Virgin Money UK PLC: Interim Results 2022

David Duffy, Chief Executive Officer:

“We've made good progress against our strategy, while delivering a significant increase in profit. We have positive momentum in attracting new customers to Virgin Money through record credit card sales, good growth in personal current account openings and a strong uptake of our new digital fee-free business current account.

"We have upgraded our net interest margin guidance given strong growth in unsecured lending, combined with the rising interest rate environment. Looking ahead, while the macroeconomic outlook is uncertain and there are increased cost pressures on consumers, we remain prudently provisioned and are confident in the quality of our loan portfolio.”

Summary financials

Key performance indicators ⁽¹⁾

⁽¹⁾For definitions of the KPIs, refer to ‘Measuring financial performance – glossary’ on pages 322 to 323 of the Group's 2021 Annual Report and Accounts. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.

Momentum in our financial performance; NIM guidance for FY upgraded

• Significantly improved underlying PBT compared to H1 2021; underlying profit increased 58% YoY to £388m (H1 2021: £245m) primarily reflecting stronger income. This drove improvement in statutory PBT and statutory RoTE of 9.1% (H1 2021: 2.2%)
• NIM expanded further to 1.83% in H1 (H1 2021: 1.56%) due to the benefit of higher rates, lower deposit costs from ongoing repricing and mix benefit, and a higher yielding lending mix, offsetting mortgage spread pressures
• Underlying non-interest income of £83m, up 26% YoY reflecting higher card spending and business activity levels
• Underlying costs of £456m were 1% lower YoY, as expected cost savings from ongoing digital transformation and restructuring were offset by inflation, including agreed pay rises, along with targeted growth and planned higher digital development costs
• Impairment charge of £21m (6bps cost of risk) reflects updated macroeconomics and judgements; limited specific provisions and changes in asset quality metrics in the period, with a defensively positioned portfolio as the outlook becomes more uncertain

Strong early delivery against our digital strategy – attracting new customers and progress on digital transformation

• Customer and propositions: Strong reaction to new digital products with sales of BCAs & PCAs doubling QoQ, record quarterly card sales & 97% of personal sales (ex. mortgages) are digital. 42% of key customer journeys now automated (FY21: 27%)
• Colleagues and property: A Life More Virgin supporting higher engagement; property and branch footprint reduced c.20%
• Digital: Mobilising cloud migration and removal of legacy applications; adoption of Agile approach to change is giving customers faster delivery of new features at a lower overall unit cost

Balance sheet well positioned; continued to optimise deposits and growth in target segments

• Strong relationship deposits growth, increasing 4.2% to £31.9bn, reflecting new current account customer acquisition; overall deposits managed lower, down 3.7% to £64.4bn with continued successful optimisation of deposit mix and funding costs
• Targeted volume growth saw a stable loan book at £71.9bn:
  - Unsecured lending grew 7.0% to £5.8bn driven by strong cards growth, reflecting customer demand and new propositions
  - Business lending declined 2.5% to £8.3bn; BAU returned to growth in Q2, and government lending ran off as expected
  - Stable mortgage balances at £57.8bn with volumes managed tactically, prioritising margin in a competitive environment
• Solid credit quality maintained across portfolios with robust coverage of 66bps (FY21: 70bps); above pre-pandemic levels
• Strong capital base: transitional CET1 ratio of 14.7% (FY21: 14.9%) and 14.4% fully loaded with underlying capital generation during the half offset by the planned removal of the software intangible benefit

FY22 outlook upgraded

• Expect FY22 NIM between 180 and 185bps based on current rate expectations
• Costs anticipated to remain broadly stable compared to FY21 level
• Expect cost of risk to rise towards through the cycle range

Updated capital framework and distribution policy

• CET1 target range of 13 – 13.5% in the long-term; expect to operate above the range for the time being
• Expect a 30% full year dividend pay-out level; given strong capital position, declaring an interim dividend of 2.5p per share
• Dividends supplemented by buybacks, subject to ongoing assessment of surplus capital, market conditions and regulatory approval

Summary income statement

Key performance indicators ⁽¹⁾

⁽¹⁾For a definition of each of the KPIs, refer to ‘Measuring financial performance – glossary’ on pages 322 to 323 of the Group's 2021 Annual Report and Accounts. The KPIs include statutory, regulatory and alternative performance measures. Where applicable certain KPIs are calculated on an annualised basis for the periods to 31 March.

Key performance indicators (Continued)

⁽¹⁾Cost of risk is calculated on an annualised basis.
⁽²⁾LTV of the mortgage portfolio is defined as mortgage portfolio weighted by balance.

Summary balance sheet

⁽¹⁾ Current account and linked savings balances

Delivering our Digital First strategy

“We've made good progress against our strategy, while delivering a significant increase in profit. We have positive momentum in attracting new customers to Virgin Money through record credit card sales, good growth in personal current account openings and a strong uptake of our new digital fee-free business current account.

"We have upgraded our net interest margin guidance given strong growth in unsecured lending, combined with the rising interest rate environment. Looking ahead, while the macroeconomic outlook is uncertain and there are increased cost pressures on consumers, we remain prudently provisioned and are confident in the quality of our loan portfolio."

David Duffy, CEO

Dear stakeholder,

Since we announced our Digital First strategy alongside our FY21 results, we have made a strong start in delivering our key objectives of profitable growth and greater cost-efficiency. We’re already seeing early signs of a positive response as personal and business customers take advantage of our new digital propositions and loyalty programmes. We have good early momentum in delivering the gross cost savings set out, with the reduction in our physical footprint on track. The launch of key initiatives, which will drive improved customer experience through greater automation and digitisation of the bank’s core customer journeys, is also progressing well.

Although it is still early in the delivery of our Digital First strategy, we are seeing signs of our strategic delivery starting to support improved financial performance, including growth in our key focus segments, and well-controlled operating expenses. Over the course of the half, we’ve also benefited from an improving rate backdrop, which has supported our net interest margin as we’ve continued to reduce deposit costs further in supportive market conditions, and seen improved income from our structural hedge. We have also benefited from lower impairment levels compared to a year ago and, taken together, these factors have underpinned a significant increase in profitability. I’m pleased to be able to update our capital framework today, giving investors clarity about future returns, while also announcing an interim dividend of 2.5p. As we look to the remainder of the year, the Group is well placed to continue to deliver innovative propositions and profitable growth in our target segments, despite a more uncertain environment.

Our strategy remains the right one against a macroeconomic backdrop that has become more uncertain over the course of the six months. Following a period of strong recovery in Gross Domestic Product (GDP) as COVID restrictions were lifted and consumer spending levels improved, the impact of higher inflation has seen expectations for further growth start to temper. As a domestic UK bank, the Group doesn’t have direct lending exposure in Ukraine or Russia, but we are monitoring carefully for any second-order impacts arising from the conflict, particularly upon inflationary pressures in the UK. We have seen only limited changes in asset quality across the portfolios to date but have taken steps to factor the higher cost of living into our affordability assessments. It remains too early to assess the full implications of the changing backdrop and we will continue to help customers where needed. Our thoughts are with all of those impacted by the conflict, and I’m incredibly proud of the way our colleagues responded to launch a basic bank account for refugees fleeing the conflict in just 8 days, while the Group has also donated £300k to the Disasters Emergency Committee (DEC) appeal.

Strategic delivery – Growth in our target segments

As we continue to focus on digital-led growth in key target segments, we’ve made a good start to the year with relationship deposits and unsecured balances continuing to benefit from strong demand, the launch of new propositions and extended loyalty programmes. Our relaunch of the Business bank ensures we are well placed for growth over the remainder of the year as sector volumes recover.

Relationship deposits grew 4.2% in H1, benefitting from higher new sales of our Virgin Money Personal and Business Current Accounts (BCA). Personal Current Account (PCA) sales continue to be supported by attractive switching offers and we added the option for debit card cashback to PCAs in January, with c.120k customers already signing up and earning on average c.7.5% cashback on qualifying purchases. In March, we refreshed the proposition further, enhancing the interest rates on offer, following the recent Bank of England rate increases. PCA sales in Q2 were double those of Q1, and since the launch of the re-branded Virgin Money PCA in late 2020, we have opened c.180k new PCAs. The latest offer, launched in Q3, will give customers 20,000 Virgin Points to switch (equivalent to a flight to New York) for each current account opened and leaves the Group well placed to continue to drive PCA sales. We’re replicating the same rewards model for businesses with our new, fee-free digital BCA, the M-Account, which was launched in November offering debit card cashback. The strength of this new proposition has driven new BCA accounts in Q2 to double those achieved in Q1, supported by ongoing improvements to the digital sales channel which are delivering improved conversion rates. The M-account also offers businesses access to other proposition developments which will include M-Track and Marketplace.

Unsecured lending grew 7.0% over the half, supported by record new credit card account opening levels – Q2 saw c.175k opened, beating the previous record set in Q1. Our overall proposition remains strong, with prudent underwriting, and offers customers good value and competitively priced and versatile credit cards, including cashback on purchases, for which c.350k customers have now signed up (FY21: c.230k). To this we have added Instalment Credit capability, allowing our customers access to ‘Buy Now Pay Later’ functionality in the credit card mobile app, offered within customers’ existing, fully underwritten and affordability-stressed credit limit. The strength of our proposition has seen us deliver above-market growth, and we now have a c.8% share of the UK cards market.

In Business banking, we expected to build momentum throughout the year as the sector recovered and in Q2 we have seen growth returning to the BAU segment, alongside the anticipated run-off of government scheme lending. BAU business lending saw a 20% increase in drawdowns QoQ as the lending pipeline builds into H2. This supported BAU business balance growth of c.1% in Q2, although the overall book reduced 2.5% in the half, reflecting a 13% reduction in the government scheme lending book. The government lending book is performing as expected; some customers have chosen to pay back their loans in full, while others have begun making monthly repayments as per their schedule. Currently whilst there has been a modest increase in stage 3 Bounce back loans (BBLs), claims for defaults have been paid in full by HMT, and incidences of fraud are very low.

Strategic delivery – Delivering digital efficiency

We have made a positive start against all three of our key themes laid out at FY21: Customer and Propositions, Colleagues and Property, and Digital. Within Customer and Propositions, we are making progress in offering customers an improved, digital-first customer experience. From a starting point of 70% of customer service interactions being voice-led at FY21, we’ve already seen a 10%pt reduction, as digital solutions such as chatbots are being introduced to enhance the customer service experience. Chatbots were first deployed in January and have now dealt with c.650k customer queries, resolving 55% of these queries without colleague intervention, freeing up colleagues and delivering stronger customer service. We have more work to do to improve customer service through greater automation and we are rapidly digitising key customer journeys, with 42% now fully digitised, up from 27% at FY21. Digital sales of personal banking products (ex. mortgages) are now 97% of total sales, and PCA digital adoption has picked up from 62% to 64%, driving towards our 80% target by FY24.

We are continuing to make progress in the Colleagues and Property workstream as VMUK transforms its colleague operating model, building on capabilities introduced over the last year, to embed fully the new A Life More Virgin (ALMV) flexible working model. ALMV features harmonised working terms, enhanced colleague benefits and enables flexible, remote working, allowing us to tap into new, more diverse talent pools. These changes have been very well received by colleagues, reflected in improved engagement scores in the period, up to 73% from 68% at FY21, and external commentators continue to be very keen to talk to us to understand the changes we’ve made to give our colleagues greater flexibility and freedom. In order to drive productivity, we continue to implement new IT infrastructure and have initiated programmes that will use the full power of Microsoft’s Cloud computing product-suite, enhancing the way we work and supporting colleague collaboration. Greater remote working is also enabling the Group to reduce its property footprint, reducing costs and supporting the environment. The property footprint is down more than 20% since FY21, and branch numbers reduced as announced in September 2021, reflecting the changes in customer demand seen during the pandemic.

Our Digital investment continues to focus on driving our three-year transformation programme to deliver a scalable, more efficient digital growth platform, featuring migration to Cloud infrastructure and the deployment of Agile methodology and tools to increase the pace and delivery of change, at lower cost. We are still in the mobilisation phase of our Cloud migration in partnership with Microsoft, with significant planning underway, and this is set to commence in FY23, enabling us to begin exiting physical data centres in late FY23. In the meantime, we are making progress on the digitisation of the bank and the Agile delivery of change. We are in the process of starting to de-commission legacy applications, while building the new applications required to support the new Cloud infrastructure. We are deploying Microsoft tools, such as AI and robotics, and rolling out Agile methodology across our new change programmes. This is delivering new functionality for customers at greater pace at an average of c.20% lower unit costs.

Improving financial momentum and capital framework

We have seen a strong improvement in our financial performance compared to a year ago, supported by early strategic delivery combined with an improved rate environment. Statutory profit before tax of £315m was significantly higher (H1 2021: £72m), with stronger underlying profit of £388m which improved 58% (H1 2021: £245m).

The loan book remained broadly stable in the period, but with improved momentum in our key target segments including the strong growth in unsecured lending and the stabilisation of BAU business lending balances discussed above, which broadly offset the decline in government scheme lending and a small reduction in mortgages where we continued to trade tactically in a competitive market. We continued to optimise the deposit book, which reduced 3.7% over the period but with growing relationship deposit balances, which were up 4.2%, and now represent half of all deposits.

Total income improved 16% vs H1 2021 with a stronger contribution from both net interest income and other income, driven by a stronger rate environment supporting hedge income and ongoing deposit cost optimisation, along with a continued improvement in customer activity levels. Our net interest margin strengthened significantly in the half to 183 basis points (bps) (H1 2021: 156bps) and we now expect a stronger outlook for FY22 NIM of between 180 and 185bps. Other income of £83m also improved 26% compared to a year ago reflecting higher customer and business activity, including increased card spending as the cards book grew significantly in H1.

Underlying costs of £456m were broadly stable year-on-year (H1 2021: £460m), tracking in line with expectations as the benefit of gross savings from ongoing digital transformation and restructuring were offset by the costs of growth, ongoing planned investment in new propositions, and the impacts of inflation, including agreed pay rises and the harmonisation of colleague terms. Despite the higher inflationary backdrop than at the time we set our plan, we continue to be well placed to achieve our broadly stable guidance for FY22 and our objective of £175m of gross cost savings by FY24. The delivery of these gross savings will be enabled by restructuring charges, with £46m incurred in H1 2022 and we continue to expect to incur c.£275m across FY22-FY24 with around half in FY22.

Overall adjusting items of £73m in H1 were much improved year-on-year (H1 2021: £173m) given the reduction in legacy conduct costs.

Asset quality remained robust in the period, with a low impairment charge of £21m or 6bps cost of risk. Since FY21, the UK initially saw a continued recovery post-COVID, although more recently the Ukraine conflict has seen greater uncertainty in the outlook and some reduction of forecasts. Overall, forecasts for unemployment remain below pre-COVID levels, albeit with a slightly lower pace of GDP growth. We have not yet seen the impacts of higher inflation on our customers, but have already taken actions to ensure we tighten affordability criteria, and our track record of prudent underwriting across our portfolios leaves the loan book well positioned. Our coverage remains strong at 66bps (FY21: 70bps), and above pre-pandemic levels, despite the modest reduction in the period.

Having returned to paying a dividend alongside our FY21 results, and following the Group’s successful participation in its inaugural stress test last year, we’re able to update the market on our capital framework and returns policy. The Group will operate in a CET1 target range of 13 – 13.5% in the long term, although we will operate above this level for the time being due to heightened macroeconomic uncertainty. The Group will target a 30% full year dividend payout ratio and the interim dividend is expected to represent around 1/3rd of the prior year’s total dividend, beginning H1 2023. Dividends will be supplemented by buybacks, subject to ongoing assessment of surplus capital, market conditions and regulatory approval. Given a strong capital position and robust H1 performance, the Board has announced an interim dividend of 2.5p.

Building momentum in delivering our Environmental, Social and Governance (ESG) ambitions

Recognising the challenges that Ukrainian people may face when trying to open an account in the UK, I was very proud of how quickly our colleagues responded, delivering an updated account opening process for refugees within 8 days. We’ve donated £300k to the DEC Ukraine Humanitarian Appeal and are supporting our staff who are offering up their homes to Ukrainian families and using volunteering days to support fundraising activities. We’ve achieved c.£200k in fundraising for our charity partner Macmillan and rolled out our national Macmillan Guides support service to support people living with or affected by cancer.

In November, we launched our new purpose-driven ‘A Life More Virgin’ employment package, offering equal, gender neutral family leave, 30 days’ holiday and an additional five paid wellbeing days to all colleagues from day one of their employment. As we continue to evolve our senior leadership team for our digital future, we continue to focus on the diversity of our senior leadership. Women continued to comprise 42% of senior management roles and 4% of these roles are undertaken by colleagues from an ethnic background (FY21: 2%). There remains more to do here to achieve our 2025 targets which include senior gender diversity of 45-55%, ethnicity of 10%, LGBTQ+ of 4%, and disability of 8%, but we are continuing to make progress.

From a financial inclusion perspective, we continue to work with Smart Data Foundry to define a national measure for the poverty premium and, in partnership with Turn2Us, are helping people across the UK make sure they are not missing out on benefits they are entitled to. Our social media campaign, which targeted over 65’s, has reached over 175,000 people, and resulted in more than 1,000 benefit calculator assessments being completed.

We are continuing to make progress in embedding our climate strategy and in developing baselines, roadmaps and targets to net zero in line with the Net-Zero Banking Alliance commitment made in September 2021. We included climate-related financial disclosures within the Group's 2021 Annual Report and Accounts and will make disclosures aligned to the Task Force on Climate-related Financial Disclosures (TCFD) recommendations in the 2022 Annual Report and Accounts. Recognising the increased relevance and materiality to the Group’s risk profile, we’ve elevated climate risk to principal risk status.

Developing our leadership to deliver our strategy

I’d like to welcome Syreeta Brown, who joined the Group in November 2021 as Group Chief People and Communications Officer. Syreeta joined from Citi, where she spent 11 years in a number of HR roles, the most recent of which was Managing Director, Head of HR for Global Functions, Operations and Technology, and led the HR strategy for 20,000 employees across Europe, Middle East and Africa. She brings a wealth of experience in cultural transformation, talent development and in building a workforce that is fit for the future and has hands-on, senior-level experience embedding a digital agenda within a major financial services business.

I would also like to welcome Susan Poot who joined the Group in January 2022 as Group Chief Risk Officer following Mark Thundercliffe’s retirement. Susan joined from ING Bank, where she spent over 20 years in a number of commercial and risk roles, the most recent of which was Chief Risk Officer, Retail Banking, where she was responsible for credit risk, compliance and operational risk management across all of ING’s retail markets, managing a team of over 1,000 people and overseeing a lending book of €400 billion. Susan brings with her a wealth of experience across a range of risk disciplines, with broad banking experience across both retail and wholesale banking.

I would like to take this opportunity to thank Kate Guthrie, Mark Thundercliffe and Helen Page for their contributions to my leadership team during their time with the Group, which spanned the acquisition of Virgin Money Holdings and the significant integration and rebrand activity that has laid the platform for our exciting future. In addition, Amy Stirling will leave the Board today and I thank her for her contribution to the Board since joining as part of the Virgin Money acquisition. Finally, Paul Coby will leave the Board in June and I’d also like to thank him for his significant contribution over the past 6 years.

Outlook

Over the first half of the year, we’ve made good initial progress delivering against the accelerated digital strategy launched alongside our FY21 results. We will continue to focus in H2 on growing in our target segments and delivering exciting new digital propositions for customers, while continuing to improve our efficiency and customer service.

It’s encouraging to see our strategy, and an improving rate environment, are combining to drive stronger financial performance. The improved NIM outlook, well controlled costs and low impairment charge have driven a significant improvement compared to a year ago underpinning all other guidance for FY22 and adding to our conviction in achieving our medium-term targets. The announcement of our updated capital framework provides a clear guide for capital returns going forwards, while we maintain a robust balance sheet.

The macroeconomic outlook has become more uncertain over the course of the six months. Following a positive recovery in expectations post-COVID, recent events have seen forecasts moderate. As we enter a more uncertain environment, we are monitoring carefully the impacts of higher inflation on the cost of living and implications for customers, as well as the second-order impacts from the conflict in Ukraine, but aren’t yet seeing signs of significant stress in the book. We enter this period with prudent coverage, robust underwriting and a defensive portfolio.

We will say more on the Group’s outlook and prospects for profitable growth alongside our FY22 results in November and I strongly believe the Group is well placed to deliver its strategy. We have a unique brand, and access to a complementary set of partner companies in the Virgin Group, while our deepening relationship with Virgin Red offers exciting possibilities for our customers to earn and spend Red points, with Virgin Money products and propositions at the heart of deeper, more loyal customer relationships. We will continue to make progress in developing our digital wallet over the second half of the year combining many of these unique features with instalment credit, loyalty and payment capabilities.

Overall, we continue to have the right strategy and are executing on the key components that will underpin our delivery of improved returns and profitable growth over the coming years, as we fulfil our purpose to Make You Happier About Money.

David Duffy, Chief Executive Officer – 4 May 2022

Read the full announcement here

FORWARD-LOOKING STATEMENTS

This document and any other written or oral material discussed or distributed in connection with the results (the ‘Information’) may include forward-looking statements, which are based on assumptions, expectations, valuations, targets and estimates about future events. These can be identified by the use of words such as 'expects', 'aims', 'anticipates', 'plans', 'intends', 'prospects', 'outlooks', 'projects', ‘forecasts’, 'believes', 'potential', 'possible', and similar words or phrases. These statements are subject to risks, uncertainties and assumptions about the Group and its securities, investments and the environment in which it operates, including, among other things, the development of its business and strategy, any acquisitions, combinations, disposals or other corporate activity undertaken by the Group (including but not limited to the consequences of the integration of the business of Virgin Money Holdings (UK) PLC and its subsidiaries into the Group), trends in its operating industry, changes to customer behaviours and covenant, macroeconomic and/or geopolitical factors, the repercussions of the outbreak of coronaviruses (including but not limited to the COVID-19 outbreak), changes to its Board and/or employee composition, exposures to terrorist activity, IT system failures, cybercrime, fraud and pension scheme liabilities, changes to law and/or the policies and practices of the Bank of England (BoE), the Financial Conduct Authority (FCA) and/or other regulatory and governmental bodies, inflation, deflation, interest rates, exchange rates, tax and national insurance rates, changes in the liquidity, capital, funding and/or asset position and/or credit ratings of the Group, future capital expenditures and acquisitions, the repercussions of Russia’s invasion of Ukraine, the repercussions of the UK’s exit from the European Union (EU) (including any change to the UK’s currency and the terms of any trade agreements (or lack thereof) between the UK and the EU), Eurozone instability, and any referendum on Scottish independence.

These forward-looking statements involve inherent risks and uncertainties and should be viewed as hypothetical. The events they refer to may not occur as expected and other events not taken into account may occur which could significantly affect the analysis of the statements. No member of the Group or their respective directors, officers, employees, agents, advisers or affiliates (each a ‘VMUK Party’) gives any representation, warranty or assurance that any such events, projections or estimates will occur or be realised, or that actual returns or other results will not be materially lower than those expected.

Whilst every effort has been made to ensure the accuracy of the Information, no VMUK Party takes any responsibility for the Information or to update or revise it. They will not be liable for any loss or damages incurred through the reliance on or use of it. The Information is subject to change. No representation or warranty, express or implied, as to the truth, fullness, fairness, merchantability, accuracy, sufficiency or completeness of the Information is given.

The Information contains certain industry, market and competitive position data, some of which comes from third parties and some of which comes from the Group’s own internal research and estimates based on the knowledge and experience of the Group’s management in the markets in which the Group operates. Whilst the Group reasonably believes that such data is reputable, reasonable and reliable, no VMUK Party has independently verified the third party data and no independent source has verified the Group’s research, estimates, methodology and assumptions (except to the extent any such data has been reviewed by the Group’s auditors as part of their review of the Group’s interim and year-end financial statements). Accordingly, undue reliance should not be placed on any such industry, market or competitive position data.

The Information does not constitute or form part of, and should not be construed as, any public offer under any applicable legislation or an offer to sell or solicitation of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments. The distribution of the Information in certain jurisdictions may be restricted by law. Recipients are required to inform themselves about and to observe any such restrictions. No liability is accepted in relation to the distribution or possession of the Information in any jurisdiction.