1 January 444,942,008 44,494 443,711,458 44,371
======================== ============ ======= ============ =======
Issued during
year - - 1,230,550 123
======================== ============ ======= ============ =======
At 31 December 444,942,008 44,494 444,942,008 44,494
======================== ============ ======= ============ =======
Deferred Shares
of GBP0.001 each
======================== ============ ======= ============ =======
At 1 January and at 31
December 10,052,161 10,052 10,052,161 10,052
======================== ============ ======= ============ =======
As permitted by the Companies Act 2006, the Company's Articles
of Association do not contain any references to authorised share
capital.
The following describes the rights attaching to each share class
at 31 December 2017:
Ordinary Shares
The holders of Ordinary Shares are entitled to one vote per
share at meetings of the Group. All Ordinary Shares in issue in the
Company rank equally and carry the same voting rights and the same
rights to receive dividends and other distributions declared or
paid by the Company. The shares represented 81.6 per cent of the
total share capital at 31 December 2017 (2016: 81.6 per cent).
There are no restrictions in the transfer of Ordinary Shares in
the Company other than:
-- certain restrictions which may from time to time be imposed
by law and regulations (for example, insider trading laws);
-- where Directors and certain employees of the Group require
the approval of the Company to deal in the Company's Ordinary
Shares; and
-- pursuant to the rules of some of the Group's employee share
plans where certain restrictions may apply while the Ordinary
Shares are subject to the plan.
Deferred Shares
As set out in the Articles of Association adopted on listing
(and pursuant to the provisions of the Companies Act in respect of
shares held in own shares), the Deferred Shares have no voting or
dividend rights and, on a return of capital on a winding up, have
no valuable economic rights. No application has been made or is
currently intended to be made for the Deferred Shares to be
admitted to the Official List or to trade on the London Stock
Exchange or any other investment exchange.
The Deferred Shares are held in treasury. This is to ensure that
the aggregate nominal value of the Company's share capital will be
not less than GBP50,000, which is the minimum level of nominal
share capital required by the Companies Act for a company to be
established as a public limited company. The shares represented
18.4 per cent of the total share capital at 31 December 2017 (2016:
18.4 per cent).
Note 28: Other equity instruments
2017 2016
GBPm GBPm
======================================== ====== ======
At 1 January 384.1 156.5
======================================== ====== ======
Additional Tier 1 securities issued in
the year (net of issue costs) - 227.6
======================================== ====== ======
At 31 December 384.1 384.1
======================================== ====== ======
The Company issued Fixed Rate Resettable Additional Tier 1 (AT1)
securities on the Luxembourg Stock Exchange of GBP230.0 million on
10 November 2016 and GBP160.0 million on 31 July 2014. 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 GBP5.9 million. Dividends and
other returns to equity holders are treated as a deduction from
equity.
The principal terms of the AT1 securities in issue are described
below:
-- the securities constitute direct, unsecured and subordinated
obligations of the Company and rank pari passu with holders of
other Tier 1 instruments and the holders of that class or classes
of preference shares but rank junior to the claims of senior
creditors;
-- the securities bear a fixed rate of interest of 8.750% and
7.875% from their issue dates up to their first reset dates on 10
November 2021 and 31 July 2019 respectively;
-- interest on the securities will be due and payable only at
the sole discretion of the Company, and the Company has sole and
absolute discretion at all times and for any reason to cancel (in
whole or in part) any interest payment that would otherwise be
payable on any interest payment date;
-- the securities are perpetual with no fixed redemption date
and are repayable, at the option of the Company, all (but not part)
on the first reset date or any reset date thereafter. In addition,
the AT1 securities are redeemable, at the option of the Company, in
whole for certain regulatory or tax reasons. Any optional
redemption requires the prior consent of the PRA; and
-- all AT1 securities will be converted into Ordinary Shares of
the Company, at a pre-determined price, should the Common Equity
Tier 1 ratio of the Group fall below 7.0% as specified in the
terms.
Note 29: Other reserves
2017 2016
GBPm GBPm
====================================================== ======= =======
Revaluation reserve in respect of available-for-sale
financial assets
====================================================== ======= =======
At 1 January 4.1 (0.3)
====================================================== ======= =======
Net gains from changes in fair value 2.6 52.8
====================================================== ======= =======
Net gains on disposal transferred to
income statement (13.5) (38.3)
====================================================== ======= =======
Amounts transferred to income statement
due to hedge accounting 11.5 (8.4)
====================================================== ======= =======
Taxation (0.1) (1.7)
====================================================== ======= =======
At 31 December 4.6 4.1
====================================================== ======= =======
2017 2016
GBPm GBPm
========================================= ======= =======
Cash flow hedge reserve
========================================= ======= =======
At 1 January (31.5) (15.3)
========================================= ======= =======
Amounts recognised in equity (1.2) (36.1)
========================================= ======= =======
Amounts transferred to income statement 12.6 13.6
========================================= ======= =======
Taxation (2.6) 6.3
========================================= ======= =======
At 31 December (22.7) (31.5)
========================================= ======= =======
Note 30: Retained earnings
2017 2016
GBPm GBPm
============================================= ======= =======
At 1 January 659.2 544.8
============================================= ======= =======
Profit for the year 192.1 140.1
============================================= ======= =======
Dividends paid to ordinary shareholders (23.9) (20.8)
============================================= ======= =======
Distributions to Additional Tier 1 security
holders (net of tax) (24.3) (10.1)
============================================= ======= =======
Purchase of own shares (8.5) (7.3)
============================================= ======= =======
Share based payments (including deferred
tax) 9.9 12.5
============================================= ======= =======
Other distributions (0.2) -
============================================= ======= =======
As at 31 December 804.3 659.2
============================================= ======= =======
Other distributions represent distributions paid by certain SPVs
currently in the process of liquidation.
Employee Benefit Trust (EBT)
Retained earnings are stated after deducting GBP8.0 million
(2016: GBP6.9 million) representing 2,868,458 (2016: 2,922,220) own
shares held in an EBT.
The Company established an EBT in 2011 in connection with the
operation of the Company's share plans. The Company funded the EBT
by means of a cash loan and is therefore considered to be the
sponsoring entity. The EBT purchased shares in the Company using
the cash loan which is accounted for as a purchase of own shares by
the Company. The investment in own shares at 31 December 2017 is
GBP8.0 million (2016: GBP6.9 million). The market value of the
shares held in the EBT at 31 December 2017 was GBP8.2 million
(2016: GBP8.8 million).
Note 31: Contingent liabilities and commitments
Contingent liabilities
The Board was not aware of any significant contingent
liabilities as at 31 December 2017 (31 December 2016: none).
The Company is, from time to time and in the normal course of
business, subject to a variety of legal or regulatory claims,
actions or proceedings. When such circumstances arise, the Board
considers the likelihood of a material outflow of economic
resources and provides for its best estimate of costs where an
outflow of economic resources is considered probable. While there
can be no assurances, the Directors believe, based on information
currently available to them, that the likelihood of material
outflows from such matters is remote.
The Board does not expect the ultimate resolution of any other
threatened or actual legal proceedings to have a significant
adverse effect on the financial position of the Group.
Loan commitments
Contractual amounts to which the Group is committed for
extension of credit to customers.
2017 2016
GBPm GBPm
====================================== ======== ========
Not later than 1 year 5,815.9 4,854.3
====================================== ======== ========
Later than 1 year and not later than
5 years 97.1 88.2
====================================== ======== ========
Later than 5 years 280.5 346.6
====================================== ======== ========
Total loan commitments 6,193.5 5,289.1
====================================== ======== ========
Operating lease commitments - land and buildings
Minimum future lease payments under non-cancellable operating
leases:
2017 2016
GBPm GBPm
========================================== ====== ======
Not later than 1 year 7.5 7.1
========================================== ====== ======
Later than 1 year and not later than
5 years 26.0 25.0
========================================== ====== ======
Later than 5 years 18.7 20.0
========================================== ====== ======
Total operating lease commitments - land
and buildings 52.2 52.1
========================================== ====== ======
Operating lease commitments - other operating leases
Minimum future lease payments under non-cancellable operating
leases:
2017 2016
GBPm GBPm
=========================================== ====== ======
Not later than 1 year 4.6 4.6
=========================================== ====== ======
Later than 1 year and not later than
5 years - 4.6
=========================================== ====== ======
Later than 5 years - -
=========================================== ====== ======
Total operating lease commitments - other
operating leases 4.6 9.2
=========================================== ====== ======
Capital commitments
Capital commitments for the acquisition of fixed assets:
2017 2016
GBPm GBPm
====================================== ====== ======
Not later than 1 year 1.1 1.0
====================================== ====== ======
Later than 1 year and not later than - -
5 years
====================================== ====== ======
Later than 5 years - -
====================================== ====== ======
Total capital commitments 1.1 1.0
====================================== ====== ======
Note 32: Fair value of financial assets and financial
liabilities
Fair value of financial assets and liabilities recognised at
cost
The following table summarises the fair values of those
financial assets and liabilities not presented on the Group's
balance sheet at their fair value, by the level in the fair value
hierarchy into which each fair value measurement is categorised.
The accounting policy in note 1.9 (j) sets out the key principles
for estimating the fair values of financial instruments.
Total Total
Level Level Level fair carrying
1 2 3 value value
GBPm GBPm GBPm GBPm GBPm
================================= ======== ========= ========= ========= ==========
At 31 December 2017
================================= ======== ========= ========= ========= ==========
Cash and balances at central
banks - 2,579.0 - 2,579.0 2,579.0
================================= ======== ========= ========= ========= ==========
Loans and advances to banks - 359.4 - 359.4 359.4
================================= ======== ========= ========= ========= ==========
Loans and advances to customers - - 36,951.6 36,951.6 36,740.2
================================= ======== ========= ========= ========= ==========
Debt securities classified
as loans and receivables 0.3 - - 0.3 0.3
================================= ======== ========= ========= ========= ==========
Available-for-sale financial
assets - - 0.3 0.3 0.3
================================= ======== ========= ========= ========= ==========
Other assets - 55.0 - 55.0 55.0
================================= ======== ========= ========= ========= ==========
Total financial assets at
fair value 0.3 2,993.4 36,951.9 39,945.6 39,734.2
================================= ======== ========= ========= ========= ==========
Deposits from banks - 5,379.0 - 5,379.0 5,379.0
================================= ======== ========= ========= ========= ==========
Customer deposits - 30,800.5 - 30,800.5 30,808.4
================================= ======== ========= ========= ========= ==========
Debt securities in issue 2,748.3 - - 2,748.3 2,736.9
================================= ======== ========= ========= ========= ==========
Other liabilities - 215.1 - 215.1 215.1
================================= ======== ========= ========= ========= ==========
Total financial liabilities
at fair value 2,748.3 36,394.6 - 39,142.9 39,139.4
================================= ======== ========= ========= ========= ==========
Total Total
Level Level Level fair carrying
1 2 3 value value
GBPm GBPm GBPm GBPm GBPm
================================= ======== ========= ========= ========= ==========
At 31 December 2016
================================= ======== ========= ========= ========= ==========
Cash and balances at central
banks - 786.3 - 786.3 786.3
================================= ======== ========= ========= ========= ==========
Loans and advances to banks - 635.6 - 635.6 635.6
================================= ======== ========= ========= ========= ==========
Loans and advances to customers - - 32,514.0 32,514.0 32,367.1
================================= ======== ========= ========= ========= ==========
Debt securities classified
as loans and receivables 0.7 - - 0.7 0.7
================================= ======== ========= ========= ========= ==========
Available-for-sale financial
assets - - 0.3 0.3 0.3
================================= ======== ========= ========= ========= ==========
Other assets - 68.8 - 68.8 68.8
================================= ======== ========= ========= ========= ==========
Total financial assets at
fair value 0.7 1,490.7 32,514.3 34,005.7 33,858.8
================================= ======== ========= ========= ========= ==========
Deposits from banks - 2,132.5 - 2,132.5 2,132.5
================================= ======== ========= ========= ========= ==========
Customer deposits - 28,222.7 - 28,222.7 28,106.3
================================= ======== ========= ========= ========= ==========
Debt securities in issue 2,610.8 - - 2,610.8 2,600.0
================================= ======== ========= ========= ========= ==========
Other liabilities - 189.5 - 189.5 189.5
================================= ======== ========= ========= ========= ==========
Total financial liabilities
at fair value 2,610.8 30,544.7 - 33,155.5 33,028.3
================================= ======== ========= ========= ========= ==========
Fair value hierarchy
The table above summarises the carrying value and fair value of
assets and liabilities held on the balance sheet. There are three
levels to the hierarchy as follows:
Level 1 - Quoted prices (unadjusted) in active markets for
identical assets and liabilities.
Level 2 - Inputs other than quoted prices included within Level
1 that are observable for the asset or liability, whether directly
(i.e. as prices) or indirectly (i.e. derived from prices).
Level 3 - Inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
Valuation methods for calculations of fair values of financial
assets and liabilities recognised at cost are set out below:
Cash and balances at central banks
Fair value approximates to carrying value because cash and
balances at central banks have minimal credit losses and are either
short-term in nature or reprice frequently.
Loans and advances to banks
Fair value was estimated by using discounted cash flows applying
either market rates where practicable or rates offered by other
financial institutions for loans with similar characteristics. The
fair value of floating rate placements, fixed rate placements with
less than six months to maturity and overnight deposits is
considered to approximate to their carrying amount.
Loans and advances to customers
The Group provides loans of varying rates and maturities to
customers. The fair value of loans with variable interest rates is
considered to approximate to carrying value as the interest rate
can be moved in line with market conditions. For loans with fixed
interest rates, fair value was estimated by discounting cash flows
using market rates or rates normally offered by the Group. The
change in interest rates since the majority of these loans were
originated means that their fair value can vary significantly from
their carrying value. However, the Group's policy is to hedge fixed
rate loans in respect of interest rate risk, which limits the
Group's exposure to this difference in value to be within the
Group's risk appetite.
Loans and advances to customers are categorised as Level 3 as
unobservable pre-payment rates are applied.
Debt securities classified as loans and receivables
Fair values are based on quoted prices, where available, or by
discounting cash flows using market rates.
Available-for-sale financial assets
These are unquoted equity securities held by the Group and
relating to participation in banking and credit card operations.
They are categorised as Level 3 as the fair value of these
securities cannot be reliably measured, due to the lack of
equivalent instruments with observable prices.
Other assets and liabilities - trade debtors/creditors, accrued
income and accrued interest
Fair value is deemed to approximate the carrying value.
Deposits from banks and customer deposits
Fair values of deposit liabilities repayable on demand or with
variable interest rates are considered to approximate to carrying
value. The fair value of fixed interest deposits with less than six
months to maturity is their carrying amount. The fair value of all
other deposit liabilities was estimated by discounting cash flows,
using market rates or rates currently offered by the Group for
deposits of similar remaining maturities.
Debt securities in issue
Fair values are based on quoted prices where available or by
discounting cash flows using market rates.
Fair value of financial assets and liabilities recognised at
fair value
The following table summarises the fair values of those
financial assets and liabilities recognised at fair value, by the
level in the fair value hierarchy into which each fair value
measurement is categorised. The accounting policy in note 1.9(j)
sets out the key principles for estimating the fair values of
financial instruments.
Level Level Level
1 2 3 Total
2017 GBPm GBPm GBPm GBPm
================================== ======== ====== ====== ========
Financial assets
================================== ======== ====== ====== ========
Derivative financial instruments - 78.8 - 78.8
================================== ======== ====== ====== ========
Available-for-sale financial
assets 1,048.7 - 2.8 1,051.5
================================== ======== ====== ====== ========
Financial liabilities
================================== ======== ====== ====== ========
Derivative financial instruments - 93.5 - 93.5
================================== ======== ====== ====== ========
Level Level Level
1 2 3 Total
2016 GBPm GBPm GBPm GBPm
================================== ======== ====== ====== ========
Financial assets
================================== ======== ====== ====== ========
Derivative financial instruments - 104.2 - 104.2
================================== ======== ====== ====== ========
Available-for-sale financial
assets 850.9 - 7.6 858.5
================================== ======== ====== ====== ========
Financial liabilities
================================== ======== ====== ====== ========
Derivative financial instruments - 229.7 - 229.7
================================== ======== ====== ====== ========
Level 1 Valuations
The fair value of debt securities categorised as
available-for-sale financial assets is derived from unadjusted
quoted prices in an active market.
Level 2 Valuations
The fair values of derivative instruments are calculated by
discounted cash flow models using yield curves that are based on
observable market data or are based on valuations obtained from
counterparties.
Level 3 Valuations
Level 3 available-for-sale financial assets represent the
Group's best estimates of the value of certain equity investments
in unlisted companies and of unlisted preferred stock. The
valuations take into account relevant information on the individual
investments, with discounts applied to reflect their illiquid
nature and, in respect of the preferred stock, risks of reduction
in conversion rights. The discounts applied are the most
significant unobservable valuation inputs.
The Group's shares in VocaLink Holdings Limited (Vocalink) were
included within this category at 31 December 2016. The shares were
sold in April 2017 following regulatory approval of Mastercard's
acquisition of Vocalink, resulting in recognition of a gain on
disposal of GBP6.1 million, included within other operating
income.
Note 33: Offsetting of financial assets and financial
liabilities
Related amounts
where set
off in the
balance sheet
not permitted(2)
======================= ============= ========== =========== ========================= =========
Amounts Net
Gross offset amounts
amounts in presented Subject
of assets the in the to master Collateral
and balance balance netting received/ Net
liabilities sheet(1) sheet agreements pledged amounts
GBPm GBPm GBPm GBPm GBPm GBPm
======================= ============= ========== =========== ============ =========== =========
As at 31 December
2017
======================= ============= ========== =========== ============ =========== =========
Financial assets
======================= ============= ========== =========== ============ =========== =========
Derivative financial
instruments 129.8 (51.0) 78.8 (11.5) (67.3) -
======================= ============= ========== =========== ============ =========== =========
Loans and advances
to banks 359.4 - 359.4 - (74.6) 284.8
======================= ============= ========== =========== ============ =========== =========
Financial liabilities
======================= ============= ========== =========== ============ =========== =========
Deposits from banks 5,379.0 - 5,379.0 - (8.4) 5,370.6
======================= ============= ========== =========== ============ =========== =========
Derivative financial
instruments 107.7 (14.2) 93.5 (11.5) (63.6) 18.4
======================= ============= ========== =========== ============ =========== =========
Other liabilities 251.9 (36.8) 215.1 - - 215.1
======================= ============= ========== =========== ============ =========== =========
Related amounts
where set
off in the
balance sheet
not permitted(2)
======================= ============= ========== =========== ================================ =========
Amounts Net
Gross offset amounts
amounts in presented Subject
of assets the in the to master
and balance balance netting Collateral Net
liabilities sheet(1) sheet agreements received/pledged amounts
GBPm GBPm GBPm GBPm GBPm GBPm
======================= ============= ========== =========== ============ ================== =========
As at 31 December
2016
======================= ============= ========== =========== ============ ================== =========
Financial assets
======================= ============= ========== =========== ============ ================== =========
Derivative financial
instruments 123.9 (19.7) 104.2 (25.4) (78.8) -
======================= ============= ========== =========== ============ ================== =========
Loans and advances
to banks 635.6 - 635.6 - (168.1) 467.5
======================= ============= ========== =========== ============ ================== =========
Other assets 72.0 (3.2) 68.8 - - 68.8
======================= ============= ========== =========== ============ ================== =========
Financial liabilities
======================= ============= ========== =========== ============ ================== =========
Deposits from banks 2,132.5 - 2,132.5 - (10.7) 2,121.8
======================= ============= ========== =========== ============ ================== =========
Derivative financial
instruments 254.1 (24.4) 229.7 (25.4) (168.1) 36.2
======================= ============= ========== =========== ============ ================== =========
Other liabilities 188.0 1.5 189.5 - - 189.5
======================= ============= ========== =========== ============ ================== =========
1 The amounts set off in the balance sheet as shown above
represent derivatives and variation margin cash collateral with
central clearing houses which meet the criteria for offsetting
under IAS 32.
2 The Group enters into derivatives with various counterparties
which are governed by industry standard master netting agreements.
The Group holds and provides cash and securities collateral in
respect of derivative transactions covered by these agreements. The
right to set off balances under these master netting agreements or
to set off cash and securities collateral 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 effects of over collateralisation have not been taken into
account in the above table.
Note 34: Cash flow statements
(a) Change in operating assets
2017 2016
GBPm GBPm
=========================================== ========== ==========
Change in loans and advances to customers (4,417.3) (5,295.7)
=========================================== ========== ==========
Change in derivative financial assets 25.4 (21.9)
=========================================== ========== ==========
Change in other operating assets 34.1 (69.7)
=========================================== ========== ==========
Change in operating assets (4,357.8) (5,387.3)
=========================================== ========== ==========
(b) Change in operating liabilities
2017 2016
GBPm GBPm
============================================ ======== ========
Change in deposits from banks 3,247.1 833.2
============================================ ======== ========
Change in customer deposits 2,702.1 2,961.4
============================================ ======== ========
Change in derivative financial liabilities (136.2) 73.7
============================================ ======== ========
Change in other operating liabilities (6.4) 89.0
============================================ ======== ========
Change in operating liabilities 5,806.6 3,957.3
============================================ ======== ========
(c) Non-cash and other items
2017 2016
GBPm GBPm
=========================================== ====== ======
Depreciation, amortisation and impairment 35.2 21.0
=========================================== ====== ======
Other non-cash items 13.0 39.3
=========================================== ====== ======
Total non-cash and other items 48.2 60.3
=========================================== ====== ======
(d) Analysis of cash and cash equivalents as shown in the balance sheet
2017 2016
GBPm GBPm
=========================================== ========== ==========
Cash and balances at central banks 2,579.0 786.3
=========================================== ========== ==========
Less: mandatory reserve deposits(1) (53.0) (49.1)
=========================================== ========== ==========
2,526.0 737.2
=========================================== ========== ==========
Loans and advances to banks 359.4 635.6
=========================================== ========== ==========
Available-for-sale financial assets (with 149.4 -
a maturity of less than 3 months)
=========================================== ========== ==========
Deposits from banks (5,379.0) (2,132.5)
=========================================== ========== ==========
Less: amounts not repayable on demand 5,379.0 2,131.9
=========================================== ========== ==========
- (0.6)
=========================================== ========== ==========
Total cash and cash equivalents 3,034.8 1,372.2
=========================================== ========== ==========
1 Mandatory reserves with central banks are not available for
use in day-to-day operations.
Note 35: Related party transactions
Key Management Personnel
Key Management Personnel refer to the Executive Committee of the
Group, Non-Executive Directors and Directors of subsidiary
companies.
2017 2016
GBPm GBPm
======================================== ====== ======
Compensation
======================================== ====== ======
Salaries and other short-term benefits 6.7 7.4
======================================== ====== ======
Share based payments (refer note 7) 6.1 7.6
======================================== ====== ======
Post-employment benefits 0.9 0.8
======================================== ====== ======
Total compensation 13.7 15.8
======================================== ====== ======
Aggregate contributions in respect of Key Management Personnel
to defined contribution pension schemes GBP0.9 million (2016:
GBP0.8 million).
2017 2016
GBPm GBPm
======================================== ====== ======
Deposits
======================================== ====== ======
At 1 January 1.4 2.2
======================================== ====== ======
Placed (includes deposits of appointed
Key Management Personnel) 0.6 1.5
======================================== ====== ======
Withdrawn (includes deposits of former
Key Management Personnel) (0.9) (2.3)
======================================== ====== ======
Deposits outstanding at 31 December 1.1 1.4
======================================== ====== ======
Deposits placed by Key Management Personnel attracted interest
rates of up to 3.0% (2016: 3.0%). At 31 December 2017, the Group
did not provide any guarantees in respect of Key Management
Personnel (2016: none).
At 31 December 2017, transactions, arrangements and agreements
entered into by the Group's banking subsidiaries with Key
Management Personnel included amounts outstanding in respect of
loans and credit card transactions of GBP0.6 million with 7 Key
Management Personnel (2016: GBP0.9 million with 7 Key Management
Personnel).
Subsidiaries
Transactions and balances with subsidiaries have been eliminated
on consolidation. A full list of the Company's subsidiaries and
SPVs included within the consolidation is provided in note 2 to the
parent company financial statements.
Other transactions
Transaction value at year end: 2017 2016
GBPm GBPm
=========================================== ====== ======
Trademark licence fees paid to Virgin
Enterprises Limited (8.0) (7.0)
=========================================== ====== ======
Commissions received and charges paid
to Virgin Atlantic Airways Limited 0.5 0.4
=========================================== ====== ======
Donations to The Virgin Money Foundation (1.4) (1.4)
=========================================== ====== ======
Dividend payment to Virgin Group Holdings
Limited (8.4) (7.3)
=========================================== ====== ======
Other costs paid to Virgin Management
Group Companies (0.3) (0.3)
=========================================== ====== ======
Balance outstanding at year end: 2017 2016
GBPm GBPm
============================================== ======= ======
Trademark licence fees to Virgin Enterprises
Limited (0.6) (0.6)
============================================== ======= ======
Commissions received and charges paid
to Virgin Atlantic Airways Limited 0.1 0.1
============================================== ======= ======
Asset recognised in relation to Virgin -
Atlantic Airways Limited agreement 10.0
============================================== ======= ======
Liability recognised in relation to Virgin -
Atlantic Airways Limited agreement (10.0)
============================================== ======= ======
Donations to The Virgin Money Foundation - (0.2)
============================================== ======= ======
Other costs to Virgin Management Group
Companies - (0.1)
============================================== ======= ======
Trademark licence fees paid to Virgin Enterprises Limited
Licence fees are payable to Virgin Enterprises Limited for the
use of the Virgin Money brand trademark.
Virgin Atlantic Airways Limited
The Group receives credit card commissions and incurs air mile
charges to Virgin Atlantic Airways Limited (VAA) in respect of an
agreement between the two parties.
In June 2017 an agreement was signed with VAA which will give
rise to related party transactions in future periods. An asset and
liability has been recognised during the year in relation to a
committed payment under this agreement.
Donations to The Virgin Money Foundation (the Foundation)
The Group has made donations to the Foundation in both the
current and prior year to enable the Foundation 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 GBP0.4 million (2016:
GBP0.3 million).
Dividend payment to Virgin Group Holdings Limited
The Group made dividend payments totalling GBP8.4 million to
Virgin Group Holdings Limited in the year which represented that
company's proportionate share of the total final 2016 dividend and
the total interim 2017 dividend. In the prior year, the Group made
dividend payments totalling GBP7.3 million to Virgin Group Holdings
Limited which represented that company's proportionate share of the
total final 2015 dividend and the total interim 2016 dividend.
Other costs paid to Virgin Management Group Companies
These costs include transactions with other companies in the
Virgin Group.
Note 36: Events after balance sheet date
There have been no significant events between 31 December 2017
and the date of approval of the financial statements which would
require a change or additional disclosure in the financial
statements.
Note 37: Future accounting developments
A number of new accounting standards and amendments to
accounting standards have been issued by the IASB, however are not
yet effective and have not been early adopted by the Group. Those
which may be relevant to the Group are set out below.
(a) IFRS 9 'Financial instruments' (Effective 1 January 2018, EU endorsed on 22 November 2016)
Background
In July 2014, the IASB issued the final version of IFRS 9
'Financial Instruments' which replaces IAS 39 'Financial
Instruments: Recognition and Measurement'. This new accounting
standard is effective from 1 January 2018 and has three core areas
of change: Classification and Measurement; Hedge Accounting; and
Impairment. The most significant impacts on the Group are from the
changes to impairment.
Classification and Measurement
The Classification and Measurement requirements of IFRS 9
require financial assets to be classified into one of three
measurement categories, fair value through profit or loss (FVTPL),
fair value through other comprehensive income (FVOCI) and amortised
cost. For financial assets classification is based on the
objectives of the entity's business model for managing its
financial assets and the contractual cash flow characteristics of
the instruments. IFRS 9 retains most of the existing classification
requirements for financial liabilities.
In relation to Classification and Measurement, IFRS 9 will not
result in a significant change to current asset and liability
measurement bases. The Group's debt security investment portfolio,
which is classified as Available-for-Sale under IAS 39, will be
reclassified into the FVOCI category on 1 January 2018, with no
change in measurement basis and no impact to the Group's financial
position. The Group's small number of equity investments, which are
classified as Available-for-Sale under IAS 39, will be reclassified
to either FVOCI or FVTPL on a case by case basis, with no change in
measurement basis.
Hedge Accounting
The hedge accounting requirements of IFRS 9 are more closely
aligned with risk management practices and follow a more
principle-based approach. IFRS 9 includes an accounting policy
choice to maintain existing IAS 39 hedge accounting rules until the
IASB completes its project on macro hedging. The Group has decided
to apply this accounting policy choice and will continue applying
IAS 39 hedge accounting.
Impairment (Expected Credit Loss)
The impairment requirements of IFRS 9 replaces the existing
'incurred loss' impairment approach with an expected credit loss
approach, resulting in earlier recognition of credit losses. The
IFRS 9 impairment model has three stages. Entities are required to
recognise a 12 month expected loss allowance on initial recognition
(stage 1) and a lifetime expected loss allowance when there has
been a significant increase in credit risk (stage 2).
Stage 3 requires objective evidence that an asset is
credit-impaired, which is similar to the guidance on incurred
losses in IAS 39. Loan commitments and financial guarantees not
measured at fair value through profit or loss are also in scope for
impairment. The assessment of whether a significant increase in
credit risk has occurred is a key aspect of the IFRS 9 methodology.
It involves quantitative and qualitative measures and therefore
requires considerable management judgement. In addition IFRS 9 also
requires the use of more forward-looking information including
reasonable and supportable forecasts of future economic
conditions.
Key accounting judgements
The Group undertook a full technical assessment of IFRS 9 which
highlighted certain significant accounting policies and judgements.
These areas include the selection of quantitative and qualitative
criteria for the determination of significant increase in credit
risk and the application of forward-looking data into the expected
credit loss calculations, including multiple economic scenarios.
The following summarises the key accounting judgements the Group
will apply on adoption of IFRS 9:
Measurement of Expected Credit Loss
Expected credit loss is measured on either a 12 month or
lifetime basis depending on whether a significant increase in
credit risk has occurred since initial recognition or whether the
asset meets the definition of default. Expected credit loss is the
product of the probability of default (PD), exposure at default
(EAD) and loss given default (LGD), discounted at the effective
interest rate.
Significant Increase in Credit Risk (movement from stage 1 to
stage 2)
The Group has identified a series of quantitative, qualitative
and backstop criteria that will be used to determine if an account
has demonstrated a significant increase in credit risk, and
therefore should move from stage 1 to stage 2:
-- Quantitative measures consider the increase in an account's
remaining lifetime PD compared to the expected residual lifetime PD
when the account was originated. The Group will segment its credit
portfolios into PD bands and has determined a relevant threshold
for each PD band, where a movement in excess of threshold is
considered to be significant. These thresholds have been determined
separately for each portfolio based on historical evidence of
delinquency.
-- Qualitative measures include the observation of specific
events such as short-term forbearance, payment cancellation,
historical arrears or extension to customer terms.
-- IFRS 9 includes a rebuttable presumption that 30 days past
due is an indicator of a significant increase in credit risk. The
Group considers 30 days past due to be an appropriate backstop
measure and will not rebut this presumption.
Definition of default (movement to stage 3)
The Group has identified a series of quantitative and
qualitative criteria that will be used to determine if an account
meets the definition of default, and therefore should move to stage
3:
-- IFRS 9 includes a rebuttable presumption that 90 days past
due is an indicator of default. The Group considers 90 days past
due to be an appropriate measure of default and will not rebut this
presumption.
-- Qualitative measures include the observation of specific
events such as insolvency or enforcement activity.
Forward-looking information and multiple economic scenarios
The assessment of significant increase in credit risk and the
calculation of expected credit loss both incorporate
forward-looking information. The Group has identified the most
significant macroeconomic factors including house price inflation,
unemployment rate and Bank Base Rate. These variables and their
associated impact on PD, EAD and LGD have been factored into the
credit loss models.
The Group has determined an approach to the selection and
application of multiple scenarios. The Group does not have an
in-house economics function and will therefore source economic
scenarios from a third party source to form the basis of the
economic scenarios used. The Group will consider a minimum of three
scenarios on a probability-weighted approach. These scenarios
include a base, an upside and a downside scenario.
IFRS 9 implementation programme and governance
The Group has managed the transition to IFRS 9 through an IFRS 9
delivery programme to ensure a high-quality implementation in
compliance with the accounting and regulatory guidance. The Audit
Committee has had oversight responsibility for the implementation
of IFRS 9.
The Group has developed and built new expected credit loss
models for the key retail portfolios (secured and unsecured). The
Group has run these models during the second half of 2017 in a
period of parallel run to ensure full readiness in advance of
implementation from 1 January 2018. The Group is in the process of
completing the refinement and validation of these models. The
Group's auditors have undertaken extensive audit procedures during
the course of 2017 to provide proactive assurance over the new
expected credit loss models and the Group's IFRS 9 accounting
policies.
The Group continues to monitor the wider market developments in
relation to IFRS 9, including evolving disclosure requirements and
regulatory developments such as potential capital transitionary
rules.
Impact of transition to IFRS 9
The Group will record an adjustment to its opening 1 January
2018 retained earnings to reflect the application of the new
requirements of IFRS 9 and will not restate comparative
periods.
The Group estimates the transition to IFRS 9 will reduce
shareholders' equity by approximately GBP35 million after deferred
tax as at 1 January 2018. The impact on the Group's CET1 ratio will
reflect the recently published capital transitional arrangements.
This adjustment arises from the increase in the Group's balance
sheet loan loss allowances as a result of the application of IFRS 9
requirements, with the Group's retail credit card portfolio being
the most significantly impacted.
The Group continues to refine, monitor and validate certain
elements of the impairment models and related controls ahead of
full reporting of IFRS 9 impacts later in 2018.
(b) IFRS 15 'Revenue from Contracts with Customers' (Effective 1
January 2018, EU endorsed on 22 September 2016)
IFRS 15 replaces IAS 18 'Revenue' and IAS 11 'Construction
contracts' as a comprehensive standard to address current
inconsistencies in accounting practice for revenue recognition.
Financial instruments and other contractual rights or obligations
within the scope of IFRS 9 are excluded from the scope of this
standard.
The Group has reviewed the requirements of the new standard and
it is not expected to have a significant impact, as a substantial
proportion of the Group's income is generated from financial
instruments.
(c) IFRS 16 'Leases' (Effective 1 January 2019, EU endorsed on 31 October 2017)
This standard replaces IAS 17 'Leases' and will result in most
leases for lessees being brought on to the Balance Sheet under a
single lease model, removing the distinction between finance and
operating leases. It requires a lessee to recognise a
'right-of-use' asset and a lease liability. Lessor accounting
remains largely unchanged.
This will mainly impact properties the Group currently accounts
for as operating leases. A project is in place and the Group is
currently undertaking a review of its lease agreements. No
decisions have been made yet in relation to transition options.
Note 38: Country by country reporting
The Capital Requirements (Country by Country Reporting)
Regulations came into effect on 1 January 2014 and place certain
reporting obligations on financial institutions within CRD IV.
The activities of the Group are described in the Strategic
Report.
All companies consolidated within the Group's financial
statements are UK registered entities.
UK
=================================== ==========
Number of employees (average FTE) 2,959
=================================== ==========
Turnover (total income) GBP662.7m
=================================== ==========
Pre-tax profit GBP262.6m
=================================== ==========
Corporation tax paid GBP45.1m
=================================== ==========
Public subsidies received GBP0.0m
=================================== ==========
The Group received no public subsidies during the year.
Alternative Performance Measures
The Group analyses its performance on an underlying basis, as
described in the basis of preparation of the financial results on
page 48, and reconciled to the statutory results in note 2 to the
consolidated financial statements. These are consistent with the
Board and the Executive's view of the Group's underlying
performance without the distortions of items and timing differences
which are not reflective of the Group's ongoing business
activities.
The Group also calculates a number of metrics that are commonly
used and reported throughout the banking industry on an underlying
basis, as these provide the Board and the Executive with a
consistent view of these measures from period to period and provide
relevant information to investors and other external
stakeholders.
Descriptions of alternative performance measures used throughout
this Report, including their basis of calculation, are set out
below.
Banking Net Net interest income, calculated on an
Interest Margin underlying basis, as a percentage of
(NIM) simple average interest-earning banking
assets.
Cost of funds Funding costs divided by average funding
(spread) balances less the average 3 month Libor
interest rate for the period.
Cost of risk Impairment charges, net of debt recoveries,
divided by simple average gross loans
for the period.
Cost:income Operating expenses divided by total
ratio income, calculated on an underlying
basis.
JAWS The difference between the period on
period percentage change in total income
less the period on period change in
operating expenses calculated on an
underlying basis.
Loan-to-deposit The ratio of loans and advances to customers,
ratio net of allowances for impairment, divided
by customer deposits (each excluding
adjustments for fair value of portfolio
hedging).
Net interest Net interest income, calculated on an
margin (NIM) underlying basis, as a percentage of
simple average interest-earning assets.
Return on assets Profit attributable to equity owners
divided by closing total assets.
Return on tangible Underlying profit before tax (adjusted
equity (RoTE) to deduct distributions to Additional
Tier 1 securities) less tax calculated
using the statutory effective tax rate
of the Group, divided by simple average
tangible equity. Tangible equity is
calculated as total equity less other
equity instruments and intangible assets.
Tangible net Net assets excluding intangible assets
asset value and Additional Tier 1 securities divided
per share by the closing number of Ordinary Shares
(excluding own shares held).
Underlying basic Underlying profit before tax (adjusted
earnings per to deduct distributions to Additional
share Tier 1 securities) less tax calculated
using the statutory effective tax rate
of the Group, divided by the weighted-average
number of Ordinary Shares outstanding
during the period (excluding own shares
held).
Underlying net Statutory net interest income adjusted
interest income for a subset of certain items as detailed
on page 48.
Underlying profit/(loss) Statutory profit/(loss) before tax adjusted
before tax for certain items as detailed on page
48.
Underlying return Underlying profit before tax (adjusted
on assets to deduct distributions to Additional
Tier 1 securities) less tax calculated
using the statutory effective tax rate
of the Group, divided by simple average
total assets.
Underlying total Statutory total income adjusted for
income a subset of certain items as detailed
on pages 48.
The Group also discloses a number of capital and liquidity
metrics relevant to its financial position for which calculation is
required under prudential rules issued by the PRA and FCA, in line
with requirements of UK/EU legislation and Basel III. The bases of
calculation of those metrics is defined within the relevant
legislation (for example CRD IV) and are disclosed in the
Glossary.
Glossary
Advanced Internal A CRD IV approach for measuring exposure
Ratings Based to credit risk. The method of calculating
(AIRB) Approach credit risk capital requirements uses
internal probability of default (PD),
loss given default (LGD) and exposure
at default (EAD) models. AIRB approaches
may only be used with Prudential Regulation
Authority (PRA) permission.
Basel III Global regulatory standard on Bank Capital
Adequacy, Stress Testing and Market
and Liquidity proposed by the Basel
Committee on Banking Supervision in
2010. See also CRD IV.
Basis Point One hundredth of a per cent (0.01%).
(bps) 100 basis points is 1%. Used when quoting
movements in interest rates or yields.
Capital at Risk Approach set out for the quantification
(CaR) of interest rate risk expressed as the
impact to the present value of the Group's
capital under interest rate sensitivity
analysis.
CASS Client Assets Sourcebook, included in
the FCA Handbook and sets out the requirements
with which firms must comply when holding
or controlling client assets.
Certificates A certificate issued by a bank to a
of Deposit person depositing money for a specified
length of time at a specified rate of
interest.
Charge-Off Charge-off occurs on outstanding credit
card balances where in-house collections
and recoveries have been exhausted.
This involves the removal of the balance
and associated provision from the balance
sheet with any remaining outstanding
balance recognised as a loss. Charged-off
accounts may be subject to debt-sale,
where by additional recoveries will
be taken to profit or loss.
Common Equity The highest quality form of capital
Tier 1 Capital under CRD IV that comprises common shares
(CET1) issued and related share premium, retained
earnings and other reserves excluding
the cash flow hedging reserve, less
specified regulatory adjustments.
CRD IV In June 2013, the European Commission
published legislation for a Capital
Requirements Directive (CRD) and Capital
Requirements Regulation (CRR) which
form the CRD IV package. The package
implements the Basel III proposals in
addition to the inclusion of new proposals
on sanctions for non-compliance with
prudential rules, corporate governance
and remuneration. The rules are implemented
in the UK via the PRA policy statement
PS7/13 and came into force from 1 January
2014, with certain sections subject
to transitional phase in.
Credit Enhancements Risk reduction techniques that improve
the credit standing of financial obligations;
generally those issued by a structured
entity in a securitisation.
Credit Valuation These are adjustments to the fair values
Adjustments of derivative assets to reflect the
(CVA) creditworthiness of the counterparty.
Cross-Currency An arrangement in which two parties
Swaps exchange specific principal amounts
in different currencies at inception
and subsequent interest payments on
the principal amounts.
Debt Securities Debt securities are assets held by the
Group representing certificates of indebtedness
of credit institutions, public bodies
or other undertakings, excluding those
issued by Central Banks.
Earnings at Approach set out for the quantification
Risk (EaR) of interest rate risk expressed as the
impact to forecast net interest income
under interest rate sensitivity analysis.
Expected Loss Regulatory expected loss represents
(regulatory) the anticipated loss, in the event of
a default, on a credit risk exposure
modelled under the Advanced Internal
Ratings Based approach. Expected loss
is determined by multiplying the associated
PD, LGD and EAD.
Expected Credit Expected Credit Losses are a provision
Loss (IFRS 9) held on the balance sheet for all financial
instruments. Expected Credit Losses
may be recognised on either a 12 month
or lifetime basis. The level will be
determined by the performance of individual
assets, and take into consideration
associated credit risk attributes, including
a significant increase in credit risk
or any credit impairment. An expected
credit loss may either be individual
or collective as a result of the raising
of a charge against profit for the expected
loss inherent in the lending book. An
expected credit loss may either be individual
or collective.
Exposure at An estimate of the amount expected to
Default (EAD) be owed by a customer at the time of
a customer's default.
Forbearance Forbearance takes place when a concession
is made on the contractual terms of
a loan in response to borrowers' financial
difficulties; or for where the contractual
terms have been cancelled for credit
cards. Forbearance options are determined
by assessing the customer's personal
circumstances.
Full Time Equivalent A full time employee is one that works
(FTE) a standard five day week. The hours
worked by part time employees are measured
against this standard and accumulated
along with the number of full time employees
and counted as full time equivalents.
Funding for The Bank of England launched the Funding
Lending Scheme for Lending scheme in 2012 to allow
(FLS) banks and building societies to borrow
from the Bank of England at cheaper
than market rates for up to four years.
This was designed to increase lending
to households and businesses by lowering
interest rates and increasing access
to credit.
Funding Risk The inability to raise and maintain
sufficient funding in quality and quantity
to support the delivery of the business
plan.
Impaired Assets Loans that are in arrears and where
the carrying amount of the loan exceeds
the expected recoverable amount. All
mortgage expired terms, fraud and operational
risk loans are categorised as impaired
irrespective of the expected recoverable
amount. Unsecured lending assets are
treated as impaired at one day past
due.
Impairment Allowance Impairment allowances are a provision
(IAS 39) held on the balance sheet as a result
of the raising of a charge against profit
for the incurred loss inherent in the
lending book. An impairment allowance
may either be individual or collective.
Impairment Losses An impairment loss is the reduction
in value that arises following an impairment
review of an asset that determined that
the asset's value is lower than its
carrying value.
Interest Rate The risk of a reduction in the present
Risk value of the current balance sheet or
earnings as a result of adverse movement
in interest rates.
Interest Rate The risk of a reduction in the present
Risk in the value of the current balance sheet or
Banking Book earnings as a result of an adverse movement
(IRRBB) in interest rates arising as a consequence
of carrying out and supporting core
business activities.
Internal Capital The part of the Pillar 2 assessment
Adequacy Assessment to be undertaken by a bank. The ICAAP
Process (ICAAP) allows financial institutions to assess
the level of capital that adequately
supports all relevant current and future
risks in their business. In undertaking
an ICAAP, a financial institution should
be able to ensure that it has appropriate
processes in place to ensure compliance
with CRD IV.
Internal Liquidity The ILAAP provides comprehensive documentation
Adequacy Assessment of the Bank's Liquidity Risk Management
Process (ILAAP) framework, including: identifying the
key liquidity and funding risks to which
Virgin Money is exposed; describing
how these risks are identified, monitored
and measured and describing the techniques
and resources used to manage and mitigate
these risks.
Leverage Ratio Total Tier 1 Capital expressed as a
percentage of Total assets (adjusted
in accordance with CRD IV).
Liquidity Coverage Stock of high quality liquid assets
Ratio (LCR) as a percentage of expected net cash
outflows over the following 30 days
according to CRD IV requirements.
Liquidity Risk The inability to accommodate liability
maturities and withdrawals, fund asset
growth, and otherwise meet the Group's
contractual obligations to make payments
as they fall due.
Loan-to-Value The amount of a secured loan as a percentage
Ratio of the appraised value of the security
e.g. the outstanding amount of mortgage
loan as a percentage of the property's
value.
Loss Emergence Under IAS 39, the loss emergence period
Period (IAS allows for the recognition of impairment
39) in respect of losses that have been
incurred but not reported. The emergence
period is measured as time between the
emergence of impairment triggers and
the time at which the loss is incurred.
Loss Given Default The estimated loss that will arise if
(LGD) a customer defaults. LGD comprises the
actual loss (the part that is not expected
to be recovered), after taking account
of credit risk mitigation, for example,
any security held over collateral and
the economic costs associated with the
recovery process.
Master Netting An agreement between two counterparties
Agreement that have multiple derivative contracts
with each other that provides for the
net settlement of all contracts through
a single payment, in a single currency,
in the event of default on, or termination
of, any one contract.
Mortgage Completion The balance weighted average effective
Spread interest rate on new mortgages advanced
in the period less the cost of associated
fixed to 3 month Libor interest rate
swaps.
Net Interest The difference between interest received
Income on assets and interest paid on liabilities.
Net Promoter A measure of satisfaction that ranges
Score (NPS) between -100 and +100 and represents
the likelihood of respondents recommending
Virgin Money, its products or services
to others.
From a scale between 0 to 10, those
scoring 9 to 10 are categorised as Promoters,
those scoring 0 to 6 as Detractors and
those scoring 7 to 8 as Passives.
The NPS is calculated by subtracting
the percentage of respondents who are
Detractors from the percentage of respondents
that are Promoters. Passives count towards
the total number of respondents and
thus decrease the percentage of Detractors
and Promoters.
Net Stable Funding The ratio of available stable funding
Ratio (NSFR) to required stable funding over a one
year time horizon, assuming a stressed
scenario. The ratio is required to be
100% with effect from 2018. Available
stable funding would include such items
as equity capital, preferred stock with
a maturity of over 1 year, or liabilities
with a maturity of over 1 year.
Percentage Point Unit for measuring the difference of
(pp) two percentages. A change from 1% to
2% is 1 percentage point.
Pillar 1 The part of CRD IV that sets out the
process by which regulatory capital
requirements should be calculated for
credit, market and operational risk.
Pillar 2 The part of CRD IV that ensures financial
institutions hold adequate capital to
support the relevant risks in their
business. It also encourages financial
institutions to develop and use enhanced
risk management techniques in monitoring
and managing their risks.
Pillar 3 The part of CRD IV that sets out the
information banks must disclose in relation
to their risks, the amount of capital
required to absorb them, and their approach
to risk management. The aim is to strengthen
market discipline.
Probability The probability of a customer defaulting
of Default (PD) over a defined outcome period. Default
occurs where a borrower has missed 6
months of mortgage repayments or 3 months
of credit card repayments, or the borrower
is deemed to be unlikely to repay their
loan. The outcome period varies for
assessment of capital requirements and
for assessment of provisions.
Repurchase Agreements A form of short-term funding where one
(Repos) party sells a financial asset to another
party with an agreement to repurchase
at a specific price and date. From the
seller's perspective such agreements
are repurchase agreements (repos) and
from the buyer's reverse repurchase
agreements (reverse repos).
Risk Appetite The risk appetite sets limits on the
amount and type of risk that the Group
is willing to tolerate in order to meet
its strategic objectives.
Risk-Weighted A measure of a bank's assets adjusted
Assets for their associated risks. Risk weightings
are established in accordance with PRA
rules and are used to assess capital
requirements and adequacy under Pillar
1.
Securitisation Securitisation is a process by which
a group of assets, usually loans, are
aggregated into a pool, which is used
to back the issuance of new securities
through an SPV.
Sovereign Exposures Exposures to central governments and
central government departments, central
banks and entities owned or guaranteed
by the aforementioned.
Standardised In relation to credit risk, a method
Approach for calculating credit risk capital
requirements using External Credit Assessment
Institutions (ECAI) ratings of obligors
(where available) and supervisory risk
weights. In relation to operational
risk, a method of calculating the operational
risk capital requirement by the application
of a supervisory defined percentage
charge to the gross income of specified
business lines.
Stress Testing Techniques where plausible events are
considered as vulnerabilities to ascertain
how this will impact the capital or
liquidity resources which are required
to be held.
Tier 1 Capital A measure of banks financial strength
defined by the PRA. It captures Common
Equity Tier 1 capital plus other Tier
1 securities in issue, but is subject
to deductions including in respect of
material holdings in financial companies.
Tier 1 Capital Tier 1 capital as a percentage of risk-weighted
Ratio assets.
Tier 2 Capital A further component of regulatory capital
defined by the PRA for the Group. It
comprises eligible collective assessed
impairment allowances under CRD IV.
Term Funding The Bank of England launched the Term
Scheme (TFS) Funding Scheme in 2016 to allow banks
and building societies to borrow from
the Bank of England at rates close to
Bank Base Rate.
Virgin Virgin Group Holdings Limited.
Virgin Money The agreement under which Virgin Enterprises
Trademark Licence Limited (a subsidiary undertaking of
Agreement Virgin Group Holdings Limited) grants
perpetual licence to Virgin Money to
use the 'Virgin' and 'Virgin Money'
trademarks.
Abbreviations
AGM Annual General Meeting GDPR General Data MREL Minimum Requirements
Protection Regulation for Own Funds
and Eligible
Liabilities
AIRB Advanced Internal GHG Greenhouse Gas NIM Net Interest
Ratings Based Margin
AT1 Additional Tier 1 HMRC Her Majesty's NPS Net Promoter
Revenue and Customs Score
BOE Bank of England HPI House Pricing NSFR Net Stable Funding
Index Ratio
CET1 Common Equity Tier HQLA High Quality PCA Personal Current
1 Capital Liquid Assets Account
CRD Capital Requirements IAS International PD Probability
Directive Accounting Standards of Default
CRR Capital Requirements IASB International PRA Prudential Regulation
Regulation Accounting Standards Authority
Board
CVA Credit Valuation Adjustment ICAAP Internal Capital PSD2 Second Payment
Adequacy Services Directive
Assessment Process
DTR Disclosure Guidance IFRS International PwC PricewaterhouseCoopers
and Transparency Rules Financial Reporting LLP
Standards
EBO Everyone better off ILAAP Individual Liquidity RoTE Return on Tangible
Adequacy Assessment Equity
Process
EAD Exposure At Default IPO Initial Public RMBS Residential
Offering Mortgage Backed
Securities
EIR Effective Interest IRRBB Interest Rate RWAs Risk-weighted
Rate Risk in the Banking Assets
Book
EPS Earnings per share ISA Individual Savings SID Senior Independent
Account Director
FCA Financial Conduct ISDA International SME Small or Medium-sized
Authority Swaps and Derivatives Enterprise
Association
FLS Funding for Lending LIBOR London Inter-Bank SPV Special Purpose
Scheme Offered Rate Vehicle
FRC Financial Reporting LCR Liquidity Coverage TFS Term Funding
Council Ratio Scheme
FSCS Financial Services LGD Loss Given Default TNAV Tangible Net
Compensation Scheme Asset Value
FTE Full Time Equivalent LTIP Long-Term Incentive TSYS Total System
Plan Services, Inc
FTP Funds Transfer Pricing LTV Loan-to-Value
The information contained within this announcement is deemed by
Virgin Money to constitute inside information as stipulated under
the Market Abuse Regulation No 596/2014. Upon the publication of
this announcement via a Regulatory Information Service, this inside
information is now considered to be in the public domain.
ENQUIRIES:
Virgin Money Press Office
Scott Mowbray / Simon Hall
0191 279 4676 or press.office@virginmoney.com
FTI Consulting
John Waples / Mitch Barltrop
07717 814520 / 020 3727 1039
john.waples@fticonsulting.com /
mitch.barltrop@fticonsulting.com
Virgin Money Investor Relations
Adam Key
020 7111 1311
adam.key@virginmoney.com
Issued by Virgin Money Holdings (UK) plc.
Registered office: Jubilee House, Gosforth,
Newcastle upon Tyne NE3 4PL
Registered in England and Wales no.03087587
This information is provided by RNS
The company news service from the London Stock Exchange
END
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February 27, 2018 02:01 ET (07:01 GMT)
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