Virgin Money UK PLC Interim results

for the 6 months ended 30 September 2024

Summary financials

Solid financial performance in the 12-month period to 30 September 2024

·      Customer loans 2% lower as 6% growth in target segments of Unsecured and Business was offset by 4% reduction in Mortgages

·      Total deposits increased 4% with relationship deposits increasing to 55% of total deposits (30 Sep 2023: 53%)

·      NIM of 1.98% (+7bps YoY), supported by positive credit card EIR performance adjustments, reflecting strong activity levels and updated assumptions

·      Operating expenses (excluding notable items) 6% higher YoY, driven by inflation and the new BoE Levy (£12m) partially offset by ongoing delivery of the cost savings programme; adjusted C:I ratio⁽³⁾ higher YoY at 53.0%

·      Notable expenditure of £158m comprised £56m of restructuring spend, £37m of FCPP⁽⁴⁾ costs and £64m of transaction-related costs

·      Impairment charge of £177m / 24bps CoR (12 months to 30 Sep 2023: 42bps), incorporating benefit from SICR⁽⁵⁾ review of the Group's card portfolio and an improving macroeconomic outlook; credit quality remains solid; stable provision coverage of 84bps

·      As a result of these factors, statutory RoTE improved in the period to 6.7% (12 months to Sep 2023: 3.9%)

·      CET1 ratio of 13.6% was 1.1%pts lower YoY; movement includes £63m of share buybacks prior to the cancellation of the programme and full recognition of the TMLA⁽⁶⁾ fee (£250m plus VAT of £50m), which was a foreseeable charge for capital purposes

Acquisition of the Company by Nationwide

·      The acquisition of Virgin Money by Nationwide completed on 1 October 2024, following the sanction of the Scheme of Arrangement (Scheme) by the Court, creating the second largest provider of mortgages and savings in the UK

·      Virgin Money will remain a separate legal entity within the combined group including Nationwide, with a separate Board and banking license held by Clydesdale Bank

·      The PRA has confirmed outstanding externally held own funds issued by Virgin Money will, subject to applicable deductions, be eligible to meet the consolidated capital requirements applicable to the combined group until 31 December 2028

·      The BoE has also confirmed it will treat the outstanding externally held eligible liabilities, AT1 and Tier 2 instruments issued by Virgin Money as eligible to meet the consolidated MREL requirements applicable to the combined group until 31 December 2028

Business and financial review

KPIs

Measuring strategic delivery

Business and financial review

Business review

Acquisition of Virgin Money by Nationwide

The acquisition of Virgin Money by Nationwide became effective on 1 October 2024, following the satisfaction of all conditions within the Scheme, with Virgin Money shares delisted on the same date. Following the Scheme becoming effective, the Virgin Money Group is wholly owned by Nationwide, forming the second largest provider of mortgages and retail savings in the UK. This Business and financial review focuses on the strategic and financial progress of Virgin Money in the 12 months to 30 September 2024, which encompasses the acquisition process. Please refer to Nationwide's Interim Results for the period ended 30 September 2024 for further commentary on the acquisition of Virgin Money by Nationwide.

Board changes

David Duffy has stepped down as Chief Executive Officer and as an Executive Director of Virgin Money. The appointment of Chris Rhodes, formerly Chief Financial Officer of Nationwide, as an Executive Director and Chief Executive Officer became effective from 1 October 2024.

Clifford Abrahams has informed the Board he will be stepping down as Group Chief Financial Officer (CFO) on 15 December 2024 to pursue a new opportunity. During this period there will be a handover to Gergely Zaborszky who will takeover as CFO and join the Board as an Executive Director, subject to regulatory approval. Gergely recently led the Group's Financial Planning and Analysis and Capital Management team.

Sara Weller, the representative of Virgin Enterprises on the Virgin Money Board, has stepped down following the completion of the acquisition. Darren Pope has also stepped down, given his intention to take up another non-executive director role externally which will cause a conflict with his role at Virgin Money. Petra van Hoeken joined the Board as an independent Non-Executive Director of the Company with effect from 1 July 2024, after Geeta Gopalan stepped down from the Board on 30 June 2024. Petra brings to the Board extensive banking and financial services industry and risk experience gained across multiple geographies.

Solid financial performance in the 12-month period to 30 September 2024

During the last 12 months, the Group has remained focused on supporting customers with continued growth in Business and Unsecured lending, as well as relationship deposits. This has been against a continued competitive backdrop in the broader UK banking sector, where the higher rate environment has seen more subdued demand in the mortgage market.

Overall, the Group reported a profit before tax of £558m for the 12-month period to 30 September 2024, 62% higher than the prior 12-month period, resulting in a statutory RoTE for the period of 6.7% (12 months to 30 September 2023: 3.9%). This incorporated some impacts from the transaction, including £64m of transaction-related costs, and the deferral of restructuring activity, which limited the benefit delivered by the Group's gross annualised cost saving measures. As such, RoTE during the period was lower than the c.8% anticipated in November 2023.

Continuing the Group's strategic execution

Virgin Money set out a three-year plan at FY21 to digitise the bank, improve efficiency and deliver profitable growth in its target segments. In the final 12 months of the plan, the Group continued to deliver operational, financial and strategic progress in line with its Purpose-led digital strategy as set out below:

Pioneering Growth

Virgin Money delivered growth of c.6% in balances in its target lending segments of Business and Unsecured lending over the last 12 months. In Business lending, balances increased by 7% to £9.4bn, supported by a record year for new originations, as we delivered £2.9bn of new lending to small and medium business customers (12 months to 30 September 2023: £2.5bn).

Unsecured lending increased c.4% to £6.8bn, driven mainly by 8% growth in credit cards, reflecting strong demand from existing customers, and further new account acquisition in a growing market. The Group also launched its new fully digitised personal loan proposition to direct channels in July, with volumes building gradually as we enter the market cautiously.

In Mortgages, balances reduced by 4% over the year to £55.1bn, reflecting lower gross new lending, given the rate environment. Against this backdrop and with continued competitive pressure on spreads, the Group maintained its disciplined approach to trading, delivering £5.6bn of new mortgage completions during the 12 months to 30 September 2024 (12 months to 30 September 2023: £7.9bn).

Relationship deposits increased by 8% in the period to £38.2bn, with strong take up of the exclusive ISA and regular saver propositions. Current account balances were c.4% lower over the year, reflecting lower average customer balances. Our personal current account (PCA) proposition continued to attract new customers, with c.131k new PCAs opened over the last year (12 months to 30 September 2023: c.110k). Our business current account stock grew 7% benefitting from the sale of c.38k new accounts in the last year (12 months to September 2023: c.39k).

Business and financial review

Business review

Delighted Customers and Colleagues

The Group remains focused on improving its customer service and will continue to prioritise this work. During the last year, we continued to digitise customer journeys, with further automation of key processes such as ISA maturities. Investment within the Business bank saw the Group move from 13^th place in the Business CMA rankings to 10^th, the joint best improvement in the industry over the past year.

Complaints have increased in recent months to 4.4 complaints per 1,000 accounts (30 September 2023: 4.0), driven by higher transaction volumes, two significant payments incidents and tightened fraud rules. We remain focused on addressing the root causes of customer complaints and improving customer service levels. Despite the increased volume of complaints, Financial Ombudsman Service referrals remained very low and overturn rate in line with industry average.

The Group has embedded the second phase of Consumer Duty requirements, which came into effect in July, including completing the full review of off-sale products. As part of this, we have made improvements across several customer communications, improved management information to give better insight into customer outcomes, and have made some changes to back book pricing across our Savings and Mortgage portfolios.

Colleague engagement remains positive based on our most recent survey, with 77% engagement overall (30 September 2023: 80%). This was a good performance given some natural uncertainty from colleagues as a result of the transaction process. During the period, we have continued to make positive progress on our Diversity, Equity and Inclusion agenda, including embedding our BRAVER initiative and were pleased to be highly commended at the Diversity in Finance Awards and Balance in Business Awards, while also being ranked top in our sector for the FTSE Women's Leaders Review. This year we also welcomed 23 interns as part of the 10,000 Black and Able Internship Programme, further enhancing our ability to build and maintain a representative workforce.

Super-straightforward Efficiency

As noted in the March 2024 Interim results, as a result of the acquisition the Group has deferred certain restructuring activity as part of its ongoing cost savings programme. This has meant that activity to further consolidate the Group's property estate and increase the use of cost-effective geographies for outsourced activities has been paused. Despite this, the Group has delivered further efficiencies as part of the existing cost savings programme during the year, with £187m of annualised gross cost savings now delivered (FY23: £130m), including benefits from sourcing, digitisation and organisational design. While the expanded £200m cost saving target set out in November 2023 has been suspended, the Group will continue to focus on enhancing customer journeys and service and investing in technology to support ongoing efficiency improvements over time.

Discipline and Sustainability

The Group maintained a strong funding and liquidity position, and remains robustly capitalised, with a CET1 ratio of 13.6% as at 30 September 2024. As part of the transaction process, Virgin Money will recognise certain adjustments reflecting, where appropriate, the alignment of accounting policies and practices with Nationwide (see note 5.6 to the interim condensed consolidated financial statements). As part of the combined group's capital management, and as previously announced, Nationwide will take any required actions to ensure that Virgin Money remains robustly capitalised, including the down streaming of capital resources as needed.

The 3-year c.£130m investment in the financial crime prevention programme (FCPP), announced in November 2023, is progressing as planned with several key improvements delivered during its first year. During the year, we implemented an upgraded financial crime platform and enhanced customer risk assessments in our onboarding journeys. From a fraud prevention perspective, we have delivered improvements in detection capabilities and continue to work towards the implementation of our new, upgraded fraud platform during the first half of calendar 2025. The investment in the FCPP has supported lower digital payment fraud losses during the period, although the implementation of the new UK Payment Systems Regulator's rules in October, with banks taking increased responsibility for Authorised Push Payment fraud remediation, is a potential headwind for future fraud losses.

From a sustainability perspective, we've continued to execute our ESG strategy, delivering a broader set of customer propositions to support the transition to a low carbon economy. Through ongoing embedding of sustainability principles, we've continued to focus on making progress towards our net zero goals, including across the Business portfolio and operational emissions with continued collaboration throughout our supply chain. The Group will provide a further update as part of the combined annual report disclosures in 2025.

Business and financial review

Chief Financial Officer's review

Delivering resilient financial performance

Overview

The Group performed well during the 12-month period to 30 September 2024 with a solid overall performance, demonstrated by an improvement in statutory RoTE to 6.7% relative to 3.9% in the previous year. This performance coincided with the acquisition process of Virgin Money by Nationwide, which completed on 1 October 2024. While overall financial performance improved, the acquisition did have some impact during the six-month period to 30 September 2024, most notably as the Group incurred transaction-related costs, paused restructuring activity, and cancelled its share buyback programme.

Solid financial performance

During the 12-month period to 30 September 2024, the Group delivered growth in statutory total income of 5% year-on-year, to £1,921m, mainly driven by a 7bps year-on-year improvement in NIM. Statutory non-interest income was 13% higher year-on-year, though was lower when excluding the effects of notable income, including income relating to the purchase of abrdn Holdings Limited's (abrdn) c.50% stake in Virgin Money Investments (VMI) in April. Operating and administrative costs of £1,028m (excluding notable items) were 6% higher year-on-year, reflecting inflation, the new BoE Levy, and the impact on cost savings of the pause to our restructuring programme. Notable expenditure was lower year-on-year, despite the Group incurring additional transaction related-costs, given the higher scale of restructuring charges and intangible asset write-downs incurred in the 12-month period to 30 September 2023. Credit impairment losses of £177m were significantly lower year-on-year, reflecting updated macroeconomic assumptions, the review of the application of significant increase in credit risk (SICR) on the credit card portfolio and resilient credit quality. The combination of all of these factors drove improved profit before tax of £558m, 62% higher year-on-year, along with the 2.8%pts improvement in statutory RoTE to 6.7%.

Growing in target lending segments

The Group delivered further lending growth in its target segments during the 12-month period to 30 September 2024, while overall customer lending was 2% lower at £71.3bn. Mortgage balances reduced 4% during the 12-month period to £55.1bn, as the Group safeguarded overall returns in a subdued market. Business lending increased 7% overall, as growth in BAU balances offset ongoing reductions in government-backed lending. Unsecured balances increased 4% to £6.8bn, driven by 8% growth in the credit card portfolio. We continued to attract new deposits during the 12-month period to 30 September 2024, supporting overall deposit growth of 4%, while the mix of relationship deposits increased from 53% to 55%.

Robust balance sheet

The Group maintained a conservative balance sheet position, including stable provision coverage, robust funding and liquidity and a strong capital position. Total credit provisions at 30 September 2024 were £606m (30 September 2023: £617m) equivalent to a coverage ratio of 0.84% (30 September 2023: 0.84%). Funding and liquidity remain strong, with the 12-month average liquidity coverage ratio (LCR) increasing to 157% (30 September 2023: 146%) and 12-month average net stable funding ratio (NSFR) stable at 138% (30 September 2023: 136%). The loan to deposit ratio (LDR) reduced to 103% (30 September 2023: 109%) given higher deposits and lower lending balances. The CET1 ratio remained strong at 13.6% (30 September 2023: 14.7%), with the movement during the period including the full recognition of the TMLA fee (£250m plus VAT of £50m) due to Virgin Enterprises as part of the amended TMLA arrangements⁽¹⁾. This reflected that this fee represented a foreseeable charge for capital purposes only as at 30 September 2024, with an impact equivalent to 86bps of CET1.

Business and financial review

Chief Financial Officer's review

Income

Overview

Statutory total operating income of £1,921m was 5% higher compared with 2023, driven by growth in NII. NII (excluding notable items) improved 4% year-on-year as NIM increased 7bps to 1.98%. There were also £(15)m of acquisition accounting unwinds within NII during the 12-month period to 30 September 2024 (12 months to 30 September 2023: £(29)m), reflecting fair value accounting adjustments at the time of Virgin Money's (then named CYBG PLC) acquisition of Virgin Money Holdings (UK) PLC. Statutory non-interest income was 13% higher year-on-year and mainly reflected higher notable non-interest income during the period resulting from the VMI acquisition in April and lower hedge ineffectiveness given the current rate environment.

Business and financial review

Chief Financial Officer's review

Net interest income

NII and NIM

Overall, asset yields increased 112bps in the 12-month period to 30 September 2024. Mortgage yields increased 74bps, reflecting the higher rate environment for customers that re-financed and new business, while average mortgage balances were 2% lower year-on-year. Together, this resulted in mortgage interest income that was 25% higher year-on-year.

Unsecured average balances increased 7% in the 12-month period to 30 September 2024. Average yields increased 308bps year-on-year and incorporated £194m of positive EIR performance adjustments in the credit cards portfolio, equivalent to c.22bps of NIM on an annualised basis. These adjustments include a positive assessment of the net present value of the EIR asset as a result of observed behavioural outperformance relative to more prudent assumptions, and the removal of temporary macroeconomic adjustments that were applied at 30 September 2023. Altogether, this drove a 52% year-on-year increase in interest income from unsecured lending.

In Business, a 106bps increase in the average yield was driven by a combination of the higher rate environment and a reduction in lower-yielding government-backed lending. This, alongside a growth in average balances, resulted in 24% higher interest income year-on-year.

Rates on interest bearing liabilities increased 119bps in the period to 30 September 2024, with increased average rates across all products, mainly due to the higher rate environment. Current account average balances reduced during the period, reflecting deposit migration into higher rate products. Average term deposit balances increased 23% year-on-year, mainly driven by growth in PCA-linked exclusive fixed rate products. Average savings account balances were 6% lower year-on-year due to the attrition or churn of existing balances. Wholesale funding average balances reduced during the period, primarily reflecting the repayment of TFSME.

Business and financial review

Chief Financial Officer's review

Non-interest income

Non-interest income (excluding notable items) was £11m lower in the 12-month period to 30 September 2024 relative to the same period in 2023. The reduction year-on-year included the full-year impact of a change in allocation of insurance costs incurred on packaged current accounts in April 2023, from operating and administrative expense to non-interest income. Furthermore, we also made changes to the reporting of credit card cash advance fees in October 2023 from non-interest income to interest income. Excluding these impacts, performance was broadly stable year-on-year, reflecting resilient credit card activity and business fee income.

There were a further £12m of notable items within non-interest income. This included an £11m day 1 accounting gain, recognised following the acquisition of the remaining c.50% of ordinary share capital in VMI in April. In addition, there was also £12m arising in the ordinary course of operating VMI following the acquisition. This has been included as notable income in the six-month period to 30 September 2024, given it arises from fully consolidated accounting following the acquisition, which had not been incorporated in the Group's guidance for the 12-month period to 30 September 2024, first set in November 2023. The Group also recognised £(11)m relating to hedge ineffectiveness in the period.

Costs

Operating expenses (excluding notable items) increased 6% year-on-year to £1,028m, while the adjusted cost: income ratio increased 1.1%pts to 53.0%. Staff costs were £449m or 22% higher relative to the same period last year due to wage inflation, FTE growth and a lower defined benefit pension credit year-on-year, partly mitigated by restructuring benefits. The reduction in corporate and professional services costs year-on-year primarily reflected lower consultancy spend. The Group also benefitted from a lower depreciation charge in the year, primarily due to the lower level of capitalised assets and prior store and head-office closures. Other expenses of £166m were £4m lower year-on-year and included £12m of costs related to the new BoE Levy (that replaced the BoE's Cash Ratio Deposit Scheme, with effect from 1 March 2024), more than offset by higher VAT recoveries and lower fraud losses.

The Group incurred £158m of notable expenditure during the year, £44m lower than in the 12-month period to 30 September 2023. Restructuring charges of £56m included spend related to the Group's programme of digitisation, property changes and severance. As first reported alongside the half-year trading update in May 2024, the Group has deferred certain restructuring activities as a result of the acquisition by Nationwide. Consequently, restructuring charges of £23m in the 6-month period to 30 September 2024 were lower than during the previous six months (£33m). During the 12-month period to 30 September 2024, the Group also incurred £37m of costs in relation to the financial crime prevention programme to support the upgrade of our financial crime prevention and cyber defence capabilities. The legacy conduct credit of £11m primarily reflects costs that were recovered as part of the successful defence against RGL Management over historic fixed rate tailored business loans litigation. There were £76m of other notable items during the period, with £64m related to transaction costs resulting from the acquisition of Virgin Money by Nationwide. The remaining £12m included expenses incurred by Virgin Money arising in the ordinary course of operating VMI, following the acquisition of the remaining c.50% of ordinary share capital in April 2024. As with VMI non-interest income from April 2024, these expenses have been included as notable expenditure in the six months to 30 September 2024, given they arise from fully consolidated accounting following the acquisition of the remaining 50% of ordinary share capital, which was not incorporated in the Group's guidance for the 12-month period to 30 September 2024, first set in November 2023.

Business and financial review

Chief Financial Officer's review

Impairments

As at 30 September 2024, the Group's expected credit loss (ECL) provision was £606m, modestly lower relative to 30 September 2023 (£617m). Combined with lower customer lending balances, this resulted in total provision coverage of 84bps, which was static relative to 30 September 2023 and reflects improvements in the macroeconomic outlook and SICR changes to credit cards, offsetting changes to the customer lending mix from growth in unsecured and business lending and lower mortgage balances. The components of the total ECL provision includes £535m of modelled and individually assessed ECL (30 September 2023: £541m) and £71m of management adjustments (MAs) (30 September 2023: £76m). These factors resulted in a £177m impairment charge during the period, equivalent to a CoR of 24bps.

As reported in the March 2024 interim financial report, the Group finalised changes to the credit card SICR model that removed the requirement for a two-month probation before accounts could return to Stage 1 from Stage 2 for non-forborne exposures. Overall, this reduced the ECL by £31m during that period.

The key macroeconomic assumptions used in the Group's IFRS 9 modelling were updated based on scenarios provided by our third-party provider Oxford Economics. The weightings applied to the scenarios were 10% to the upside scenario, 55% to the base scenario, 20% to the downside scenario and 15% to the severe downside scenario. The severe downside scenario represents an additional scenario for the period to 30 September 2024, aligning to industry best practice. The weighted macroeconomic scenario includes modest growth in GDP, peak unemployment of 5.0% in 2027 and a 2.0% contraction in the House Price Index (HPI) in 2025, followed by a recovery.

In the 12-month period to 30 September 2024, loans classified as Stage 2 reduced from 8.6% of the portfolio to 7.3%, including the impact from SICR model changes in the credit cards portfolio. 94% of Stage 2 lending balances remain less than 30 days past due (DPD). Stage 3 assets as a percentage of Group lending were broadly stable at 1.6% (30 September 2023: 1.5%).

In Mortgages, the coverage ratio of 9bps reflects the loan book that is weighted to owner-occupied mortgages and low LTVs. Despite a gradual increase in late-stage arrears over the period, the portfolio continues to evidence good underlying credit performance with customers continuing to demonstrate the ability to withstand higher mortgage payments at maturity.

In Unsecured lending, the coverage ratio of 602bps includes 606bps of coverage for our credit card portfolio and 547bps of coverage for our personal loans and overdrafts. Credit card portfolio coverage was lower relative to 30 September 2023 (688bps) and incorporates the impact of SICR model changes. In the six-months ended 30 September 2024, credit card arrears gradually improved, though remain elevated reflecting the ongoing maturation of the portfolio and diversification into higher risk products. 97% of balances are categorised as Stage 1 or Stage 2 not past due (30 September 2023: 97%).

In Business, the coverage ratio of 161bps as at 30 September 2024 was broadly stable year-on-year. There continues to be no significant deterioration in asset quality metrics, however, a small number of individually assessed (IA) provisions have been recognised increasing the value of IA held by £35m to £60m at 30 September 2024. The proportion of loans in Stage 1 or 2 not past due remains high at 95% (30 September 2023: 95%).

Business and financial review

Chief Financial Officer's review

Profitability

Overview

The Group made a statutory profit before tax of £558m in the 12-month period to 30 September 2024 (12 months to 30 September 2023: £345m), resulting in a statutory RoTE of 6.7% (2023: 3.9%). TNAV per share was (1.5)p lower year-on-year, as +20.6p of retained earnings and +8.8p from share buybacks prior to the cancelation of the programme, were more than offset by (23.8)p from a reduction in the cash flow hedge reserve, (5.0)p from a lower overall actuarial pension surplus and (2.0)p of fair value through other comprehensive income (FVOCI) and other movements.

Taxation

There was a £180m tax expense in the 12-month period to 30 September 2024 (12 months to 30 September 2023: £99m), resulting in an effective tax rate of 32%. This included the re-assessment of the recoverability of deferred tax assets, which resulted in the de-recognition of £252m of tax losses and an associated current tax charge of £63m. The Group assesses the recoverability of deferred tax assets over a six-year corporate planning time horizon which incorporates all aspects of the Group's future performance and expectations, including the transaction related impacts described in note 5.6 to the interim condensed consolidated financial statements.

Business and financial review

Chief Financial Officer's review

Balance sheet

Overview

At an aggregate level, total customer lending reduced 2% in the 12-month period to 30 September 2024 to £71.3bn as growth in Unsecured and Business lending was offset by a reduction in Mortgages. Total customer deposits increased 4% to £69.4bn in the same period, resulting in a reduction in the LDR to 103% (30 September 2023: 109%).

Mortgage balances reduced 4% in the 12-month period to 30 September 2024 to £55.1bn. This reflected a more subdued market with mortgage rates positioned at higher levels throughout the year, and wider cost of living pressures. Against this market backdrop, the Group traded with discipline to protect overall spreads.

Unsecured balances increased 4% in the 12-month period to 30 September 2024, as 8% growth in credit cards was offset by a reduction in personal loans. In credit cards, the Group benefitted from resilient activity levels, further new account acquisition and strong retention. During the period, the Group has continued to observe customer behavioural activity outperforming its prudent assumptions across spend, repayment and retention, resulting in card EIR performance remaining persistently better than expected.

Business lending increased 7% in the 12-month period to 30 September 2024, as a reduction in Government-scheme balances was more than offset by 11% growth in BAU balances. BAU growth reflected the strength of our national franchise and sector specialisms in resilient market segments. Government-scheme balances reduced 38% to £0.4bn, as borrowers made contractual repayments.

Customer deposits increased 4% in the 12-month period to 30 September 2024. Relationship deposits were £2.8bn higher year-on-year, as the Group continued to grow current accounts and linked savings. Non-linked savings increased by £1.6bn as the Group prioritised this market for new secondary funding. Term deposit balances reduced by £1.6bn given ongoing maturities.

Wholesale funding and liquidity

The Group has a stable funding base with customer deposits representing c.85% of total funding. The Group's customer deposits are weighted towards retail customers (76%), with the remaining deposits from business customers, predominantly small and medium-sized enterprises. Of the total customer deposit book, c.72% is insured via the FSCS and of the balances that are uninsured, a proportion are fixed term and/or would incur a charge if customers wanted to withdraw their money.

During the 12-month period to 30 September 2024, the Group successfully issued €750m of MREL senior notes and £500m of RMBS publicly to investors, while at the same time repaying £3.25bn of its TFSME drawings (£2.95bn outstanding as at 30 September 2024). On an overall basis, wholesale funding reduced to £12.2bn as at 30 September 2024 (30 September 2023: £16.7bn). Of our total debt securities in issue, only c.17% (£1.6bn) has less than 1-year to effective maturity, reflecting term issuance roll-downs (the Group has negligible short-term wholesale funding). The Group has £2.05bn of TFSME maturing in 2025, with the remaining £0.9bn subject to term extension beyond 2026.

Business and financial review

Chief Financial Officer's review

The stability of the Group's funding sources is highlighted in its NSFR, which remains strong on a 12-month average basis at 138%. The Group's 12-month average LCR increased to 157% (30 September 2023: 146%), continuing to comfortably exceed both regulatory requirements and the Group's more prudent internal risk appetite metrics. The Group's c.£14.1bn liquid asset portfolio is primarily comprised of cash at the BoE (c.62%) with the remainder comprising UK Government securities (Gilts) and AAA rated listed securities (e.g. bonds issued by supra-nationals and corporate covered bonds). The liquid asset portfolio is fully hedged from an interest rate, inflation and FX risk perspective and any movements in fair value are recognised in CET1 via the income statement or FVOCI reserve. The Group also has unencumbered pre-positioned collateral at the BoE representing c.£9.7bn of secondary liquidity drawing capacity via the Bank's Sterling Monetary Framework, which does not form part of the liquid asset portfolio for LCR or internal stressed outflow purposes. Over time the stock of unencumbered pre-positioned collateral will increase as remaining TFSME drawings are repaid. In addition, the Group has a further c.£21.2bn of unencumbered assets eligible and readily available but not currently pre-positioned at the BoE.

Overview

At 30 September 2024, the Group maintained a robust capital position, with a CET1 ratio of 13.6% (IFRS 9 transitional basis) and a total capital ratio of 19.2%. The Group's CET1 ratio on an IFRS 9 fully loaded basis was 13.5%. The Group's CET1 position included a deduction for the £250m (plus VAT of £50m) fee due to Virgin Enterprises, following amendments to the brand licence agreement between the Company and Virgin Enterprises as part of the Nationwide acquisition. Although this fee was not recognised for accounting purposes, it was deducted from the Company's regulatory capital resources as it represented a foreseeable charge.

As a result of the Group's usual annual SREP process and ICAAP submission, the Group's Pillar 2A CET1 requirement increased from 1.9% to 2.1% effective from 2 October 2024. Accordingly, the Group's CRD IV minimum CET1 capital requirement (or MDA threshold) has increased from 10.9% to 11.1%.

Ahead of the Group's implementation of updates to mortgage IRB models (including hybrid PD), a model adjustment has been applied to increase RWAs and expected losses in advance of formal approval of models.

Based on Virgin Money's initial interpretation of the near-final Basel 3.1 rules, the Group expects a benefit to the CET1 ratio from Basel 3.1 implementation on day 1 (1 Jan 2026). The Group expects the RWA output floor based on the standardised approach to bind later in the transitional period, subject to a more granular assessment of the PRA's final rules and the evolution of the Group's balance sheet.

As detailed in note 5.6 to the interim condensed consolidated financial statements, the Group has made a number of material accounting policy changes to align with those used by Nationwide. These changes took place following completion of the acquisition on 1 October 2024 and have therefore not been recognised in the 30 September 2024 interim condensed consolidated financial statements or capital position.

The accounting policy changes include revisions to EIR methodology for mortgages and credit cards and will require restatement to prior periods. The impact of the restatement will include reductions of £185m and £370m to the mortgage EIR asset and to the credit card EIR asset respectively compared to the 30 September 2024 positions. There remains the potential for further adjustments following other changes to accounting policy and practice. On 1 October 2024, the Company issued ordinary shares to Nationwide for cash consideration of £650m. This ordinary share issue mitigates the impact of the accounting policy changes noted above on the Group's CET1 ratio.

As part of its ongoing management of capital, the Group has applied to the PRA and Court of Session to approve a c.£1.55bn reduction of Clydesdale Bank PLC's share premium account, with a corresponding increase in retained earnings. This would increase the level of available distributable reserves in Clydesdale Bank PLC, with no impact to the Group's overall equity position or CET1 ratio. The Final Court hearing to approve the share premium account reduction is expected to take place on 28 November 2024.

Business and financial review

Chief Financial Officer's review

CET1 capital

CET1 reduced by (109)bps in the period with the movements set out in the table below. The (86)bps impact of the TMLA fee arises from the deduction of the foreseeable £250m (plus VAT of £50m) as a foreseeable charge as set out above. The (25)bps impact of the share buyback includes £63m that was returned to shareholders, prior to the cancellation of the programme as a result of the acquisition process.

MREL

The Group's transitional MREL ratio at 30 September 2024 was 28.9% of RWAs (30 September 2023: 31.9%), or 9.1% when expressed as a percentage of Leverage exposures (30 September 2023: 9.3%). This provides headroom of £0.2bn or 0.9% above the Group's latest binding loss-absorbing capacity (LAC) requirement of 28.0% of RWAs (effective from 2 October 2024, following the Group's usual annual SREP process and ICAAP submission).

The PRA has confirmed that it intends to apply sub-consolidated prudential requirements to Virgin Money until 31 December 2028, and that it also intends to treat the outstanding externally held AT1, Tier 2 and MREL-eligible senior unsecured liabilities issued by Virgin Money as eligible to meet the consolidated MREL requirements applicable to the combined group until 31 December 2028, subject to applicable deductions. Going forward all new AT1, Tier 2 and MREL-eligible senior instruments will be issued by Nationwide. Down-streaming arrangements will be in place to ensure appropriate capital levels in Virgin Money and Clydesdale Bank PLC.

Clifford Abrahams, Chief Financial Officer - 26 November 2024

Risk management

Risk overview

Risk management

Risk overview

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

This report provides information on developments during the period relating to the Group's risk exposures, including how those risks are managed or mitigated.

Key developments in 2024

During 2024, Risk has focussed on the launch and delivery of key initiatives, supporting the vision to 'Drive Better Outcomes Through More Impactful Risk Management.'

Work continues to enhance risk management practices and reporting capabilities. During the period significant effort has been made to ensure readiness for the launch of our new Integrated Risk Management (IRM) system. The new system will provide enhanced risk management practices and reporting capabilities, improving transparency and understanding of risks and related controls across the bank, and building a more data driven approach to risk management. Control effectiveness requires focus, with the introduction of the new IRM system and ongoing training supporting heightened awareness and better controls. Internal policies, standards and procedures are being strengthened in line with improved system capabilities to drive further improvements and uplift overall control quality and completeness in readiness for increased expectations under Principle 29 of the Corporate Governance Code 2024. Additionally, work continues to enhance our internal fraud control environment, with robust plans established which are due to be implemented by December 2024.

A new model inventory solution was launched, delivering core functionality to support adherence to the new supervisory statement (SS)1/23 'Model risk management principles for banks'. This is another step forward as we continue to automate and digitise, bringing efficiencies in our deliverables and strengthening our model risk management objectives.

The second phase of Consumer Duty was implemented, including compliance with the requirements for closed book review and reporting. This helps to deliver good outcomes for our customers and included the launch of our new vulnerability disclosure tool.

We have successfully launched our enhanced financial crime protection programme, with all three lines of defence collaborating to ensure we can keep our customers and the Group safe, and enable the Group to adapt to new and evolving threats such as Artificial Intelligence (AI) and cybercrime.

Principal risks

Principal risks are those which could result in events or circumstances that might threaten the Group's business model, future performance, solvency, liquidity or reputation. The Group's principal risks are listed below and remain as disclosed in the 2024 March Interim Financial Report.

Risk management

Risk overview

Principal risks (continued)

Emerging and evolving risks

Emerging and evolving risks are current or future risks arising from internal or external events, with a material unknown or unpredictable component, and the potential to significantly impact the future performance of the Group or prevent delivery of good outcomes for our customers over the medium to long term (12 months +). Emerging and evolving risks are continually assessed through a horizon scanning process, considering all internal and external factors, with escalation and reporting to the Board.

The emerging and evolving risk classifications reported in the Group's 2023 Annual Report and Accounts have been reviewed throughout the year and updated.

Risk management

Credit risk