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Virgin Money Hldgs (VM.)

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Thursday 05 March, 2015

Virgin Money Hldgs

Full Year Results

RNS Number : 5853G
Virgin Money Holdings (UK) PLC
05 March 2015
 



 

5 March 2015

 

 

Pursuant to Listing Rule 9.6.1, copies of the following documents have 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.

 

·    Annual Report and Accounts 2014

 

A copy of the Annual Report and Accounts 2014, Pillar III Report 2014 and an investor presentation are available within the Investor Relations section of our website www.virginmoney.com.

 

This announcement also contains additional information for the purposes of compliance with the Disclosure and Transparency Rules, including principal risks and uncertainties, details of related party transactions and a responsibility statement. Reference to pages and numbers refer to page numbers and notes to the annual accounts in the Annual Report and Accounts 2014.

 

 

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 2014.

 

Statutory basis

 

Statutory information is set out in the Financial Statements section of this announcement.

 

Underlying basis

 

In order to present a more meaningful view of business performance, the results of the Group and business units are presented on an underlying basis of reporting are described below.

 

The following items have been excluded from underlying profits;

·    credit card and current account platform build;

·    costs associated with listing;

·    additional Northern Rock consideration;

·    FSCS levies;

·    fair value adjustments;

·    gain on sale of subsidiary and trading loss of disposal group; and

·    premium on repurchase of Non-core Tier 1 notes.

 

Note: 2013 figures are restated. See note 39 of the financial statements for details.

 

The financial statements have been restated as set out in Note 39: the Group has adopted IFRIC 21 which has resulted in a reassessment of the liability recognised in previous periods in relation to the FSCS levy. During the year, the Group undertook a review of the allocation and classification of both costs and income. Following this review, the Group has realigned elements of fee and commission income, fee and commission expense and operating expenses to better reflect the nature of these costs. The Group has restated information for the preceding comparative periods.

 

Unless otherwise stated, income statement commentaries throughout this document compare the year ended 31 December 2014 to the year ended 31 December 2013, and the balance sheet analysis compares the Group balance sheet as at 31 December 2014 to the Group balance sheet as at 31 December 2013.

 

 

 

Forward looking statements

 

This document contains certain forward looking statements with respect to the business, strategy and plans of Virgin Money Group 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 Group'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; changes to Virgin Money's credit ratings; 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 and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes; 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; 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 European Union, the US or elsewhere; the implementation of the EU Bank Recovery and Resolution Directive and banking reform, following the recommendations made by the Independent Commission on Banking; the ability to attract and retain senior management and other employees; the extent of any future impairment charges or write-downs caused by 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 2014 RESULTS

 

§ Record performance and profits in a landmark year for the business

§ Underlying profit before tax increased by 127 per cent to £121.2 million, from £53.4 million in 2013

 

GROWTH

Delivered strong growth in mortgage, savings and credit card balances

·      Mortgage balances increased to £21.9 billion, up 11.8 per cent against market growth of 1.4 per cent.

·      Net lending of £2.3 billion, a market share of 10.2 per cent.

·      Credit card balances increased to £1.1 billion, up 41 per cent.

·      Retail deposit balances increased to £22.4 billion, up 6 per cent.

 

QUALITY

Maintained focus on a high-quality balance sheet, underpinned by high asset quality and a conservative risk appetite

·      Held mortgage arrears at low levels, with loans over three months in arrears of 0.31 per cent compared with the latest industry average of 1.33 per cent.

·      Maintained low credit card arrears, with credit card balances two or more payments in arrears of 1.46 per cent, compared with the latest industry average of 2.64 per cent.

·      Strong capital position, with a fully-loaded Common Equity Tier 1 ratio of 19.0 per cent in 2014, compared to 15.5 per cent in 2013.

·      Strong leverage ratio, increasing to 4.1 per cent in 2014 from 3.8 per cent in 2013.

 

RETURNS

Delivered significant improvement in profitability, reflecting balance sheet growth and higher margins

·      Underlying profit before tax increased by 127 per cent to £121.2 million, from £53.4 million in 2013.

·      Underlying net interest margin grew by 24 basis points to 1.50 per cent, from 1.26 per cent in 2013.

·      Underlying cost:income ratio improved to 68.7 per cent, from 77.2 per cent in 2013.

·      Underlying return on tangible equity grew by 5.1 percentage points to 7.4 per cent, from 2.3 per cent in 2013.

·      Statutory profit before tax of £34.0 million despite costs associated with the Initial Public Offering and payment of additional consideration for Northern Rock plc to HM Treasury following the successful listing on the London Stock Exchange.

  

CULTURE

As well as delivering a strong corporate performance, Virgin Money also delivered to other stakeholders in 2014

·      Customers - increased overall Net Promoter Score, a key measure of customer advocacy, to +16, one of the highest scores of any UK bank.

·      Communities - over £88 million was donated to charities in 2014, including Gift Aid, through Virgin Money Giving, Virgin Money's not-for-profit online donation service.

·      Corporate partners - over 13,000 Intermediary Partners introduced mortgage business to Virgin Money in 2014, and the Group was awarded the coveted Five Star Financial Adviser award for intermediary service.

·      Colleagues - increased colleague engagement to 86 per cent, the level of a large high-performing UK company and an overall share in success bonus and IPO share award, averaging over 11 per cent of base salary, was awarded to eligible employees, on top of their normal bonus awards.

 

2014 was a landmark year in Virgin Money's history, culminating in our successful listing on the London Stock Exchange in November.

 

"I am delighted to report a 127 per cent increase in underlying profit for 2014 which ended the year at £121.2 million.

 

"We have made great progress against our objectives to achieve strong growth, maintain our high-quality balance sheet and deliver returns to shareholders.  We set out to be a credible and effective challenger to the large incumbent banks and I believe we have laid an excellent foundation on which to realise our ambition. We now rank in the top six of all UK net mortgage lenders and are among the highest rated retail banks in the UK by Net Promoter Score.

 

"We aim always to live up to the consumerchampion ethos of the Virgin brand and our conservative approach to risk and strong financial performance go hand in hand with our commitment to serve the needs of customers and communities.

 

"Following the progress made in 2014 I am pleased to report that we expect to be admitted to the FTSE 250 on 20 March 2015.

 

"Our staff are at the heart of Virgin Money and I would like to thank them for their hard work throughout what has been a landmark year for the business.  I am pleased we are able to reward all eligible employees with a share in success bonus on top of their normal bonus awards, to add to the £1,000 of shares that all employees received on listing."

 

 

Jayne-Anne Gadhia
Chief Executive

 

STRATEGIC UPDATE AND OUTLOOK

 

Continued strong performance in 2014 provides a positive platform for the future

 

STRATEGIC UPDATE

 

·      Overall our guidance for the mid-term is unchanged from that given prior to listing.

·      We continue to target mid-teens return on tangible equity by the end of 2016.

·      We will continue to maximise our net interest margin within our prudent risk appetite.

·      Our net interest margin will be further enhanced in the longer term by the growth of our credit card business which we are building in partnership with TSYS. 

·      We will continue to take advantage of our operational leverage to deliver a cost:income ratio of around 50 per cent by 2017.

·      2015 will see us continue to enhance our existing capabilities, and develop our current account, insurance and digital offerings.

·      As announced in September 2014, Glen Moreno will assume the Chairmanship of Virgin Money in May 2015, taking over from the current Chairman, Sir David Clementi. Sir David will stand down as Chairman of the Board on 21 May 2015 and will retire as Non-Executive Director of Virgin Money on 30 June 2015.

 

OUTLOOK

 

·      The UK economy is performing well although there remains uncertainty at home and abroad.

·      Despite an increasingly competitive market environment, we plan to continue to achieve a market share of annual gross mortgage lending of over 3 per cent. We will build upon our existing high-quality mortgage business, without significantly increasing our risk appetite.

·      We have the core infrastructure needed to grow to our target of £3 billion of credit card balances by the end of 2018. Growth in credit cards will enhance our net interest margin and our return on equity, and will enable us to drive further capital efficiency.

·      We are uniquely placed to provide effective competition to the large incumbent banks in the UK and we look forward to the outcome of the Competition and Markets Authority (CMA) investigation into Retail and SME banking.

·      According to Bank of England data, in January we took almost 4 per cent market share of mortgages, reinforcing our confidence in our strategy and in delivering our organic plan for growth.

  

 

 

UNDERLYING BASIS CONSOLIDATED INCOME STATEMENT

 


2014

2013

Change


£m

£m

%

Net interest income

366.1

289.2

27%

Other income

72.1

72.3

0%

Total income

438.2

361.5

21%

Costs

(301.2)

(279.2)

8%

Impairments

(15.8)

(28.9)

(45)%

Underlying profit before tax

121.2

53.4

127%

 

UNDERLYING BASIS consolidated balance sheet and key ratios

 

Assets


2014

2013

Change


£m

£m

%

Cash and balances at Central Banks

851.3

1,423.5

(40)%

Loans and receivables

23,822.2

20,978.8

14%

Available-for-sale financial assets

1,539.6

1,679.2

(8)%

Other assets

323.7

483.5

(33)%

Total assets

26,536.8

24,565.0

8%

 

liabilities and equity

Deposits from banks

846.7

389.2

118%

Customer deposits

22,365.7

21,121.4

6%

Debt securities in issue

1,594.1

1,469.8

8%

Other liabilities

477.2

642.2

(26)%

Provisions

9.3

7.5

24%

Total liabilities

25,293.0

23,630.1

7%

Total equity

1,243.8

934.9

33%

Total liabilities and equity

26,536.8

24,565.0

8%

 

KEY RATIOS

 


2014

2013

Change


%

%

%

Net interest margin

1.50

1.26

19%

Underlying cost:income ratio

68.7

77.2

(11)%

Cost of risk1

0.11

0.15

(27)%

Basic earnings per share - underlying (pence)

21.4

8.1

164%

Loan-to-deposit ratio

102.8

96.4

7%

Common Equity Tier 1 ratio

19.0

15.5

23%

Leverage ratio

4.1

3.8

8%

Underlying return on tangible equity

7.4

2.3

222%

 

1 Cost of risk excludes benefit of debt sale of £8.9 million 

RECONCILIATION TO STATUTORY PROFIT


2014

2013

Change


£m

£m

%

Underlying profit before tax

121.2

53.4

127%

Additional Northern Rock consideration

(36.0)

(9.0)

300%

One-off costs associated with IPO (2014) and intangible assets (2013)

(23.9)

(34.6)

(31)%

Strategic transaction (costs)/ income

(10.9)

189.0

(106)%

FSCS levy

(16.4)

(13.4)

22%

Statutory profit before tax

34.0

185.4

(82)%

 

 

 

Chief Executive's REVIEW

 

 

"2014 was a significant year in Virgin Money's history, culminating in our successful listing on the London Stock Exchange in November.

 

As well as completing our IPO, we delivered excellent business performance, maintaining our strong growth momentum, continuing to build our high-quality balance sheet and delivering improving returns.

 

As a public company we remain committed to maintaining our straightforward, transparent approach to banking that we believe is better for customers. With our powerful brand, high-quality balance sheet and strong core business franchise, we remain confident that we can continue our growth trajectory, improving our net interest margin while protecting the quality of our balance sheet, and can generate increasing returns and dividends for our shareholders.

 

Results overview

 

2014 was an important year in positioning Virgin Money as a leading challenger bank, able to grow on its strong foundations, untainted by legacy issues.

 

We improved our financial performance substantially in 2014. We increased our underlying profit by 127 per cent to £121.2 million, as a result of our focus on driving growth, quality and returns.

 

On an underlying basis, our total income grew by 21 per cent to £438.2 million, driven mainly by strong growth in our mortgage business and a 24 basis point increase in our net interest margin to 1.50 per cent, while our total costs increased by 8 per cent to £301.2 million. During the year, the total impairment charge fell by 15 per cent to £24.7 million, excluding a further benefit of £8.9 million arising from the sale of credit card debt.

 

As a result, the Group's underlying return on risk-weighted assets improved by 103 basis points to 1.41 per cent, and our underlying return on tangible equity improved from 2.3 per cent to 7.4 per cent.

 

On a statutory basis, Virgin Money delivered a profit before tax of £34.0 million, compared to £185.4 million in 2013. This reduction in our statutory profit is a reflection of an exceptional gain of £203.4 million in 2013 related to the disposal of Virgin Money Cards Limited, which was undertaken in parallel with our acquisition of £1 billion of Virgin Money credit cards from MBNA, as well as one-off costs in 2014 related to our IPO.

 

Our strong growth performance during the year was achieved whilst maintaining a high-quality balance sheet. At the end of the year, our fully-loaded Basel III Common Equity Tier 1 capital ratio was 19.0 per cent, our leverage ratio was 4.1 per cent and our loan-to-deposit ratio was 102.8 per cent. During the year, we continued to manage our balance sheet carefully with a view to maintaining its quality and efficiency.

 

Delivering outstanding growth

 

Growth potential exists across our business as demonstrated by our performance in 2014. Our ability to capture that growth potential has been enhanced through our successful listing on the London Stock Exchange in November 2014.

 

Mortgages

 

We delivered gross mortgage lending of £5.8 billion in 2014, and achieved 12 per cent growth in mortgage balances to £21.9 billion. This represents a market share of mortgage stock of 1.7 per cent. Over the year, our growth of 12 per cent in mortgage balances exceeded market growth of 1.4 per cent.

 

We took steps to accelerate our lending in the second half of the year, in light of renewed capital guidance from the Prudential Regulation Authority and the receipt of £150 million of primary capital from our IPO. We were pleased to achieve a second half market share of gross mortgage lending of 3.1 per cent and continue to anticipate a market share of more than 3.0 per cent in each of the years to come.

 

Our mortgage business remains high-quality, with an average loan-to-value of new lending of 67 per cent and a buy-to-let exposure of around 15 per cent. Impairments in our mortgage business reduced significantly during the course of the year.

 

Mortgage distribution performed particularly strongly during 2014 with significant growth in our intermediary channel achieved through a focus on product quality, transparency to customers and superior service. Our success in this channel was recognised towards the end of the year by the intermediary market awarding us the coveted Five Star Financial Adviser award for service.

 

Our performance was particularly pleasing given the changes in the mortgage market in 2014 following the introduction of the Mortgage Market Review (MMR). We had prepared thoroughly for the implementation of these requirements in April 2014 and were able to continue to build our business with confidence following the introduction of the new rules.

 

We remain of the view that our intermediary-led distribution model is a competitive advantage given the importance of advice in the post-MMR world.

 

Credit cards

 

A further important development in 2014 has been the successful establishment of our own in-house credit card business.

 

This business will enable us to diversify our asset mix and grow the volume of high-quality credit card lending that we have previously delivered successfully in partnership with MBNA.

 

We have partnered with TSYS to build our own cards platform and, as a result, we have created scalable, low-cost, flexible operations.

 

During the course of 2014 we completed our agreement with MBNA to acquire a proportion of the book that we had built with them over previous years and to transfer to our own balance sheet new business written in 2013 and 2014.

 

As a result, we ended the year with credit card balances of £1.1 billion and with the core infrastructure needed to grow to our target of £3 billion of credit card balances by the end of 2018. Growth in credit cards will enhance our net interest margin and our return on equity, and will enable us to achieve a more efficient use of our capital, taking account of risk-weighted capital requirements and leverage ratio requirements.

 

Deposits

 

Our deposits franchise continued to flourish in 2014. We continued to offer customers a range of competitively-priced instant access and fixed term products as well as Cash ISAs, through all our channels: store, online, digital and telephone. Our online-led distribution model, supported by our efficient national store footprint, was a key factor in growing our retail deposit business in a cost-effective way during the year.

 

During the course of the year our deposit balances grew by 6 per cent to £22.4 billion, a market share of 1.4 per cent. Both the average tenor of our retail deposit base and our customer retention improved during the year. Our performance during 2014 gives us great confidence in our ability to grow our retail deposits on an ongoing basis in the years to come.

 

Access to funding to support growth

 

We made further progress in diversifying our funding position during the year. In September 2014 we completed our fourth public issuance under our securitisation programme. Strong investor demand enabled us to raise £1 billion from investors at attractive margins. We also accessed the Funding for Lending scheme to support our mortgage growth.

  

 

Building capabilities for future growth

 

During the year we made significant strides in expanding our product range. The build of our current account - the Virgin Essential Current Account - was completed in December 2013, and a pilot operated in Stores in Scotland and Northern Ireland during 2014. Following the success of this initiative, we will offer this product through all Stores in 2015.

 

Our potential to grow profitably at scale in current accounts is limited by the structure of the UK current account market, including the low level of switching and the predominance of free-if-in-credit banking. We look forward to the recommendations of the CMA and believe we are well-placed to grow in this important market if, as we hope, their recommendations result in a properly competitive current account marketplace.

 

We also developed our insurance capabilities during the course of 2014 through the build of our new life insurance proposition with our partner Friends Life and through the establishment of an attractive contractual relationship with Ageas for home and motor insurance. These products, in addition to our successful travel insurance and pet insurance businesses, position us well for the years to come.

 

During 2014 we agreed a contract with Monitise to provide Virgin Money with enhanced digital capability. We expect the first output from this agreement to be available for consumers in 2015.

 

 

Maintaining a high-quality balance sheet

 

In 2014 we continued to focus on ensuring that our balance sheet is safe, secure and fit for purpose for both the regulatory environment of today and that of the future. Our capital position exceeds the requirements of Basel III well in advance of its full implementation at the start of 2019.

 

Our fully-loaded Common Equity Tier 1 ratio improved to 19.0 per cent at the end of 2014. During the year we raised £150 million of new equity capital at the time of our IPO. We raised a further £160 million through Additional Tier 1 securities in July, and used these funds to repay Non-core Tier 1 notes held by the Government following our acquisition of Northern Rock plc, benefiting our cost of capital. These developments demonstrate our ability to increase and diversify our capital base.

 

We were not required to participate in the 2014 UK-wide stress test, which was applied to the eight largest banks and building societies. However, we replicated in full the UK stress test scenario, which included a substantial fall in house prices along with rising interest rates and unemployment, and the results demonstrate we have adequate resources to withstand such a scenario.

 

Our leverage ratio improved to 4.1 per cent at the end of 2014, well in excess of the 3.0 per cent minimum requirement and above the level, including a leverage ratio buffer that we expect to be required to hold as a ring-fenced bank.

 

During the course of the year we continued to focus on our liquidity position and remain confident, although always vigilant, that our liquidity policy enables us to achieve an appropriate balance between profitability and liquidity risk.

 

In January 2014 the rating agency Fitch upgraded Virgin Money plc's long-term rating to BBB+ and its short-term rating to F2. These ratings were further affirmed by Fitch in November 2014.

 

Delivering improving returns

 

The improvement in our underlying return on tangible equity from 2.3 per cent to 7.4 per cent reflects the successful delivery of our business plan for the year.

 

Key contributors to this improvement were strong growth in mortgage balances and a significant improvement in our net interest margin, enabling us to grow income during the year by 21 per cent. We also saw the total impairment charge for the year almost halve, supported by continued low interest rates and a benefit from the sale of credit card debt.

 

Management of cost remains a key focus for the business and underlying cost growth during the year was limited to 8 per cent, meaning that we further improved our cost:income ratio.

 

We believe there is still significant scope to improve our cost efficiency and we are confident that our returns will be enhanced by taking further advantage of our operational leverage in the years to come.

 

Colleagues and communities

 

Our positive results for 2014 would not have been possible without the hard work of our colleagues at Virgin Money, and their commitment to our vision to create a better bank for the benefit of customers and communities in the UK, and to provide fair, sustainable and growing shareholder returns.

 

Despite the workload and pressures of 2014, the results of our Staff Engagement Survey continue to be world-class, with an industry-leading staff engagement score of 86 per cent.

 

I am pleased that, during the year, we were able to continue our work to support our local communities, both through sponsorships such as the London Marathon and our investment in our not-for-profit online donation engine Virgin Money Giving. Virgin Money Giving enhances the Virgin Money brand and around five per cent of Virgin Money Giving users go on to become Virgin Money customers.

 

In December we announced our intention to create the Virgin Money Foundation, supported by £4 million of Government funding and an initial £1 million from Virgin Money, with a view to investing in good causes in the North East of England. The Foundation will, over time, make a significant impact on communities across the UK.

 

Customers

 

Ours is a national customer base with access to Virgin Money through all forms of distribution channels including online, mobile, intermediary, store, telephone and also through our Virgin Money Lounges.

 

Investment in the digital channel in 2014 has continued to develop both functionality and content to enhance our customer experience. For example, customers are increasingly accessing us online through mobile devices, with almost 30 per cent of website visits in 2014 made in this way, and in recognition of this we made significant progress during the year in building a mobile solution for our customers.

 

During 2014 we opened new Virgin Money Lounges in the centre of London and in Glasgow, and I am pleased to report that all of our Lounges have enjoyed materially increasing footfall and that the Net Promoter Score (NPS) results that they drive are in excess of those of leading retailers. However, it is not just our Lounges that drive excellent customer service. With an overall NPS score of +16, we believe that we are one of the leading UK retail banks for customer service and we remain the only major UK bank to resolve all complaints within eight weeks.

 

It is our intention to continue to build on our customer franchise, the positive attributes of our brand and our position as a trusted consumer champion in the UK retail banking market.

 

Management team

 

A key driver of our future performance is ensuring we have the right management team in place. To support continued growth in the business and the planned expansion of product lines, we have strengthened the Executive further.

 

Richard Hemsley has recently joined as Chief Banking Officer, with overall responsibility for the commercial performance of all non-cards products lines, as well as the customer and operations divisions that support them. Darrell Evans has also been appointed as a new Commercial Director to lead growth in current accounts, insurance and investments. I am delighted to welcome Richard and Darrell to Virgin Money.

 

Outlook

 

Our vision is to bring a positively-differentiated approach to banking through our ambition to make 'everyone better off'. We will achieve this by delivering good value to our customers, treating colleagues well, making a positive contribution to society, building positive relationships with partners and delivering growing shareholder returns.

 

In delivering our vision, we aim to achieve strong and sustainable growth in our business while maintaining our high-quality balance sheet, and in so doing provide increasing returns for our shareholders.

 

I am delighted that in 2014 we have delivered strongly against this objective. We have delivered strong financial results, we have built a robust platform for the future, and we have listed successfully on the London Stock Exchange.

 

In closing I wish to thank Sir David Clementi for his stewardship and guidance during the last three years. I look forward to working with Glen Moreno as he takes over during the course of 2015 as Chairman of Virgin Money. I know that together and with the support of all our Virgin Money colleagues we will continue to develop the leading challenger bank that will provide growth, quality and returns for all our stakeholders.

 

 

Jayne-Anne Gadhia CBE

Chief Executive

 

 

 

 

 

 

 

 

Chief Financial Officer's Overview of Performance

 

In 2014, we delivered growth in the balance sheet, maintained high asset quality, significantly improved profitability and strengthened capital ratios to support continued growth. Income grew as mortgage lending increased and funding costs fell, more than offsetting lower yields on mortgage lending. Expenses continued to grow at a lower rate than income which, combined with a reduction in the cost of risk, resulted in an increase in underlying profits from £53.4 million to £121.2 million.

 

Significantly improved underlying profitability

 

Group underlying profitability more than doubled compared to 2013, increasing by £67.8 million to £121.2 million. The underlying return on tangible equity improved to 7.4% from 2.3% principally due to increased underlying profitability and after taking into account the £150 million of new capital raised as part of our listing in November 2014. After expenses charged directly to equity relating to the capital raise, the net increase in common equity from the listing was £145.4 million.

 

Underlying net interest income grew by 27% to £366.1 million as a result of improved net interest margin and growth in mortgage balances, which also drove growth in underlying total income of 21% to £438.2 million. Underlying other income was broadly unchanged at £72.1 million.

 

We maintained our focus on cost control and efficiency, with total underlying costs growing by 8% to £301.2 million, reflecting mainly the continued build out of capability in and increased headcount to support the launch of our credit card business on our own platform.

 

The impairment charge fell by 45% to £15.8 million reflecting continued high asset quality and lower customer defaults due to the low interest rate environment. In addition, this reduction included a positive adjustment of £8.9 million following a successful sale of charged-off credit card balances.

 

Underlying earnings per share was 21.4p in 2014 compared to underlying earnings per share of 8.1p in 2013.

 

Our statutory profit before tax of £34.0 million for 2014 compared to a statutory profit before tax of £185.4 million in 2013. This was primarily as the result of recording a gain on the sale of a subsidiary of £203.4 million in 2013, as well as one-off Initial Public Offering transaction costs in 2014.

 

In 2014 the Group was subject to a higher effective tax rate than the UK statutory rate primarily due to a one-off payment to HM Treasury and listing costs incurred during the year not being deductible for tax purposes.

 

Statutory profit after tax was £8.7 million and earnings per share was (0.4)p including the cost of distributions on Additional Tier 1 securities and Non-core Tier 1 notes, compared to the earnings per share of 42.4p in 2013.

 

 

Strong, low risk balance sheet with a capital base to support growth

 

We have continued to grow the balance sheet while strengthening our capital position. We aim to maximise balance sheet efficiency while remaining within our prudent risk appetite.

 

During the year the Group grew customer deposit balances by 5.9% or £1.2 billion in line with market growth of 6.3%. Mortgage balances grew by 12% to £21.9 billion significantly ahead of market growth of 1.4%. The loan-to-deposit ratio increased to 102.8% from 96.4% over the course of the year, in line with our aims of increasing balance sheet efficiency and funding diversification, and our plan for a loan-to-deposit ratio above 100% but not exceeding 110%.

 

The Group's fully loaded CRD IV Common Equity Tier 1 ratio improved to 19.0% from 15.5% at 31 December 2013 primarily driven by the net £145.4 million increase in common equity from new capital raised as part of our IPO. In addition, Virgin Money agreed significantly lower risk weightings for mortgage lending with the PRA in July 2014 which resulted in mortgage risk-weighted assets reducing to £3,489.7 million from £3,860.2 million (excluding operational risks) despite the 12% increase in mortgage balances.

 

The Group's fully loaded CRD IV leverage ratio increased to 4.1% from 3.8% at the end of 2013, due to the increase in leverage ratio eligible capital more than offsetting the increase in eligible assets.

 

Underlying income


2014

2013

 Change


 £m

 £m

 %





Underlying net interest income

366.1

289.2

27

Underlying other income

72.1

72.3

 -

Total underlying income

438.2

361.5

21





Underlying net interest margin

1.50%

1.26%

 24bps

Average interest earning assets

24,475

22,840

7

Loan-to-deposit ratio

102.8%

96.4%

 6.4pp

 

 

Underlying net interest income increased by 27% to £366.1 million in 2014. The growth in underlying net interest income reflected the improved underlying net interest margin as well as the increase in mortgage balances. Other income was 0.3% or £0.2 million lower at £72.1 million.

 

The improvement in net interest margin to 1.50% in 2014 was principally driven by a reduction in retail cost of funds, against a background of falling interest rates across the market, which more than offset a small decline in mortgage margin. Credit card margin was broadly unchanged.

 

Total underlying costs


2014

2013

 Change


£m

 £m

 %





Total underlying costs

301.2

279.2

8

Underlying cost:income ratio

68.7%

77.2%

(8.5)pp

 

Total underlying costs increased by 8% to £301.2 million from £279.2 million in 2013 mainly due to the continued build out of capability and increased head count to support the launch of our credit card business on our own platform.

 

On an underlying basis, income increased by £76.7 million while the increase in our administrative expenses was limited to £22.0 million. As a result, in 2014 the underlying cost:income ratio improved by 8.5 percentage points to 68.7% from 77.2% in 2013.

 

 

Impairment


2014

2013

 Change


£m

 £m

 %





Impairment charge (including debt sale)

15.8

28.9

(45)

Impairment charge (excluding debt sale)

24.7

28.9

(15)

Cost of risk (including debt sale)

0.07%

0.15%

(8)bps

Cost of risk (excluding debt sale)

0.11%

0.15%

(4)bps

Impaired loans as a % of loans and advances

0.5%

0.7%

 (0.2)pp

Provisions as a % of impaired loans

29.5%

25.1%

 4.4pp

Provisions plus excess expected loss as a % of impaired loans

53.6%

43.5%

 10.1pp

 

The impairment charge reduced by 45% to £15.8 million, reflecting continued high asset quality of the loan portfolio and the low level of defaults resulting from the low interest rate environment. In addition, this reduction included a positive adjustment of £8.9 million following a successful sale of charged-off credit card balances.

 

The cost of risk or the impairment charge expressed as a percentage of average loans and advances improved by 8 basis points to 7 basis points from 15 basis points in 2013.

 

Impaired loans as a percentage of loans and advances reduced to 0.5% from 0.7% at 31 December 2013, driven by the increase in property values reducing the loan-to-value below the threshold for impaired status. Provisions as a percentage of impaired loans increased to 29.5% from 25.1% at 31 December 2013. This rise was primarily due to an increase in the provision against buy-to-let mortgages following a small number of operational losses seen in 2014 as well as growth in buy-to-let mortgage balances. This has been partially offset by a reduction in the credit card impairment provision as a percentage of credit card balances following the acquisition of £359.3 million additional Virgin Money branded credit cards from MBNA in November 2014. While provisions plus excess expected loss decreased, impaired loan balances fell by a greater percentage and so the total coverage increased from 43.5% to 53.6%.

 

Statutory profit

 

Our statutory profit before tax of £34.0 million for 2014 compared to a statutory profit before tax of £185.4 million in 2013. This was primarily as the result of recording a gain on the sale of a subsidiary of £203.4 million in 2013, as well as one-off Initial Public Offering transaction costs in 2014. The additional costs recognised in the statutory profit before tax are set out below.

 


2014

2013


£ million

 £ million




Underlying profit

121.2

53.4

Capital issuance:



-- IPO costs

(59.9)

(9.0)

-- Premium on repurchase of NCT1 notes

(4.5)

 -


(64.4)

(9.0)

Strategic items:



-- Strategic transaction costs

(9.0)

(13.6)

-- Impairment of intangible assets

 -

(34.6)

-- Net gain on sale of subsidiary

4.5

203.4

-- Trading loss on disposal group

(1.0)

(0.5)

-- Fair Value adjustments

(0.9)

(0.3)


(6.4)

154.4

-- FSCS levy

(16.4)

(13.4)




Profit before tax - statutory

34.0

185.4

Taxation

(25.3)

(6.4)

Profit for the year

8.7

179.0




Basic earnings per share - underlying (pence)

 21.4p

 8.1p

Basic earnings per share - statutory (pence)

 (0.4)p

 42.4p

 

 

 

Capital issuance

 

The terms agreed in respect of the acquisition of Northern Rock on 1 January 2012 included an amount payable to HM Treasury in the event of a successful, profitable IPO or sale of Virgin Money between 2012 and 2016. On completion of the listing in November 2014, the maximum consideration payable of £50.0 million was crystallised and £36.0 million of this amount was recognised in 2014. The Group incurred costs of £12.6 million in relation to its listing including underwriting commissions, professional advisers, other offer-related fees and expenses and VAT. A further £11.3 million of costs were incurred on listing, of which £10.7 million in share based awards and £0.6 million in one-off payments. In addition, the Group paid a £4.5 million premium on the repurchase of NCT1 notes from UKFI.

 

Strategic items

 

The Group incurred strategic transaction costs of £9.0 million relating to investment in credit card and digital platforms.

 

In addition, the Group recognised a gain on the sale of Church House Trust of £4.5 million and a trading loss prior to disposal of £1.0 million. Fair value adjustments arising from the acquisition of Northern Rock amounted to £0.9 million.

 

FSCS levies

 

FSCS levies amounted to £16.4 million.

 

Taxation

 

In 2014 the Group was subject to a higher effective tax rate than the UK statutory rate primarily due to charges recognised during the year not being deductible for tax purposes. These charges included the additional consideration payable to HM Treasury (£36.0 million) and costs relating to the IPO (£12.6 million). In addition, there was an adjustment to prior year tax charges (£8.3 million).

  

 

 

Balance sheet

 



2014

2013

 Change

Fully-loaded risk-weighted assets and
CRD IV fully-loaded capital ratios




%

Risk-weighted assets

£m

5,160.6

5,206.4

(1)

Common Equity Tier 1 ratio

%

19.0%

15.5%

 3.5pp

Total capital ratio

%

22.1%

18.6%

 3.5pp

Leverage ratio

%

4.1%

3.8%

 0.3pp

Return on assets

%

0.03%

0.73%

(70)bp

 

 

We have significantly strengthened the Group's capital ratios during the year. The Group's fully loaded Common Equity Tier 1 ratio has increased to 19.0% from 15.5% at 31 December 2013. The improvement was driven by a net increase of £145.4 million in new Common Equity Tier 1 capital raised as part of our listing in November 2014 as well as a significant reduction in risk weights which was agreed with the PRA in July 2014. This reduction in risk weights meant that while mortgage balances grew 12% year on year, mortgage risk-weighted assets (including operational risks) fell by 8% to £3,729.8 million (2013: £4,036.2 million).

 

The Group's total capital ratio under prevailing rules improved to 22.1% from 18.6% at 31 December 2013. Leverage ratio eligible capital was maintained by the issuance in July 2014 of £160 million of Additional Tier 1 securities which are listed on the Luxembourg Stock Exchange. £154.5 million of the proceeds of the Additional Tier 1 securities were used on 31 July 2014 to repurchase £150 million of Non-core Tier 1 notes from HM Treasury following a competitive auction process undertaken by UKFI, including a premium of £4.5 million.

 

 


At 31 Dec 2014

At 31 Dec 2013

Change


£m

£m

%

Funding and liquidity




Loans and advances to customers

23,093.1

20,342.5

14

Funded assets

24,181.9

21,427.4

13

Customer deposits

22,365.7

21,121.4

6

Wholesale funding

2,429.4

1,773.3

37

Wholesale funding <1 year maturity

835.3

303.5

175

Loan-to-deposit ratio

102.8%

96.4%

 6pp

High Quality Liquid Assets1 4

4,235.9

3,592.4

18

1. Level 1 + 2a + 2b. See Risk Report page 201 of the Annual Report & Accounts for definition. These include Funding for Lending drawings which are held off balance sheet but are available for repo and hence count towards liquidity resources.

 

During 2014 loans and advances to customers increased by £2,750.6 million to £23,093.1 million and customer deposits grew by £1,244.3 million to £22,365.7 million, resulting in a loan-to-deposit ratio of 102.8%. Virgin Money has a strong and diversified funding base, with funding provided by retail deposit customers representing 84.3% of total liabilities and equity.

 

The Group aims to manage its balance sheet so that customer asset growth is broadly matched with sustainable retail deposit growth and monitors this through the loan-to-deposit ratio which is actively managed to ensure compliance with Board approved metrics. The loan-to-deposit ratio was 102.8% at 31 December 2014, compared to 96.4% at 31 December 2013.

 

Residential Mortgage Backed Security notes in issue increased by £124.3 million to £1,594.1 million during 2014 from £1,469.8 million in 2013 due to the completion of the Gosforth Funding 2014-1 transaction in September more than offsetting the paying down of outstanding funding from prior transactions.

 

In addition to non-retail funding on the balance sheet, the Group also accessed the Government's Funding for Lending Scheme (FLS), with £1.1 billion drawn during the year to support lending growth and liquidity. Total drawings from the Funding for Lending Scheme at 31 December 2014 were £2.3 billion. If this funding were on balance sheet, total non-retail funds would have represented 17.3% of total funding at the end of 2014. All Funding for Lending Scheme drawings remain off balance sheet and are therefore not included in the table above.

 

Given the balance sheet consists predominantly of long-term mortgage assets, the Group does not rely on short-term wholesale funding, which can introduce refinancing risk. Virgin Money maintains a portfolio of High Quality Liquid Assets which consists mainly of deposits held at the Bank of England and UK Government bonds, which are available to meet cash and collateral outflows.

 

The Group's liquidity position remains strong, with High Quality Liquid Assets of £4,235.9 million at 31 December 2014 (31 December 2013: £3,592.4 million). High Quality Liquid Assets represent approximately 5.1 times our wholesale funding with a maturity of less than one year, providing a substantial buffer in the event of an extended market dislocation. In addition there are regular stress tests  of the Group's liquidity position against a range of stress scenarios which further ensure that a robust level of High Quality Liquid Assets is maintained at all times.

 

The Liquidity Coverage Ratio (LCR) will become the Pillar 1 standard for liquidity in the UK from October  2015 and the PRA has the ability to impose firm-specific liquidity requirements. European legislation specifying the definition, calibration, calculation and phase-in of the LCR in 2015 was published in October 2014. We are confident that we will meet our obligations under these revised requirements. 

 

Conclusion

 

Virgin Money has delivered growth in customer balances, a continued high quality balance sheet and increased returns. The progress in growing our balance sheet while also strengthening the Group's capital ratios positions us well to continue growing our business within our prudent risk appetite.

 

Lee Rochford

Chief Financial Officer

 

Underlying segmental analysis

 


Mortgages & Savings

Credit Cards

Current account

Insurance & 

Investments

Central Functions

 Group

2014

£m

 £m

 £m

 £m

 £m

Net interest income

291.0

75.1

 -

 -

366.1

Other income

3.1

25.2

32.8

11.0

72.1

Total underlying income

294.1

100.3

32.8

11.0

438.2

Total costs

(87.3)

(40.8)

(11.6)

(161.5)

(301.2)

Impairment

(1.2)

(14.6)

-

-

(15.8)

Underlying profit / (loss)

205.6

44.9

21.2

(150.5)

121.2







Net interest margin

1.42%

9.60%

 -

 -

1.50%

Cost of risk

0.01%

1.51%

-

 -

0.07%

Return on risk-weighted assets

4.84%

6.01%

45.34%

 -

1.41%

Key balance sheet items at 31 December 2014






Loans and advances to customers

21,887.5

1,098.2

0.1

-

22,985.8

Customer deposits

22,164.1

 -

201.6

 -

22,365.7

Total customer balances

44,051.6

1,098.2

201.7

 -

45,351.5

Risk-weighted assets (transitional)

3,729.8

973.2

47.2*

409.2

5,159.4














Mortgages & Savings

Credit Cards

Current account 

Insurance & 

Investments

Central Functions

 Group

2013

£m

 £m

 £m

 £m

 £m

Net interest income

209.0

80.2

 -

 -

289.2

Other income

1.9

28.3

33.4

8.7

72.3

Total underlying income

210.9

108.5

33.4

8.7

361.5

Total costs

(79.5)

(38.6)

(12.2)

(148.9)

(279.2)

Impairment

(2.1)

(26.8)

 -

 -

(28.9)

Underlying profit / (loss)

129.3

43.1

21.2

(140.2)

53.4







Net interest margin

1.15%

9.14%

 -

-

1.26%

Cost of risk

0.01%

2.89%

-

 -

0.15%

Return on risk-weighted assets

3.16%

5.88%

57.14%

 -

0.38%

Key balance sheet items at 31 December 2013






Loans and advances to customers

19,569.5

781.6

0.1

 -

20,351.2

Customer deposits

20,932.5

 -

188.9

 -

21,121.4

Total customer balances

40,502.0

781.6

189.0

 -

41,472.6

Risk-weighted assets (transitional)

4,036.2

708.2

37.1*

424.9

5,206.4

* Operational risk-weighted assets only.

 

 

 

 

Basis of preparation of financial results

 

In order to present a more meaningful view of business performance, the results of the Group and business units are presented on an underlying basis of reporting are described below.

 

The following items have been excluded from underlying profits;

·    credit card and current account platform build;

·    costs associated with listing;

·    additional Northern Rock consideration;

·    FSCS levies;

·    fair value adjustments;

·    gain on sale of subsidiary and loss on disposal group; and

·    premium on repurchase of non tier 1 notes.

 

Note: 2013 figures are restated. See note 39 of the financial statements for details.

 

Our Treasury function is not managed as a profit centre. Interest expense incurred from its funding and liquidity operations is allocated to the business lines respectively.

 

 

 

MORTGAGES AND SAVINGS

 

Key developments - Mortgages

 

·    Our mortgage book growth of 12% in 2014 exceeded market growth of 1.4%, driven by strong new lending of £5.8 billion (a 2.8% full year gross lending share, trending above 3.15% in H2 2014). Combined with strong customer retention, this meant we delivered a 10.2% share of net lending during the year.

·    Our focus on mortgage process effectiveness reduced the time taken to process an application through to offer stage by 17%.

·    Our intermediary service was recognised by winning a coveted 'Five Star' service award from Financial Adviser.

·    We successfully retained 69% of customers whose fixed rate or tracker products matured in 2014.

·    Our buy-to-let offer was extended to 75% loan-to-value (LTV) lending, whilst maintaining our overall portfolio appetite for buy-to-let business.

·    Our mortgage impairments of £1.2 million reflect our conservative risk appetite, strong risk management and resulting high-quality mortgage book.

·    Our provisions represented 29.5% of impaired loans. In addition to our provisions, which anticipate low losses following default because of the quality of the book and low loss experience, we have a regulatory requirement to make an adjustment to capital (the excess expected loss) which amounts to a capital deduction of £33.4 million.

  

 

Key developments - Savings

 

·    Our savings book growth was managed across the year and grew by 6% in line with the growth in the retail savings market.

·    We took a 1.5% share of inflows across the market and delivered a strong share of ISA new business at 7.6%.

·    We grew our balances by £1.2 billion and opened over 220,000 savings accounts.

·    We retained 83% of our maturing fixed rate customers - up from 78% in 2013.

 

 

2014 financial highlights

 

·    Increased net interest income, supported by modest growth in other income delivered a 39% improvement in total income.

·    Strong cost management produced a positive differential between cost growth at 10% and income growth of 39%.

·    Our underlying contribution improved by 59% reflecting strong asset growth and continued high asset quality, allied with careful pricing, NIM and cost management.

·    We delivered a full year Net Interest Margin (NIM) of 1.42% in the mortgage and savings business.

·    Mortgage balances increased by 12% to £21.9 billion. Gross mortgage lending was 4% higher than in 2013 at £5.8 billion.

·    Customer deposits grew by 6% to £22.2 billion.

·    Risk-weighted assets at year end decreased by 8% following model changes agreed with the PRA in July 2014. This drove an increase in the return on risk-weighted assets to 4.8% from 3.2% in 2013.

 

Performance summary

 


2014

2013

Change


£m

£m

%

Net interest income

291.0

209.0

39.0

Other income

3.1

1.9

63.0

Total underlying income

294.1

210.9

39.0

Total costs

(87.3)

(79.5)

10.0

Impairment

(1.2)

(2.1)

(43.0)

Underlying contribution

205.6

129.3

59.0





Mortgages and savings net interest margin

1.42%

1.15%

 27bps

Cost of risk

0.01%

0.01%

 -

Return on risk-weighted assets

4.84%

3.16%

 168bps










2014

2013

Change

Key balance sheet items at 31 December 2014

£m

£m

%

Loans and advances to customers

21,887.5

19,569.5

12

Customer deposits

22,164.1

20,932.5

6

Total customer balances

44,051.6

40,502.0

9

Risk-weighted assets

3,729.8

4,036.2

(8)

 

Note: 2013 figures are restated. See note 39 of the financial statements for details. 

 

 

 

 

 

CARDS

 

 

Key developments

 

·    We were pleased to exceed our expectations of customer retention during 2014. We ended the year with higher total customer balances as a result of completing the acquisition of the second tranche of balances from MBNA and despite being constrained in terms of new business origination due to the terms of the agreement with MBNA.

·    We acquired the remaining customer balances originated by MBNA since January 2013, in November 2014 for £362.7 million. This provides us with the full economic benefit of these customer balances.

·    Much of our cards team effort has been dedicated to the delivery of our own credit card capability and we achieved the major milestone of issuing our own cards for the first time in November. This was initially to our own colleagues, and the project was delivered on time and within budget.

·    Preparation for the migration of the acquired credit card accounts from MBNA to our own operation, TSYS, is well advanced and planned for H1 2015.

·    The full public launch of our credit card business is planned for early 2015.

·    We completed the sale of £39.5 million of previously charged-off balances to Arrow Global in October 2014.

 

2014 financial highlights

 

·    In a year where our focus was on building our new credit card capabilities, and with constraints on new card origination, underlying contribution improved by 4%.

·    The reduction in total income of £8.2 million was due largely to expected attrition of the first tranche of customer accounts and balances acquired from MBNA. In addition, there was no new card origination in November and December. Customer retention activities aimed at maintaining accounts and balances resulted in a drop in yield. Lower interest expense however, meant that 2014 credit card NIM was higher than in 2013 at 9.6%.

·    Our attributable expenses increased by £2.2 million as we continued to pay MBNA for the servicing of the acquired customer accounts while investing in the build of our own capabilities. Following migration, our unit operating costs will reduce significantly.

·    The improvement in impairments of £12.2 million is attributable to continued improvements in customer delinquency rates and an £8.9 million credit from the sale of already charged-off balances.

·    Loans and advances to customers increased by 41% to £1,098.2 million, largely due to the transfer of a further £359.3 million of credit card balances to Virgin Money from MBNA in November 2014.

·    Risk-weighted assets increased by 37% due to the increase in loans and advances on the balance sheet.

·    Return on risk-weighted assets increased by 13bps reflecting the increased underlying contribution compared to average risk weighted assets for the year which included £359.3 million of additional credit card balances for only one month. 

 

 

Performance summary

 


2014

2013

Change


£m

£m

%

Net interest income

75.1

80.2

(6)

Other income

25.2

28.3

(11)

Total underlying income

100.3

108.5

(8)

Total costs

(40.8)

(38.6)

6

Impairment

(14.6)

(26.8)

(46)

Underlying contribution

44.9

43.1

4





Credit cards net interest margin

9.60%

9.14%

 46bps

Cost of risk

1.51%

2.89%

 (138)bps

Return on risk-weighted assets

6.01%

5.88%

 13bps










2014

2013

Change

Key balance sheet items at 31 December 2014

£m

£m

%

Loans and advances to customers

1,098.2

781.6

41

Total customer balances

1,098.2

781.6

41

Risk-weighted assets

973.2

708.2

37

 

Note: 2013 figures are restated. See note 39 of the financial statements for details. 

 

 

 

 

CURRENT ACCOUNTS, INSURANCE AND INVESTMENTS

 

 

Key developments

·    We launched our Virgin Essential Current Account to customers in Scotland and Northern Ireland in early 2014, following a successful colleague pilot in late 2013. The Virgin Essential Current Account aligns with the Government initiative on Basic Bank Accounts and has been well received by consumers. We will complete the full roll-out during 2015.

·    We reaffirmed our commitment to our key fund administration partner, IFDS, through a new ten-year contract. Alongside this we agreed with State Street and IFDS a route to expanding our range of passively managed funds. Three new funds are planned for 2015.

·    We developed our life insurance capabilities through a partnership with Friends Life. We launched a simple transparent life insurance product in March 2015.

·    We signed a long-term strategic partnership with Ageas to distribute home and motor insurance products. We will launch these products in H2 2015.

·    We signed a seven-year contract with Monitise to support the development of our digital offering in current accounts.

 

2014 financial highlights

 

·    Our funds under management grew to £3.042 billion during 2014 despite a 2.1% fall in the FTSE All-Share index. This growth resulted in a 4% increase in income.

·    Our ISA and Pension sales continued to perform well. We attracted new fund inflows whilst maintaining balances from our existing customers.

·    Our travel insurance sales increased to 398,000, an 8.8% improvement year-on-year and the start of a recovery from our 2012 position where we withdrew from unprofitable channels.

·    Our insurance income in 2013 was positively impacted by a one-off payment. Underlying income was flat year-on-year.

·    Our current account balances grew by 7% in the year to £201.6 million.

·    Attributable expenses are favourable due to investment stamp duty being abolished in April 2014.

·    Risk-weighted assets are held against operational risk in the business unit. Operational risk-weighted assets are measured using income generated by the unit in the preceding three years. These showed a year-on-year increase of 27% due to growth in income of the business unit since 2010.

 

 

Performance summary

 


2014

2013

Change


£m

£m

%

Investments

29.0

28.0

4

Insurance and other

3.8

5.4

(30)

Total underlying income

32.8

33.4

(2)

Total costs

(11.6)

(12.2)

(5)

Impairment

 -

-

 -

Underlying contribution

21.2

21.2

 -





Cost of risk

 -

-

 -

Return on risk-weighted assets

45.34%

57.14%

 (11.8)pp










2014

2013

Change

Key balance sheet items at 31 December 2014

£m

£m

%

Loans and advances to customers

0.1

0.1

 -

Current account balances

201.6

188.9

7

Total customer balances

201.7

189.0

7

Risk-weighted assets

47.2

37.1

27

 

Note: 2013 figures are restated. See note 39 of the financial statements for details. 

 

 

 

CENTRAL FUNCTIONS

 

 

Key developments

 

·    We invested over £40.0 million in 2014 to improve our business capability, fully aligned with our strategy to grow the business. 98% of these initiatives were delivered on time and to budget. Costs included the opening of our new Lounges in Glasgow and London during the year.

·    We successfully implemented MMR, the most significant regulatory change in the mortgage market since MCOB in 2003. All of the changes required were completed with minimal disruption to our business.

·    Our programme to make products mobile enabled commenced with a travel insurance application. This mobile capability will be rolled out to other products in 2015.

·    To support our strategy we invested in recruiting senior management talent. This included a new Chief Banking Officer, General Counsel, Banking Insurance & Investments Director and an Investor Relations Director.

  

 

2014 financial highlights

 

·    Interest income and expense incurred from Treasury funding and liquidity operations is allocated to the business units.

·    Other income is primarily due to gains on the sale of investment securities from within the Treasury portfolio.

·    Strong business performance led to increased bonus awards in the year contributing to the 8% increase in cost.

·    An increase in depreciation of £3.3 million was a further driver of central cost change in the year, as we continued to invest in our future.

·      Costs also included the opening of our new lounges in Glasgow and London during the year.

 

Performance summary

 


2014

2013

Change


£m

£m

%

Net interest income

 -

 -

 -

Other income

11.0

8.7

26

Total underlying income

11.0

8.7

26

Total costs

(161.5)

(148.9)

8

Impairment

 -

 -

 -

Underlying loss

(150.5)

(140.2)

7










2014

2013

Change

Key balance sheet items at 31 December 2014

£m

£m

%

Loans and advances to customers

 -

 -

-

Total customer balances

 -

 -

-

Risk-weighted assets

409.2

424.9

(4)%

 

Note: 2013 figures are restated. See note 39 of the financial statements for details. 

 

 

 

 

Responsibility statement of the Directors

in respect of the Annual Financial Report

 

The responsibility statement below has been prepared in connection with the Company's full annual report for the year ending 31 December 2014. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

·    The financial statements, prepared in accordance with IFRSs as adopted by the European Union, 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 Strategic Report and Directors' Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

 

This responsibility statement was approved by the board of directors on 4 March 2014 and is signed on its behalf by:

 

Jayne-Anne Gadhia, Chief Executive

Lee Rochford, Chief Financial Officer

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

 

Credit Risk

Principal risks

Virgin Money provides residential and buy-to-let mortgages and credit cards to customers across the UK. There is a risk that any adverse changes in the economic and market environment and/or the credit quality or behaviour of our borrowers results in additional impairment losses thereby reducing our profitability.

 

Virgin Money maintains a liquid asset portfolio and hedges exposure to interest rate risk through derivative instruments to manage liquidity and market risk. These positions are Virgin Money wholesale exposures which result in credit risk.

 

Mitigating actions

·      Managed through risk appetite and risk limits reflected in approved credit policy. Appetite reflects low tolerance for wholesale credit losses.

·      Composition and quality of portfolios monitored and reported through governance committees regularly. Performance monitored to help ensure that both composition and quality remain in line with risk appetite limits.

·      Stress and scenario testing.

·      Default credit limit structure for counterparties.

·      Credit risk arising from derivative and from securities financing transactions mitigated by collateralising exposures on a daily basis.

 

Market Risk

Principal risks

Market risk is the risk that unfavourable market moves lead to a reduction in earnings or value. Virgin Money does not trade or make markets. Interest rate risk is the only material category of market risk for the Group.

 

Mitigating actions

·      Board approved risk appetite limits and policy.

·      Use of natural offsets and derivatives.

·      Stress and scenario testing.

 

Operational Risk

Principal risks

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, cybercrime and information security remain a key focus for Virgin Money. 

 

Mitigating actions

·      Risk appetite focused on maturing the control environment and therefore managing operational risk.

·      A programme of investment in security infrastructure to mitigate threats including cyber attack.

·      Continued investment in and development of risk management frameworks, systems and processes.

·      Monitoring of external events impacting other financial services companies to inform our stress testing.

 

Conduct Risk and Compliance

Principal risks

Conduct risk is the risk that our operating model, culture or actions result in unfair outcomes for customers. Compliance risk is the risk of regulatory sanction, material financial loss or reputational damage if the organisation fails to design and implement operational processes, systems and controls such that it can maintain compliance with all applicable regulatory requirements. 

 

Mitigating actions

·      Effective and timely Board response to changes in the regulatory environment to ensure compliance is maintained.

·      Customer is placed at the heart of decision-making by ensuring fair outcomes through comprehensive risk assessment and testing.

·      Continued investment in and development of risk management frameworks, systems and processes.

 

Strategic and Financial Risk

Principal risks

Strategic risk is the risk of significant loss or damage arising from business decisions that impact the long-term interests of our 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.

 

Mitigating actions

·      Board focus on ensuring alignment of business development and planning with risk appetite.

·      Investment in processes, systems, recruitment and training to support new business developments.

·      Robust risk and project management disciplines to ensure that implementation is delivered safely.

·      Active focus on asset origination and portfolio management to eliminate inappropriate concentration risk.

·      Regular validation and review of models.

 

 

Liquidity and Funding Risk

 

Principal risks

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.

 

Mitigating actions

·      Board approved risk appetite and funding and liquidity policy defining a limit structure.

·      Liquid resources maintained in adequate quantity and quality to meet estimated outflows.

·      A prudent mix of funding sources is maintained with a maturity profile set in risk appetite and policy limits.

·      Stress and scenario testing.

 

 

 

 

 

 

 

Credit risk portfolio in 2014

 

Overview

·      Impairment provisions decreased 12% to £30.6 million in the year to 31 December 2014.

·      Impairment provisions as a percentage of loans and advances to customers reduced to 0.13% as at 31 December 2014 compared to 0.17% at 31 December 2013.

 

 

The table below shows our total credit exposures.

 

 


Secured

Unsecured

Wholesale



Residential mortgage loans

Residential buy-to-let mortgage loans

Credit cards

Overdrafts

Treasury assets

Derivative exposures

Total

31 December 2014

£m

£m

£m

£m

£m

£m

£m

Total gross

loans and advances to customers

18,759.5

3,135.6

1,121.1

0.2

-

-

23,016.4

Loans and advances to banks excluding Bank of England

-

 

-

 

-

-

720.5

-

720.5

Cash and balances at central banks

-

-

-

-

 

851.3


851.3

Debt securities classified  as loans and receivables

-

 

-

 

-

-

 

8.6

-

8.6

Available- for -sale financial assets

-

-

-

-

1,539.6


1,539.6

Gross positive fair value of derivative assets

-

-

-

-

-

101.2

101.2

Total

18,759.5

3,135.6

1,121.1

0.2

3,120.0

101.2

26,237.6

 


Secured

Unsecured

Wholesale



Residential mortgage loans

Residential buy-to-let mortgage loans

Credit cards

Overdrafts

Treasury assets

Derivative exposures

Total

31 December 2013

£m

£m

£m

£m

£m

£m

£m

Total gross

loans and advances to customers

17,205.8

2,371.3

808.6

0.2

-

-

20,385.9

Loans and advances to banks excluding Bank of England

-

 

-

 

-

-

626.9

-

626.9

Cash and balances at central banks

-

-

-

-

 

1,423.5


1,423.5

Debt securities classified as loans and receivables

-

 

-

 

-

-

 

9.4

-

9.4

Available- for -sale financial assets

-

-

-

-

1,679.2


1,679.2

Gross positive fair value of derivative assets

-

-

-

-

-

187.5

187.5

Total

17,205.8

2,371.3

808.6

0.2

3,739.0

187.5

24,312.4

 

 

Maximum credit exposure

 

The maximum credit risk exposure of the Group in the event of other parties failing to perform their obligations is detailed below.  No account is taken of any collateral held, other credit enhancements or provisions for impairment.

 

The maximum credit risk exposure for off-balance sheet items relates to applications that have been approved and have not yet been drawn by the customer and undrawn loan commitments (pipeline).  These commitments represent agreements to lend in the future and can be cancelled unconditionally, subject to notice requirements.

 

 

 


Low
risk

Medium risk

Higher risk

Total exposures

Low
risk

Medium risk

Higher risk

31 December 2014








On-balance sheet

£m

£m

£m

£m

%

%

%

Wholesale








Cash and balances at central banks

851.3

-

-

851.3

100.0

-

-

Debt securities classified as loans and receivables

8.6

-

-

8.6

100.0

-

-

Available-for-sale financial assets

1,539.6

-

-

1,539.6

100.0

-

-

Loan and advances to banks

720.5

-

-

720.5

100.0

-

-

Derivative financial instruments

101.2

-

-

101.2

100.0

-

-

Retail








Gross loans and advances to customers - secured1

19,636.3

1,574.5

684.3

21,895.1

89.7

7.2

3.1

Gross loans and advances to customers - unsecured

1,091.4

2.5

27.4

1,121.3

97.4

0.2

2.4

Total on-balance sheet

23,948.9

1,577.0

711.7

26,237.6

91.3

6.0

2.7

Off-balance sheet








Loan commitments (pipeline and undrawn commitments)

3,694.2

-

-

3,694.2

100.0

-

-

 

1.    Virgin Money has amended its definition for high, medium and low categories of gross loans and advances to customers for the second portfolio. Details of the new definitions can be found on page 166.  The 2013 numbers have been restated to reflect this change.

 


Low
risk

Medium risk

Higher risk

Total exposures

Low
risk

Medium risk

Higher risk

31 December 2013








On-balance sheet

£m

£m

£m

£m

%

%

%

Wholesale








Cash and balances at central banks

1,423.5

-

-

1,423.5

100.0

-

-

Debt securities classified as loans and receivables

9.4

-

-

9.4

100.0

-

-

Available-for-sale financial assets

1,679.2

-

-

1,679.2

100.0

-

-

Loan and advances to banks

626.9

-

-

626.9

100.0

-

-

Derivative financial instruments

187.5

-

-

187.5

100.0

-

-

Retail








Gross loans and advances to customers - secured1

17,538.4

1,301.9

736.8

19,577.1

89.5

6.7

3.8

Gross loans and advances to customers - unsecured

779.0

3.2

26.6

808.8

96.3

0.4

3.3

Total on-balance sheet

22,243.9

1,305.1

763.4

24,312.4

91.5

5.4

3.1

 

Off-balance sheet








Loan commitments (pipeline and undrawn commitments)

3,504.1

-

-

3,504.1

100.0

-

-

 

1.  Virgin Money has amended its definition for high, medium and low categories of gross loans and advances to customers for the second portfolio. Details of the new definitions can be found on page 166.  The 2013 numbers have been restated to reflect this change.

 

 

Loans and advances to customers comprise of:


2014

2013


£m

£m

Advances secured on residential property not subject to securitisation

15,631.2

14,317.3

Advances secured on residential property subject to securitisation

3,128.3

2,888.5

Total advances secured on residential property

18,759.5

17,205.8

Residential buy-to-let loans not subject to securitisation

3,135.6

2,371.3

Total loans and advances to customers secured on residential property

21,895.1

19,577.1

Impairment allowance- secured

(7.6)

(7.6)

Loans and advances- secured

21,887.5

19,569.5

Credit cards

1,121.1

808.6

of which relates to the fair value of expected losses on acquired assets

(5.9)

-

Overdrafts

0.2

0.2

Unsecured receivables not subject to securitisation

1,121.3

808.8

Impairment allowance - unsecured

(23.0)

(27.1)

Loans and advances- unsecured

1,098.3

781.7

Total loans and advances to customers excluding portfolio lending

22,985.8

20,351.2

 

The mortgage portfolio has grown by 12% during 2014. In particular, buy-to-let balances have increased by £764.3million (32%) over the reporting period, reflecting Virgin Money's appetite and the growth of the buy-to-let market.

 

Secured impairment allowance has remained stable since 2013. There has been a reduction in the proportion of impairment provisions to gross loans and advances, primarily reflective of positive house price movements, helped by improved arrears performance. The decrease in unsecured loans impairment allowance is primarily a result of impaired arrears performance and reflects the transfer of less well-seasoned assets which hold lower provisions.

 

 

Credit quality of assets

 

Loans and receivables

 

Virgin Money defines three classifications of credit quality (low risk, medium risk and higher risk) for all credit exposures.  These are based on the following criteria for the different credit risk exposure types.

 

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 our 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 a 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% but less than or equal to 2%; and

·      low risk where assets are not past due and have a PD of 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 and 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.  All of Virgin Money's wholesale exposures are investment grade and therefore classified as low risk.

 

Further asset quality categorisation is disclosed below, which reflects the impairment status of assets.

 

No wholesale credit exposures are past due or impaired as at 31 December 2014 or 2013.

 

The categorisation of credit risk is detailed in the table below:

 

Credit risk categorisation

Description

Neither past due nor impaired

Loans that are not in arrears and which do not meet the impaired asset definition.  This segment can include assets subject to forbearance solutions.

Neither past due nor impaired but in forbearance

Loans that are categorised as neither past due nor impaired, but are currently subject to one of the defined forbearance solutions.

Past due and not impaired

 

Loans that are in arrears or where there is objective evidence of impairment, and the asset does not meet the definition of an impaired asset as the expected recoverable amount exceeds the carrying amount. This category is not applicable for unsecured lending.

Arrears

For secured lending this is where the customer's payment shortfall exceeds 1% of the current monthly contractual payment amount. For unsecured lending, customers are classified as in arrears at one day past due.

Impaired assets

Loans that are in arrears or where there is objective evidence of impairment, including changes in customer behaviour or circumstances, and where the carrying amount of the loan exceeds the expected recoverable amount.  Unsecured lending assets are treated as impaired at one day past due. All fraud and operational risk loans are categorised as impaired irrespective of the expected recoverable amount.

 

The Credit quality of retail assets is detailed in the tables below.

 


Secured

Unsecured

Total

Residential

mortgage

loans

Residential

buy-to-let

mortgage loans

Credit cards

Overdrafts


31 December 2014

£m

%

£m

%

£m

%

£m

%

£m

%

Neither past due nor impaired

18,508.0

98.6

3,110.4

99.2

1,093.7

97.6

0.2

100.0

22,712.3

98.6

-   of which in receipt of forbearance1

241.7

1.3

7.2

0.2

2.5

0.2

-

-

251.4

1.1

Past due and not impaired

182.6

1.0

17.6

0.6

-

-

-

-

200.2

0.9

Impaired

68.9

0.4

7.6

0.2

27.4

2.4

-

-

103.9

0.5

Total

18,759.5

100.0

3,135.6

100.0

1,121.12

100.0

0.2

100.0

23,016.4

100.0

 

1  This category reflects accounts which are neither past due nor impaired and subject to forbearance solutions.  Accounts in this category are also included in the neither past due nor impaired categorisation. 

2  A fair value adjustment of £5.9million was made to the value of gross loans and advances in order to take account of losses expected on purchased assets.


Secured

Unsecured

Total

Residential

mortgage

loans

Residential

buy-to-let mortgage loans

Credit cards

Overdrafts


31 December 2013 1,2

£m

%

£m

%

£m

%

£m

%

£m

%

Neither past due nor impaired

16,930.6

98.4

2,345.3

98.9

782.0

96.7

0.2

100.0

20,058.1

98.4

-   of which in receipt of forbearance3

285.8

1.7

7.9

0.3

3.2

0.4

-

-

296.9

1.4

Past due and not impaired

172.0

1.0

17.5

0.7

-

-

-

-

189.5

0.9

Impaired

103.2

0.6

8.5

0.4

26.6

3.3

-

-

138.3

0.7

Total

17,205.8

100.0

2,371.3

100.0

808.6

100.0

0.2

100.0

20,385.9

100.0

 

1.  Impaired assets have been restated to reflect the change in definition as noted on page 161.

2.  Virgin Money has amended its approach to forbearance inline with FCA guidance as outlined on page 161. Loans in receipt of forbearance have been restated to reflect the change in definition.

3  This category reflects accounts which are neither past due nor impaired and subject to forbearance solutions.  Accounts in this category are also included in the neither past due nor impaired categorisation. 

 

 

 

 

 

The criteria that the Group use to determine that there is objective evidence of an impairment loss are disclosed on page 167.  All loans where specific circumstances indicate that a loss is likely to be incurred, for example mortgage accounts which have entered possession or loans where fraud has been confirmed, are individually assessed for impairment by reviewing expected future cash flows including those that could arise from the realisation of security.

 

Loans and advances which are neither past due nor impaired

 

The table below shows the details of the credit quality for neither past due nor impaired loans.

 


Residential mortgage

loans

Residential

buy-to-let

mortgage loans

Total

31 December 20141

£m

%

£m

%

£m

%

PD by internal ratings







Low risk

16,597.7

89.7

3,038.6

97.6

19,636.3

90.8

Medium risk

1,507.5

8.1

67.0

2.2

1,574.5

7.3

Higher risk

402.8

2.2

4.8

0.2

407.6

1.9

Total neither past due nor impaired

18,508.0

100.0

3,110.4

100.0

21,618.4

100.0

 

1   Virgin Money has amended its definition for high, medium and low categories of gross loans and advances to customers for the second portfolio. Details of the new definition can be found on page 166.   The 2013 numbers have been restated to reflect this change

 


Residential

mortgage

loans

Residential

buy-to-let

mortgage loans

Total

31 December 20131  

£m

%

£m

%

£m

%

PD by internal ratings







Low risk

15,250.3

90.0

2,288.1

97.5

17,538.4

90.9

Medium risk

1,246.6

7.4

55.3

2.4

1,301.9

6.8

Higher risk

433.7

2.6

1.9

0.1

435.6

2.3

Total neither past due nor impaired

16,930.6

100.0

2,345.3

100.0

19,275.9

100.0

 

1  Virgin Money has amended its definition for high, medium and low risk categories of gross loans and advances to customers for the secured portfolio. Details of  the new definitions can be found on page 166. The 2013 numbers have been restated to reflect this change.

2  Impaired assets have been restated to reflect the change in definition as noted on page 161.

 

 

 

 

Loans and advances which are past due and not impaired

 

Mortgages past due and not impaired can also be analysed by overdue term as shown below.  These assets represent 0.9% of secured balances (2013: 1.0%).

 


Residential

mortgage

loans

Residential

buy-to-let

mortgage loans

Total

31 December 20141

£m

%

£m

%

£m

%

Up to one month

59.3

32.5

5.2

29.5

64.5

32.2

One to three months

72.1

39.5

8.2

46.6

80.3

40.1

Three to six months

29.6

16.2

2.6

14.8

32.2

16.1

Over six months

21.6

11.8

1.6

9.1

23.2

11.6

Total past due and not impaired

182.6

100.0

17.6

100.0

200.2

100.0

 

1 Assets categorised as past due and not impaired are those where the expected recoverable amount exceeds the carrying amount.

 


Residential

mortgage

loans

Residential

buy-to-let

mortgage loans

Total

31 December 2013 1

£m

%

£m

%

£m

%

Up to one month

56.1

32.6

3.9

22.3

60.0

31.7

One to three months

69.5

40.4

10.1

57.7

79.6

42.0

Three to six months

25.9

15.1

1.6

9.1

27.5

14.5

Over six months

20.5

11.9

1.9

10.9

22.4

11.8

Total past due and not impaired

172.0

100.0

17.5

100.0

189.5

100.0

 

1. Impaired assets have been restated to reflect the change in definition as noted on page 161.

 

The tables below show the movement of impaired loan balances during 2014 and 2013.

 


Secured

Unsecured

Wholesale

Total


Residential

mortgage

loans

Residential

buy-to-let

mortgage

loans

Credit cards

Overdrafts

Treasury assets

Derivative exposures

31 December 2014

£m

£m

£m

£m

£m

£m

£m

As at 1 January 2014

103.2

8.5

26.6

-

-

-

138.3

Classified as impaired during the year

121.6

14.5

77.0

-

-

-

213.1

Transferred from impaired to unimpaired

(136.5)

(13.7)

(39.4)

-

-

-

 (189.6)

Amounts written off

(1.1)

(0.1)

(32.7)

-

-

-

(33.9)

Repayments

(18.3)

(1.6)

(4.1)

-

-

-

(24.0)

At 31 December 2014

68.9

7.6

27.4

-

-

-

103.9

 


Secured

Unsecured

Wholesale

Total


Residential

mortgage

loans

Residential

buy-to-let

mortgage

loans

Credit cards

Overdrafts

Treasury assets

Derivative exposures

31 December 2013 1

£m

£m

£m

£m

£m

£m

£m

As at 1 January 2013

150.0

13.0

-

-

-

-

163.0

Classified as impaired during the year

158.0

22.0

93.9

-

-

-

273.9

Transferred from impaired to unimpaired

(186.0)

(25.6)

(36.8)

-

-

-

(248.4)

Amounts written off

(1.7)

(0.5)

(21.6)

-

-

-

(23.8)

Repayments

(17.1)

(0.4)

(8.9)

-

-

-

(26.4)

As at 31 December 2013

103.2

8.5

26.6

-

-

-

138.3

1. Impaired assets have been restated to reflect the change in definition as noted on page 161.

 

 

Total impaired assets on secured loans and advances to customers have fallen during the period principally driven by increases in property values, reducing the loan-to-value below the threshold for impaired status. Write offs remain low as a result of the small number of customers whose properties are taken into possession and sold.

 

An analysis of impaired assets by overdue term and by those assets where the borrower's property is in possession is provided in the table below. These assets represent 0.3% of secured balances as at 31 December 2014 (2013: 0.6%).


Residential

mortgage

loans

Residential

buy-to-let

mortgage loans

Credit cards

Overdrafts

Total

31 December 2014

£m

%

£m

%

£m

%

£m

%

£m

%

Up to one month

44.1

64.0

4.0

52.7

11.0

40.1

-

-

59.1

56.9

One to three months

10.3

14.9

2.3

30.3

8.0

29.2

-

-

20.6

19.8

Three to six months

4.5

6.5

0.3

3.9

8.4

30.7

-

-

13.2

12.7

Over six months

9.0

13.1

0.7

9.2

-

-

-

-

9.7

9.3

Possession

1.0

1.5

0.3

3.9

-

-

-

-

1.3

1.3

Total impaired assets

68.9

100.0

7.6

100.0

27.4

100.0

-

-

103.9

100.0

 


Residential

mortgage

loans

Residential

buy-to-let

mortgage loans

Credit cards

Overdrafts

Total

31 December 2013 1

£m

%

£m

%

£m

%

£m

%

£m

%

Up to one month

50.5

48.9

4.9

57.7

10.1

38.0

-

-

65.5

47.4

One to three months

23.4

22.7

2.5

29.4

7.4

27.8

-

-

33.3

24.1

Three to six months

11.0

10.7

0.4

4.7

9.1

34.2

-

-

20.5

14.8

Over six months

15.5

15.0

0.7

8.2

-

-

-

-

16.2

11.7

Possession

2.8

2.7

 -

 -

-

-

-

-

2.8

2.0

Total impaired assets

103.2

100.0

8.5

100.0

26.6

100.0

-

-

138.3

100.0

 

1. Impaired assets have been restated to reflect the change in definition as noted on page 161.

 

The total value of impaired assets for mortgages has fallen by £35.2 million during the reporting period, representing an improvement of 32% driven predominantly by positive movements in the house price index, moving properties below the loan-to-value threshold for impaired status.

  

The tables below show impaired assets and impairment provisions

 


Gross balances

Impaired balances

Impaired balances as a % of gross balances

Impairment provisions

Impairment provisions as a % of impaired balances1

31 December 2014

£m

£m

%

£m

%

Residential mortgage loans

18,759.5

68.9

0.4

6.2

9.0

Residential buy-to-let mortgage loans

3,135.6

7.6

0.2

1.4

18.4

Total secured

21,895.1

76.5

0.3

7.6

9.9

Credit cards2

1,121.1

27.4

2.4

22.9

83.6

Overdrafts

0.2

 -

 -

0.1

 -

Total unsecured

1,121.3

27.4

2.4

23.0

83.9

Wholesale treasury assets

-

-

-

-

-

Wholesale derivative exposures

-

-

-

-

-

Total

23,016.4

103.9

0.5

30.6

29.5

 

1. The increase in the buy-to-let impairment provision as a percentage of impaired balances, from 2013 to 2014, has been driven by the reassessment of property values in a small number of cases.

2. A fair value adjustment of £5.9million was made to the purchase price to take account of the losses already incurred on these assets. These losses therefore do not appear as part of the impairment provision total as at December 2014, with only losses incurred after purchase being charged.

 


Gross balances

Impaired balances

Impaired balances as a  % of gross balances

Impairment provisions

Impairment provisions as a % of impaired balances

31 December 2013

£m

£m

%

£m

%

Residential mortgage loans

17,205.8

103.2

0.6

7.0

6.8

Residential buy-to-let mortgage loans

2,371.3

8.5

0.4

0.6

7.1

Total secured 1

19,577.1

111.7

0.6

7.6

6.8

Credit cards

808.6

26.6

3.3

27.0

101.5

Overdrafts

0.2

 -

 -

0.1

 -

Total unsecured

808.8

26.6

3.3

27.1

101.9

Wholesale treasury assets

-

-

-

-

-

Wholesale derivative exposures

-

-

-

-

-

Total

20,385.9

138.3

0.7

34.7

25.1

 

1. Impaired assets have been restated to reflect the change in definition as noted on page 161.

 

 

 

Impairment provisions:

 

·      have remained stable for secured loans at £7.6 million.  Impairment provisions for residential buy-to-let mortgages have increased largely due to a small number of operational losses in 2014.

·      have decreased by £4.1 million for unsecured loans. This is primarily a result of improved arrears performance and reflective of less well-seasoned transferred assets, with consequentially lower provisions against them.

 

 

Impairment provisions as a percentage of impaired loans:

 

·      have increased for secured impaired loans from 6.8% to 9.9% as at 31 December 2014.

·      have decreased for unsecured impaired loans from 101.9% to 83.9% as at 31 December 2014.  This is a result of increased loans and advances reported at 2014 year end resulting to £360 million migrating to the balance sheet from MBNA, with lower provision levels on these less mature balances.

 

 

The table below shows the movement of impairment provisions during the year.

 


Secured

Unsecured

Wholesale



On advances secured on residential property

On advances secured on residential
buy-to-let property

Credit cards

Overdrafts

Treasury assets

Derivative exposures

Total

31 December 2014

£m

£m

£m

£m

£m

£m

£m

As at 1 January 2014

7.0

0.6

27.0

0.1

-

-

34.7

Increase in allowances during the year net of recoveries reflected in the income statement

0.3

0.9

14.6

-

-

-

15.8

Amounts written off during the year

(1.1)

(0.1)

(18.7)

-

-

-

(19.9)

As at 31 December 2014

6.2

1.4

22.9

0.1

-

-

30.6

          

 


Secured

Unsecured

Wholesale



On advances secured on residential property

On advances secured on residential
 buy-to-let property

Credit cards

Overdrafts

Treasury assets

Derivative exposures

Total

31 December 2013

£m

£m

£m

£m

£m

£m

£m

As at 1 January 2013

7.3

0.4

 -

0.1

-

-

7.8

Increase in allowances during the year net of recoveries reflected in the income statement

1.4

0.7

48.6

 -

-

-

50.7

Amounts written off during the year

(1.7)

(0.5)

(21.6)

 -

-

-

 (23.8)

As at 31 December 2013

7.0

0.6

27.0

 0.1

-

-

34.7

 

Collateral held as security for financial assets

 

A general description of collateral held as security in respect of financial instruments is provided on page 159. The Group holds collateral against loans and receivables on the mortgage portfolio; qualitative and, where appropriate, quantitative information is provided in respect of this collateral on page 174 and 176.  

 

Loans and receivables to customers

 

The Group holds collateral in respect of loans and advances to customers as set out on page 159.  The Group does not hold collateral against debt securities, comprising asset-backed securities and corporate and other debt securities, which are classified as loans and receivables.

 

The table below shows retail secured loan-to-value (LTV) % - indexed value at financial year end.

 


2014

2013


£m

%

£m

%

<50%

7,161.9

32.7

4,620.1

23.6

50%-<60%

5,628.2

25.7

3,890.5

19.9

60%-<70%

4,974.6

22.7

5,718.0

29.2

70%-<80%

2,860.8

13.1

3,605.8

18.4

80%-<90%

1,069.6

4.9

1,549.5

7.9

90%-<100%

183.3

0.8

141.7

0.7

>100%

16.7

0.1

51.5

0.3

Total

21,895.1

100.0

19,577.1

100.0





2014

2013

Average loan-to-value  of stock - indexed

55.7%

59.8%

Average loan-to-value of new business1

66.9%

65.4%

 

1.     The average loan to value of stock and new business is balance weighted.

 

Average indexed LTVs on the book have fallen by 4.1% during the reporting period, reflecting recent house price growth.

 

The average LTV for new business has risen to 66.9% in 2014 (2013: 65.4%). Details of the fair value of the property collateral held against retail secured loans are provided on the table below.

 


Residential mortgage

loans

Residential

buy-to-let

mortgage loans

Total

31 December 20141

£m

%

£m

%

£m

%

Neither past due nor impaired

18,506.6

100.0

3,110.2

100.0

21,616.8

100.0

-   of which in receipt of forbearance

241.7

100.0

7.2

100.0

248.9

100.0

Past due and not impaired

182.6

100.0

17.6

100.0

200.2

100.0

Impaired

68.4

99.3

7.6

100.0

76.0

99.3

-   of which in possession

1.0

100.0

0.3

100.0

1.3

100.0

Total

18,757.6

100.0

3,135.4

100.0

21,893.0

100.0

 

1.  Some segments may look fully collateralised due to immaterial balances in negative equity. Due to rounding these do not change the overall collateralised percentage shown

 

 

Collateral held in relation to secured loans is capped to the amount outstanding on an individual loan basis.  The percentages in the table above represent the value of collateral, capped at loan amount, divided by the total loan amount in each category.

 


Residential

mortgage

loans

Residential

buy-to-let

mortgage loans

Total

31 December 2013 1,2

£m

%

£m

%

£m

%

Neither past due nor impaired

16,925.4

100.0

2,344.7

100.0

19,270.1

100.0

-   of which in receipt of forbearance

285.7

100.0

7.9

100.0

293.6

100.0

Past due and not impaired

171.9

99.9

17.5

100.0

189.4

99.9

Impaired

102.0

98.8

8.4

98.8

110.4

98.8

-   of which in possession

2.7

96.4

 -

100.0

2.7

96.4

Total

17,199.3

100.0

2,370.6

100.0

19,569.9

100.0

 

1.  Virgin Money has amended its approach to forbearance in line with FCA guidance as outlined on page 161.  Loans in receipt of forbearance have been restated to reflect the change in definition.

2.  Impaired assets have been restated to reflect the change in definition as noted on page 161.

 

The tables below show mortgages in negative equity.  The value represents the excess between the mortgage balance and collateral value for mortgages where indexed LTV is greater than 100%.

 

The proportion of secured balances in negative equity has reduced to 0.1% in 2014 (2013: 0.3%).  This relates to £16.7 million of asset balances in the mortgage portfolio that are exposed to negative equity (2013: £51.5 million).  The amount of negative equity has decreased from £7.2 million in 2013 to £2.1 million as at 31 December 2014 as a result of positive house price index movements.

 


Residential mortgage

loans

Residential buy-to-let

mortgage loans

Total

31 December 2014

£m

£m

£m

Neither past due nor impaired

1.4

0.2

1.6

-   of which in receipt of forbearance

-

-

-

Past due and not impaired

-

-

-

Impaired

0.5

-

0.5

-   of which in possession

-

-

-

Total

1.9

0.2

2.1

 


Residential mortgage

loans

Residential buy-to-let

mortgage loans

Total

31 December 2013 1

£m

£m

£m

Neither past due nor impaired

5.2

0.6

5.8

-   of which in receipt of forbearance

0.1

 -

0.1

Past due and not impaired

0.1

 -

0.1

Impaired

1.2

0.1

1.3

-   of which in possession

0.1

 -

0.1

Total

6.5

0.7

7.2

 

1.  Impaired assets have been restated to reflect the change in definition as noted on page 161.

 

The basis for preparation for the above four tables is not comparable with balances shown in the gross secured loans and advances to customers by credit quality table on page 167, as negative equity has been calculated excluding the impact of the Group's EIR asset.

 

Loans and advances to banks

 

The Group requires collateral posting arrangements to be in place as part of entering into a derivative transaction with another bank, depending on the type of financial product and the counterparty involved, and netting arrangements are obtained. 

 

Other

 

No collateral is held in respect of retail credit cards or overdrafts.

 

 

Collateral repossessed

 

Virgin Money works with customers who have difficulty paying their mortgages, and will only repossess a property when all other possibilities have been exhausted.  Where accounts have been repossessed, the Group will obtain the best price that might reasonably be paid taking into account factors such as property and market conditions.  The Group uses external asset management specialists to realise the value as soon as practicable to settle indebtedness. Any surplus funds are returned to the borrower or are otherwise dealt with in accordance with appropriate insolvency regulations.

 

Possessions as a percentage of total book
(number of properties)

2014

2013

 


Number

%

Number

%

Properties in possession

18

0.01

17

0.01

CML industry average1

6,400

0.06

8,400

0.08

 

1. CML possession as at Q4 2014. The CML industry average includes banks with portfolios significantly larger than Virgin Money that drive up the industry average, and so the percentage comparisons are more meaningful than the pure number comparisons

 

Interest only mortgages

 

The Group provides interest only mortgages to customers, whereby payments made by the customer comprise interest for the term of the mortgage, with the customer responsible for repaying the principal outstanding at the end of the loan term.  The Group has reduced our exposure to residential interest only mortgages throughout 2014.  New residential interest only mortgages represented 2.4% of new residential mortgages on a six month average basis as at 31 December 2014 (2013: 21.7%).

 

The table below provides details of balances which are on an interest only basis, analysed by maturity.  This includes the interest only balances for loans on a part and part repayment basis.

 


2014

2013


£m

£m

Term expired (still open)

19.9

11.4

Due within 2 years

124.5

116.5

Due after 2 years and before 5 years

486.3

441.0

Due after 5 years and before 10 years

1,442.5

1,475.2

Due after more than 10 years

6,003.4

6,108.7

Total

8,076.6

8,152.8

% of Total

36.9

41.6

 

Virgin Money concluded a pilot exercise in 2014 to contact a number of customers whose interest only mortgage loan was scheduled to mature before the end of 2020.  This was performed to give customers the opportunity to take steps to avoid a mortgage repayment shortfall.  The pilot proved successful and is being rolled out to all interest only customers.

 

Interest only balances due to mature in the next two years represent 1.5% of total interest only balances, totalling £124.5 million at December 2014. Treatment strategies exist to help customers who may not be able to repay the full amount of principal balance at maturity. Of residential interest only mortgages which have missed the payment of principal at the end of term, balances of £19.9 million remain at 31 December 2014 (2013: £11.4 million).  All expired term balances are categorised as impaired loans, regardless of loss expectation. The provisioning methodology for expired term mortgage loans reflects the latest performance on these accounts.

 

Virgin Money offers interest only loans to applicants who have credible means to repay the mortgage loan at maturity. There has been a reduced risk appetite for new interest only residential business, moving from 21.7% to 2.4% of flow over the last 12 months. As a result, there has been a significant reduction in the proportion of residential interest only mortgages in the portfolio, moving from 30.4% to 24.7% during the reporting period. 

 

During 2014, Virgin Money made enhancements to internal monitoring of the interest only portfolio to track closely movements in asset quality and better understand the composition of expired term balances. This management information is regularly reviewed to assess the effectiveness of interest only policy, contact strategies and to ensure the delivery of fair customer outcomes. Less than 0.1% of the secured portfolio relates to expired term loan balances, with the average balance of these loans around £63,000 and an average LTV of 22%. 

 

Forbearance

 


Neither past due nor impaired

Past due not impaired

Impaired

Total

31 December 20141

£m

%

£m

%

£m

%

£m

%

Secured









Payment arrangement

2.8

1.1

0.4

2.4

0.1

4.8

3.3

1.2

Transfer to interest only

19.7

7.9

8.6

52.2

0.6

28.6

28.9

10.8

Term extension

162.5

65.3

4.0

24.2

0.9

42.8

167.4

62.6

Payment holiday

63.9

25.7

3.5

21.2

0.5

23.8

67.9

25.4

Total secured forbearance

248.9

100.0

16.5

100.0

2.1

100.0

267.5

100.0

Unsecured









Accounts where the customer has been approved on a repayment plan

2.5

100.0

-

-

0.8

100.0

3.3

100.0

Total forbearance

251.4

100.0

16.5

100.0

2.9

100.0

270.8

100.0

 

1. The value of forbearance stock has been restated to reflect changes to its definition.  It is possible for a customer to benefit from more than one forbearance option. In this event, account balances will be categorised in the forbearance category with the greatest probability of default.

 

The value of secured forbearance stock has reduced by £53.1 million since the end of 2013, despite considerable growth in the mortgage portfolio.

 


Neither past due nor impaired

Past due not impaired

Impaired

Total

31 December 20131

£m

%

£m

%

£m

%

£m

%

Secured









Payment arrangement

3.4

1.2

2.0

11.1

1.1

12.4

6.5

2.0

Transfer to interest only

38.0

12.9

7.5

41.7

4.8

53.9

50.3

15.7

Term extension

179.1

61.0

5.9

32.8

1.1

12.4

186.1

58.1

Payment holiday

73.2

24.9

2.6

14.4

1.9

21.3

77.7

24.2

Total secured forbearance

293.7

100.0

18.0

100.0

8.9

100.0

320.6

100.0

Unsecured









Accounts where the customer has been approved on a repayment plan

3.2

100.0

-

-

1.1

100.0

4.3

100.0

Total forbearance

296.9

100.0

18.0

100.0

10.0

100.0

324.9

100.0

 

1. The value of forbearance stock has been restated to reflect changes to its definition.  It is possible for a customer to benefit from more than one forbearance option. In this event, account balances will be categorised in the forbearance category with the greatest probability of default

  

 

Wholesale credit risk

 


2014

2013


£m

£m

Loans and advances to banks excluding Bank of England

720.5

626.9

Bank of England

851.3

1,423.5

Debt securities held as loans and receivables

8.6

9.4

Available-for-sale financial assets

1,539.6

1,679.2

Gross positive fair value of derivative contracts

101.2

187.5

Total

3,221.2

3,926.5

 

The Group's wholesale credit risk exposures reduced primarily to fund the growth in new loans and advances to customers.

 

At December 2014 the single largest exposure to any single counterparty which is not a sovereign or a supranational obligor was £110.1 million (2013: £163.4 million).  These exposures were to large universal banks. The table below shows the loans and advances to banks excluding the Bank of England.

 


2014

20131


£m

£m

AA+

19.9

-

AA-

144.4

125.4

A+

295.3

171.0

A

178.6

281.9

A-

39.6

48.6

BBB+

42.7

-

Total

720.5

626.9

 

1. Values in this table as at 31 December 2013 have been re-stated following a review of the approach applied.  The re-stated 31 December 2013 classification of credit quality is based on the rating of Virgin Money's counterparties, rather than that of the counterparties' ultimate parent entity.

 

The Group's exposure to the Bank of England was £851.3 million and £1,423.5 million as at year end 2014 and 2013, respectively.  These exposures were rated AA+ at both respective dates.

 

The table below shows debt securities held as loans and receivables and available-for-sale financial assets.

 


2014

2013

Debt securities held as loans and receivables

Available-for-sale financial assets

Debt securities held as loans and receivables

Available-for-sale financial assets

£m

£m

£m

£m

UK sovereign exposures

-

795.0

-

746.2

Non-domestic sovereign exposures

-

-

-

100.1

Supranational

-

310.7

-

420.6

Residential mortgage-backed securities

8.6

62.9

9.4

86.4

Covered bonds

-

265.7

-

46.1

Unsecured debt securities issued by banks

-

105.3

-

279.8

Total

8.6

1,539.6

9.4

1,679.2

  

 

The table below shows the credit rating on debt securities held as loans and receivables and available-for-sale financial assets.

 


2014

2013


£m

£m

AAA

508.3

573.8

AA+

978.3

885.3

AA-

20.9

138.5

A+

33.8

58.0

A

-

24.0

A-

6.9

9.0

Total

1,548.2

1,688.6

 

The changes to debt securities reflect the alignment of the Group's liquid asset portfolio to the evolving regulatory definition of high-quality liquid assets. This re-alignment also resulted in an improvement in the credit rating of the investment securities portfolio, with 96% having a rating of AA+ or better compared to 86% at year end 2013.

 

The Bank Recovery and Resolution Directive may lead rating agencies to downgrade financial institutions as they remove the assumption of taxpayer support from their credit assessment.

 

Derivative financial instruments

 

An analysis of derivative assets is given in note 17.  The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly liquid securities.  In respect of the Group's maximum credit risk relating to derivative assets of £101.2 million (2013: £187.5 million), cash collateral of £11.1 million (2013: £78.7 million) was held.

 

Virgin Money measures exposure in over the counter (OTC) derivatives using the gross positive fair value of contracts outstanding with a counterparty, increased by potential future rises in fair value and reduced by gross negative fair value of contracts and collateral received.

 

While exposures are managed on a net basis, IFRS 7 requires that they are represented on the balance sheet on a gross basis.  Contracts with positive fair value are disclosed as assets in the balance sheet under 'derivative financial instruments', those with negative fair value are disclosed as stated on the liabilities side under the same title.

 

Collateral received is shown as deposits by banks, with collateral posted shown as loans and advances to banks.  The notes to the financial statements provide further information on collateral.  The table below details OTC derivative exposures.

 


2014

2013


£m

£m

Gross positive fair value of derivative contracts

101.2

187.5

Netting with gross negative fair value of derivative contracts1

(90.0)

(103.7)

Potential future incremental exposure

49.4

63.2

Collateral received

(11.1)

(78.7)

Net OTC derivative exposures

49.5

68.3

 

1. The use of netting allows positions on all bilateral transactions with any given counterparty to be offset.

  

 

The table below provides a summary of net OTC liabilities




31 Dec 2014

31 Dec 2013



£m

£m

Gross negative fair value of derivative contracts

(223.1)

(142.1)

Netting with gross positive fair value of derivative contracts

90.0

103.7

Collateral pledged

111.7

38.4

Net OTC derivative liability

(21.4)

-

 

The only netting agreements in place are in relation to derivative financial instruments.

 

The table below provides credit quality analysis of the gross OTC derivative exposures by credit rating of the counterparties. The decrease in exposure across all rating categories reflects the overall reduction of values due to yield curve flattening.

 


2014

20131


£m

%

£m

%

AA-

34.7

34.3

43.4

23.1

A+

9.6

9.5

22.1

11.8

A

42.2

41.7

103.6

55.3

A-

11.2

11.1

18.4

9.8

BBB+

3.5

3.4

 -

 -

Total

101.2

100.0

187.5

100.0

 

1. Values in this table as at 31 December 2013 have been re-stated following a review of the approach applied. The re-stated 31 December 2013 classification of credit quality is based on the rating of Virgin Money's counterparties, rather than that of the counterparties' ultimate parent entity.

 

 

 

  

 

Funding and liquidity management in 2014

 

 

The Group funded asset growth with a mixture of retail and wholesale funding. The focus of retail funding was fixed rate ISAs and fixed rate bonds, growing 47.8% and 5.0%, respectively and helped by an accommodative deposit pricing environment during most of the year.  The behavioural stability of Virgin Money's easy access back book deposits improved through customer repricing activities.

 

Virgin Money is predominantly funded through customer deposits.  Wholesale funding is used to support balance sheet growth and diversify sources of funding. FLS drawings increased by £1.1 billion during the reporting period.  The increase in mortgage-backed debt in issue over 2014 reflects the new RMBS issuance, which raised £1 billion in new funding in September, partially offset by a reduction in outstanding funding from prior transactions as those paid down. Funding through term repos has increased to manage funding requirements.

 

The increased usage of FLS and the new RMBS issuance have increased the weighted average life of wholesale funding at December 2014 by eight months to 29.6 months (2013: 21.6 months) and has reduced wholesale refinancing concentrations.

 

Group funding sources

 

The Group's loan-to-deposit ratio has increased to 102.8% compared with 96.4% at 31 December 2013, in accordance with plan and risk appetite, driven by increased retail lending activities supported by growth in customer deposits and secured wholesale funding. The table below shows funding position.

 

 


2014

2013




£m

£m

Loans and advances to customers

23,093.1

20,342.5

Loans and advances to banks

720.5

626.9

Debt securities held as loans and receivables

8.6

9.4

Available-for-sale financial assets (encumbered)

321.7

413.5

Cash and balances at central banks (encumbered)

38.0

35.1

Funded assets

24,181.9

21,427.4

Other assets

323.7

483.5

On balance sheet primary liquidity assets



Cash and balances at central banks - primary

813.3

1,388.4

Available-for-sale financial assets (unencumbered)

1,217.9

1,265.7


2,031.2

2,654.1

Less: Other liabilities

(497.9)

(735.4)

Funding requirement

26,038.9

23,829.6

Funded by



Customer deposits

22,365.7

21,121.4

Wholesale funding

2,429.4

1,773.3

Total equity

1,243.8

934.9

Total funding

26,038.9

23,829.6

  

 

Asset origination was funded by an increase in customer deposits and wholesale funding. The table below shows the sources of wholesale funding.

 


2014

2013


£m

£m

Mortgage-backed debt issue

1,594.1

1,469.8

Term repo

835.3

303.5

Total on-balance sheet sources of funds

2,429.4

1,773.3

FLS drawings

2,260.0

1,160.0

Total

4,689.4

2,933.3

 

The tables below show residual maturity of the wholesale funding book.

 


Within 3

months

3-12 months

1-5 years

After

5 years

Total

31 December 2014

£m

£m

£m

£m

£m

Mortgage-backed debt issue1

-

-

-

1,594.1

1,594.1

Term repo

272.3

563.0

-

-

835.3

Total on-balance sheet sources of funds

272.3

563.0

-

1,594.1

2,429.4

FLS drawings

-

-

2,260.0

-

2,260.0

Total

272.3

563.0

2,260.0

1,594.1

4,689.4

 


Within 3 months

3-12 months

1-5

years

After

5 years

Total

31 December 2013

£m

£m

£m

£m

£m

Mortgage-backed debt issue

 -

 -

 -

1,469.8

1,469.8

Term repo

153.5

150.0

 -

 -

303.5

Total on-balance sheet sources of funds

153.5

150.0

 -

1,469.8

1,773.3

FLS drawings

 -

 -

1,160.0

 -

1,160.0

Total

153.5

150.0

1,160.0

1,469.8

2,933.3

 

1. Mortgage-backed securities are shown in the maturity bucket according to final legal maturity date of the notes, consistent with disclosure guidelines. The Group manages liquidity and funding risk on the basis of expected maturity, which is shorter term, reflecting the passing through of mortgage repayments by customers to note holders as they arise.

 

The increase in FLS drawings and RMBS has contributed to the increased tenor of wholesale funding by eight months (based on the forecast behavioural pay down of the Gosforth RMBS programme). 

 

Encumbered assets

 

Virgin Money's assets can be used to support funding collateral requirements for central bank operations or third-party re-purchase transactions.  Assets that have been set aside for such purposes are classified as 'encumbered and pledged assets' and cannot be used for other purposes.  The tables below show asset encumbrance.

 


Encumbered assets

Unencumbered assets



Pledged as collateral

Other1

    Available as collateral

Other2

Total

31 December 2014

£m

£m

£m

£m

£m

Cash balances at central banks

38.0

-

-

813.3

851.3

Debt securities held as loans and receivables

-

-

8.6

-

8.6

Available-for-sale financial assets

321.7

-

1,217.9

-

1,539.6

Derivative financial assets

-

-

-

101.2

101.2

Loans and advances to banks

-

569.8

-

150.7

720.5

Loans and advances to customers3,4

6,609.4

-

2,075.0

14,408.7

23,093.1

Other assets

-

-

-

222.5

222.5

Total Assets

6,969.1

569.8

3,301.5

15,696.4

26,536.8

 


Encumbered assets

Unencumbered assets



Pledged as collateral

Other1

Available as collateral

Other2

Total

31 December 2013

£m

£m

£m

£m

£m

Cash balances at central banks

35.1

 -

 -

1,388.4

1,423.5

Debt securities held as loans and receivables

-

-

9.4

-

9.4

Available-for-sale financial assets

313.5

100.0

1,265.7

 -

1,679.2

Derivative financial assets

 -

 -

 -

187.5

187.5

Loans and advances to banks

 -

626.9

 -

 -

626.9

Loans and advances to customers3,4

4,291.9

 -

2,355.7

13,694.9

20,342.5

Other assets

 -

 -

 -

296.0

296.0

Total Assets

4,640.5

726.9

3,630.8

15,566.8

24,565.0

 

1. Other encumbered assets are assets that cannot be used for secured funding due to legal or other reasons.  These include cash reserves supporting secured funding structures.

2. All other assets are defined as 'unencumbered assets'.  These comprise assets that are readily available to secure funding or to meet collateral requirements, and assets that are not subject to any restrictions and are not readily available for use. 

3. Loans and advances to customers are classified as available collateral only if they are already in such a form that they can be used immediately to raise funding.

4. Loans and advances to customers consists of collateral pledged to the Bank of England and securitised mortgage pools.  See notes 18 and 19

 

The Group maintains a portfolio of liquid assets in accordance with risk appetite.  Liquid assets are held predominantly in high-quality unencumbered securities issued by the UK government or supranationals and deposits with central banks.  The portfolio mix is aligned to the liquidity coverage requirement defined in European liquidity regulatory standards.  Other liquidity resources represent additional unencumbered liquid assets held over and above high-quality liquid assets intended to cover more extreme stress events and provide flexibility in terms of liquidity management.

  

 

The table below shows composition of the liquidity portfolio.

 


2014

2014

Average

2013

2013

Average

Level 1

£m

£m

£m

£m

Bank of England reserve

813.3

1,120.9

1,388.4

1,455.4

UK Government securities

586.2

637.8

451.7

399.0

Other buffer eligible

-

33.9

100.1

98.3

Supranational securities

310.7

350.1

420.6

486.7

Treasury bills raised through FLS

2,260.0

1,598.5

1,160.0

833.1

Total level 1

3,970.2

3,741.2

3,520.8

3,272.5






Level 2a





Covered bonds (ECAI 2)

225.7

127.9

46.1

41.3

Total level 2a

225.7

127.9

46.1

41.3






Level 2b





Eligible RMBS

40.0

42.1

25.5

55.1

Total level 2b

40.0

42.1

25.5

55.1






High quality liquid assets (Level 1 + 2a + 2b)

4,235.9

3,911.2

3,592.4

3,368.9






Other liquidity resources





Non-eligible RMBS

8.6

8.8

9.3

12.3

Certificates of deposit

-

43.8

82.1

26.0

Floating rate notes

-

11.1

24.1

34.8

Fixed rate bonds

55.3

120.3

115.6

137.5

Total other liquidity resources

63.9

184.0

231.1

210.6

Self-issued RMBS

92.8

433.4

650.4

1,401.8

Total liquidity

4,392.6

4,528.6

4,473.9

4,981.3

 

 

 

Capital

 

Capital developments during 2014

 

In December 2013, the PRA issued Policy Statement PS7/13 containing the final rules and supervisory statements implementing the Capital Requirements Directive (2013/36/EU) and the Capital Requirements Regulation (575/2013) (together, ''CRD IV''), effective from 1 January 2014.

 

CRD IV introduced new capital limits and buffers for banks, and includes a requirement to hold Common Equity Tier 1 capital to account for capital conservation, countercyclical and systemic risk buffers. These new buffers will influence the type of capital instruments that best meet the requirements likely to be expected of the Group. Implementation is required from 2016. The Group reviews the capital structure on an on-going basis to ensure it is well placed to react to prevailing economic and regulatory conditions. From a capital perspective, on a fully-loaded basis, the Common Equity Tier 1 capital ratio for the Group was 19% as at 31 December 2014, compared with a fully loaded regulatory minimum of 7.0% (comprised of Common Equity Tier 1 capital of 4.5% and a capital conservation buffer of 2.5%).

 

CRD IV also introduced a new leverage ratio requirement.  The leverage ratio is a non-risk based measure that is designed to act as a supplement to risk based capital requirements. It is intended as a back stop measure. The leverage calculation determines a ratio based on the relationship between Tier 1 capital and total consolidated exposure (i.e. total exposure is the sum of on-balance sheet exposures, derivative exposures, securities financing transaction exposures and off-balance sheet items). 

 

On a fully loaded basis, the leverage ratio for the Group (based on the Basel III definition of January 2014, and the revised CRD IV definition of October 2014) is 4.1% compared with a minimum of 3.0%.

 

The main impact of CRD IV on the Group capital position was the de-recognition from capital resources of deferred taxation assets arising from unused taxation losses carried forward.

 

This reduced capital resources by £62.2 million as at 1 January 2014 from the previous Basel II measure. This impact on capital surplus was partially offset by a corresponding reduction in risk-weighted assets. Other changes, such as the introduction of the credit valuation adjustment risk measure, have not had a significant impact on the Group's resources or requirements.

 

Transitional and fully loaded disclosures under CRD IV

 

There are a number of temporary provisions which were written to spread the impact of some of the CRD IV changes over an introductory period.  Where these transitional provisions apply, the Group has disclosed the capital position on both the transitional basis (which are the rules in place as at 31 December 2014), and on a fully loaded basis (which for the Group is as at 1 January 2015).

 

Group developments

 

The Non-core Tier 1 notes issued on 1 January 2012 were designed to be CRD IV compliant and were repurchased by Virgin Money on 31 July 2014 following a competitive auction process undertaken by UKFI for £154.5 million. The repurchase was funded with the issuance of £160.0 million of Additional Tier 1 securities listed on the Luxembourg Stock Exchange on 31 July 2014.

 

In November 2014, the Company raised an additional £150 million Common Equity Tier 1 capital (net of expenses: £145.4 million) as a result of admission to listing on the London Stock Exchange.

 

 

The table below shows the Group's capital resources.

 


Fully loaded

PRA transitional rules

2014

2013

2014

2013

Common Equity Tier 1

£m

£m

£m

£m

Share capital and share premium account

654.6

509.2

654.6

509.2

Other equity instruments

156.5

-

156.5

-

Other reserves

(1.8)

6.7

(1.8)

6.7

Retained earnings

434.5

419.0

434.5

419.0

Total equity per balance sheet

1,243.8

934.9

1,243.8

934.9

Regulatory capital adjustments





Deconsolidation of non regulated companies

4.1

3.5

4.1

3.5

Expected distribution on Additional Tier 1 securities

(2.1)

-

(2.1)

-

Other equity instruments

(156.5)

-

(156.5)

-

Other reserves

8.8

(0.2)

1.8

(6.7)

Intangible assets

(46.1)

(26.0)

(46.1)

(26.0)

Excess of expected loss over impairment

(33.4)

(41.1)

(33.4)

(41.1)

Deferred tax on brought forward tax losses

(38.1)

(62.2)

(38.1)

(62.2)

Common equity Tier 1 capital

980.5

808.9

973.5

802.4

Additional Tier 1 securities

156.5

150.0

156.5

150.0

Total Tier 1 capital

1,137.0

958.9

1,130.0

952.4






Tier 2 capital





General credit risk adjustments

5.9

11.0

5.9

11.0

Total Tier 2 capital

5.9

11.0

5.9

11.0






Total own funds

1,142.9

969.9

1,135.9

963.4






Common Equity Tier 1 ratio

19.0%

15.5%

18.9%

15.4%

Tier 1 ratio

22.0%

18.4%

21.9%

18.3%

Total capital ratio

22.1%

18.6%

22.0%

18.5%

 

The table below shows movements in Common Equity Tier 1 capital.

 


Fully loaded

Transitional rules

2014

2013

2014

2013


£m

£m

£m

£m

At 1 January

808.9

645.6

802.4

634.0

Net impact of share capital raise

145.4

-

145.4

-

Movement in retained earnings

15.5

163.9

15.5

163.9

Movement in other reserves

(8.5)

6.4

(8.5)

6.4

Expected distribution on Additional Tier 1 securities

(2.1)

-

(2.1)

-

Movement in available- for-sale reserve

-

-

(0.5)

5.1

Movement in cash flow hedge reserve

9.0

(11.5)

9.0

(11.5)

Exclude losses from non-regulated companies

0.6

0.5

0.6

0.5

Intangible assets

(20.1)

8.8

(20.1)

8.8

Excess of expected loss over impairment

7.7

(3.7)

7.7

(3.7)

Movement in deferred tax

24.1

(1.1)

24.1

(1.1)

At 31 December

980.5

808.9

973.5

802.4

 

 

 

 

 

The main factor for the increase in capital resources during the year is the issue of new shares associated with the Group stock market listing in November.  Smaller increases have arisen due to the reduced deduction for deferred tax as trading profits utilise the deferred tax asset, and due to the reduction in excess expected losses.  These are offset by an increase in the intangible assets deduction.

 

The table below shows risk-weighted assets.


Fully loaded

PRA Transitional rules

2014

2013

2014

2013


£m

£m

£m

£m

Retail mortgages

3,489.7

3,860.2

3,489.7

3,860.2

Retail unsecured lending

830.0

595.3

830.0

595.3

Treasury

221.7

268.5

220.5

268.5

Other assets

175.0

141.3

175.0

141.3

Credit valuation adjustments

13.7

15.1

13.7

15.1

Operational risk

430.5

326.0

430.5

326.0

Market risk

-

-

-

-

Total risk-weighted assets

5,160.6

5,206.4

5,159.4

5,206.4

 

The table below shows Pillar 1 risk-weighted assets and capital requirements by business line.

 


2014

Risk weighted assets

2014

Capital requirement

2013

Risk weighted assets

2013

Capital requirement


£m

£m

£m

£m

Mortgages and savings

3,729.8

298.4

4,036.2

322.9

Credit cards

973.2

77.9

708.2

56.7

Current accounts, Insurance and Investments

47.2

3.7

37.1

3.0

Central functions

409.2

32.7

424.9

34.0

Total

5,159.4

412.7

5,206.4

416.6

 

The Group calculates our capital requirement for mortgages on an Advanced Internal Ratings Based (AIRB) approach, and on the Standardised Approach for credit cards and other assets.

Movement in risk-weighted assets

 

The following table sets out the movements in the Group's credit risk weighted assets split between book size, book quality and model changes.

 

Virgin Money uses a variable scalar methodology to calculate the Probability of Default (PD) parameter used within the Advanced Internal Ratings Based (AIRB) capital models.  This approach aids capital management by ensuring the regulatory PD, and therefore the resultant regulatory capital requirements fluctuate mainly due to changes in the credit quality mix of the portfolio, rather than changes in the economy.  This methodology reduces, but does not eliminate procyclicality within PD estimates and is sensitive to movements in the distribution of accounts within each segment. During 2014 the improvement in arrears rates caused a reduction in the point-in-time PDs.  These lower point-in-time PDs have resulted in the requirement to increase the "scaling" factor used to transform these to the long-run average estimates. It is these higher scaling factors that have resulted in increased RWAs of £167.6m, despite lower arrears rates observed through the year.  This increase has been categorised as model calibration within the table on page 211.

 

During 2014, two changes were implemented within the AIRB models.  A sales cost model was developed to align to industry good practice and to provide a more appropriate calculation of sales costs.  The peak to trough house price assumption was updated to reflect more accurately historic house price movements between the peak property price and the price in a downturn.  These changes contributed to a significant reduction in RWAs of £1,036.3 million.

 

In addition to these movements further changes in the portfolio have been observed over the last 12 months which can be attributed to movements in two factors.

 

The shift in the portfolio distribution across the long run PD model segmentation, results in a change in the long run PDs assigned within the AIRB rating system.  Also, variations in observed house prices have caused corresponding movements in the downturn Loss Given Default model.  The combined impact of these two elements contributes to an increase in RWAs of £48.1 million within the "other movements" section.

 

Following the acquisition of a further portfolio of £359.3 million of Virgin Money credit cards in November, overall credit card balances have increased by £316.6 million during 2014. After taking movements in provisions into account, and the impact of the sale of Church House Trust Limited, this has led to  increases in standardised lending risk-weighted assets of £225.3 million.

 

Operational risk is calculated using the Standardised Approach, based on the average Group income over the past three years.  The year-on-year increase reflects the increasing group income from 2010 to 2013.

 


Total

IRB mortgage

Standardised lending

Other standardised assets

Credit valuation adjustment

Operational risks


£m

£m

£m

£m

£m

£m

RWAs at 1 January 2014

5,206.4

3,854.6

600.9

409.8

15.1

326.0

Book size

680.9

455.7

225.3

(0.1)

-

-

Model calibration

167.6

167.6

-

-

-

-

Model updates

(1,036.3)

(1,036.3)

-

-

-

-

Other movements

140.8

48.1

3.8

(14.2)

(1.4)

104.5

RWAs at

31 December 2014

5,159.4

3,489.7

830.0

395.5

13.7

430.5

 

 

 

Leverage ratio

 

The regulations introduced a new balance sheet metric, the leverage ratio, as a requirement from 1 January 2014. The Basel Committee is testing this ratio at a minimum threshold of 3% until 2017. The Group's leverage ratio as at 31 December 2014 was 4.1%.

 

The PRA has advised banks and building societies that the leverage ratio should be disclosed only using the following methods:

 

·      CRR definition of Tier 1 for the capital amount and the Basel definition of the exposure measures; or

·      CRR definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measures.

 

For the Group, there is no difference in the calculation of the leverage ratio when using either of these methods, and the leverage ratio calculated in accordance with the PRA's instructions is disclosed below.

 

Exposure values associated with derivatives and securities financing transactions (repos) have been adjusted using the current CRD IV rules.

 

Off-balance sheet items are made of undrawn credit facilities including such facilities that may be cancelled unconditionally at any time. Credit conversion factors, subject to a floor of 10%, have been applied to these items in accordance with the CRD IV rules.

 

 

Other regulatory adjustments consist of adjustments that have been applied to Tier 1 capital (such as intangible assets, deferred tax on tax losses carried forward and excess expected losses) which are also applied to the leverage ratio exposure measure. This ensures consistency between the Tier 1 capital and total exposures components of the ratio. The table below shows the derivation of the leverage ratio.

 


Fully loaded


£m

Tier 1 capital

1,137.0



Exposures measure


Total regulatory balance sheet assets

26,540.6

Removal of accounting values for derivatives

(101.2)

Exposure value for derivatives

172.3

Exposure value for securities financing transactions

353.8

Off balance sheet items

607.8

Other regulatory adjustments

(108.8)



Total exposures

27,464.5

Leverage ratio at 31 December 2014

4.1%

  

 

2014 Accounting reconciliation

 

 


Accounting balance sheet as in published financial statements

Deconsolidation of other entities

Under regulatory scope of consolidation

Assets

£m

£m

£m

Cash and balances with central banks

851.3

-

851.3

Derivative financial instruments

101.2

-

101.2

Loans and receivables:




Loans and advances to banks

720.5

(0.1)

720.4

Loans and advances to customers

23,093.1

-

23,093.1

Debt securities

8.6

-

8.6

Available-for-sale financial assets

1,539.6

-

1,539.6

Intangible assets

46.1

-

46.1

Tangible fixed assets

72.9

-

72.9

Deferred tax

50.2

-

50.2

Other assets

53.3

(0.5)

52.8

Intercompany assets

-

4.4

4.4





Total assets

26,536.8

3.8

26,540.6





Liabilities




Deposits from banks

846.7

-

846.7

Customer deposits

22,365.7

-

22,365.7

Derivative financial instruments

228.2

-

228.2

Debt securities in issue

1,594.1

-

1,594.1

Other liabilities

249.0

(0.1)

248.9

Provisions

9.3

(0.2)

9.1





Total liabilities

25,293.0

(0.3)

25,292.7





Equity




Share capital and share premium

654.6

-

654.6

Other equity instruments

156.5

-

156.5

Other reserves

(1.8)

-

(1.8)

Retained earnings

434.5

4.1

438.6





Total equity

1,243.8

4.1

1,247.9

Total liabilities and equity

26,536.8

3.8

26,540.6

 

 

 

 

 

FINANCIAL STATEMENTS

 

 

 

Condensed Consolidated income statement

For the year ended 31 December


Note

2014

2013 1



£ million

£ million

Interest and similar income


771.6

788.8

Interest and similar expense


(404.3)

(477.6)

Net interest income

3

367.3

311.2

Fee and commission income


35.1

38.0

Fee and commission expense


(1.1)

(1.2)

Net fee and commission income

4

34.0

36.8

Fair value gains/(losses) on financial instruments

17

0.1

(3.6)

Other operating income

5

36.9

38.6

Other income


71.0

71.8

Total income


438.3

383.0

Other operating expenses

6

(338.9)

(340.8)

Fees associated with listing

6

(12.6)

 -

Total operating expenses

6

(351.5)

(340.8)

Profit before tax from operating activities


86.8

42.2

Impairment

8

(15.8)

(50.7)

Gain on sale of subsidiary

20

4.5

203.4

Contingent consideration

6

(36.0)

(9.0)

Premium on repurchase of Non-core Tier 1 notes in issue

28

(4.5)

 -

Loss for the year of disposal group

12

(1.0)

(0.5)

Profit before tax


34.0

185.4

Taxation

9

(25.3)

(6.4)

Profit for the year


8.7

179.0

Profit attributable to equity shareholders


8.7

179.0

Profit for the year


8.7

179.0





Basic earnings per share (pence)

10

(0.4)

42.4

Diluted earnings per share (pence)

10

(0.4)

42.4

 

1 Restated - refer notes 1 and 39

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Condensed Consolidated statement of comprehensive income

For the year ended 31 December

 


2014

2013 1


£ million

£ million

Profit for the year

8.7

179.0

Other comprehensive income



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

12.1

5.6

Income statement transfers in respect of disposals

(10.3)

(10.2)

Taxation

(1.3)

(0.5)


0.5

(5.1)

Movements in cash flow hedging reserve:



Effective portion of changes in fair value taken to other comprehensive income

(14.1)

7.0

Net income statement transfers

2.6

4.8

Taxation

2.5

(0.3)


(9.0)

11.5

Other comprehensive (expense)/income for the year, net of tax

(8.5)

6.4




Total comprehensive income for the year

0.2

185.4




Total comprehensive income attributable to equity shareholders

0.2

185.4

 

1 Restated - refer notes 1 and 39

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  

Condensed Consolidated balance sheet

As at 31 December

 


Note

2014

2013 1



£ million

£ million

Assets




Cash and balances at central banks


851.3

1,423.5

Disposal group assets held for sale

12

 -

85.9

Derivative financial instruments

17

101.2

187.5

Loans and receivables:




-- Loans and advances to banks

13

720.5

626.9

-- Loans and advances to customers

14

23,093.1

20,342.5

-- Debt securities

15

8.6

9.4



23,822.2

20,978.8

Available-for-sale financial assets

16

1,539.6

1,679.2

Intangible assets

21

46.1

26.0

Tangible fixed assets

22

72.9

71.2

Deferred tax assets

23

50.2

70.0

Other assets

24

53.3

42.9

Total assets

26

26,536.8

24,565.0

 

Liabilities




Deposits from banks

25

846.7

389.2

Customer deposits

26

22,365.7

21,121.4

Disposal group liabilities held for sale

12

 -

78.9

Derivative financial instruments

17

228.2

147.1

Debt securities in issue

19

1,594.1

1,469.8

Other liabilities

28

249.0

416.2

Provisions

27

9.3

7.5

Total liabilities


25,293.0

23,630.1

Equity




Share capital and share premium

29

654.6

509.2

Other equity instruments

30

156.5

 -

Other reserves

31

(1.8)

6.7

Retained earnings

32

434.5

419.0

Total equity


1,243.8

934.9

Total liabilities and equity


26,536.8

24,565.0

 

1 Restated - refer notes 1 and 39

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 



 

Condensed Consolidated statement of changes in equity

 

For the year ended 31 December

 

Attributable to equity holders

 


Share capital

and share

premium

Other equity

instruments

Other

reserves

Retained

earnings1

Total equity


£ million

 £ million

 £ million

 £ million

 £ million

Balance at 1 January 2014

509.2

 -

6.7

419.0

934.9

Comprehensive income






Profit for the year

 -

 -

 -

8.7

8.7

Other comprehensive income






Net movement in available-for-sale reserve

 -

 -

0.5

 -

0.5

Net movement in cash flow hedge reserve

 -

 -

(9.0)

 -

(9.0)

Total other comprehensive expense

 -

 -

(8.5)

 -

(8.5)

Total other comprehensive (expense)/income for the year

 -

 -

(8.5)

8.7

0.2

Transactions with equity holders






Share based payments - charge for the year

 -

 -

 -

12.9

12.9

Share based payments - reclassifications from liabilities

 -

 -

 -

4.2

4.2

Issue of ordinary shares (net)

145.4

 -

-

 -

145.4

Issue of Additional Tier 1 securities (net)

 -

156.5

 -

 -

156.5

Distribution to Additional Tier 1 securities

 -

-

-

(3.2)

(3.2)

Distribution to Non-core Tier 1 noteholders

 -

 -

-

(9.2)