Virgin Money UK PLC interim results 2021
David Duffy, chief executive officer:
“Virgin Money had a strong first half. We doubled underlying profit compared to last year and returned to statutory profit. The quality of our loan book remained resilient in the period, and we’ve continued to support customers and look after our colleagues and communities, while safeguarding the bank. We’ve made significant strategic progress to transform Virgin Money into a leading digital bank and our rebranding is largely complete. We’ve launched a range of innovative and compelling Virgin Money personal and business products as well as differentiated loyalty offers, which are showing early signs of success. Our ESG strategy continues to gain momentum across the business including developing sustainability-linked business loans and a green mortgage product as we look to further embed sustainability across everything we do. This lays the foundation for efficient, sustainable growth of deep, long-lasting customer relationships.
“We are cautiously optimistic about the improving outlook as the impact of the vaccination programme in the UK delivers positive revisions to economic expectations. We’re continuing to manage through what is still an uncertain economic backdrop, but the bank is well placed, with a strong balance sheet, and through ongoing strategic delivery we have a clear path to long-term, improved sustainable returns.”
Significantly stronger financial performance in H1
- Returned to statutory profit, with underlying profit more than doubling YoY to £245m (H1 2020: £120m) given significantly lower impairment charge; underlying RoTE improved to 10.1% (H1 2020: 4.6%)
- Income 9% lower YoY saw pre-provision operating profit decline to £283m, although this recovered by 4% compared to H2 2020:
- H1 NIM declined 6bps YoY to 1.56% but with improved momentum as Q2 increased to 1.60%; continued deposit repricing and mix benefit, and stronger mortgage spreads more than offset lower hedge income and higher liquidity
- Deposit costs now 61bps (FY20: 90bps) underpinning overall cost of funds reduction compared to FY20
- Subdued non-interest income of £66m primarily reflects low activity; expected to improve with the easing of lockdown and as broader economic activity rebounds
- Operating costs of £460m reduced 1% YoY but remained stable in the half as cost savings were offset by one-off costs and the impact of higher investment; expect stronger H2 reduction given benefit of transformation savings and lower investment
- Low impairment charge of £38m (11bps cost of risk) given continuing support reducing the impact on customers; updated macroeconomics and limited specific provisions or changes in portfolio asset quality metrics in the period
- Statutory profit before tax of £72m after deducting £173m of exceptional items: £49m of integration & transformation costs, £47m of acquisition accounting unwind, £71m of conduct charges (£59m related to PPI, including charge taken in Q1); working towards closing down PPI programme
- Prudent volume management saw a stable loan book at £72.2bn:
- Stable mortgages balances at £58.3bn with volumes carefully managed through an uncertain backdrop, prioritising margin over volume
- Business lending declined 0.6% to £8.9bn which includes £1.4bn of government-guaranteed lending
- Personal lending declined 3.2% to £5.1bn due to subdued customer demand across the market
- Deposits grew 1.5% to £68.5bn; strong relationship deposits growth of 12% to £28.7bn across both consumers and businesses
- Restarted structural hedging programme: c.£25.9bn of eligible liabilities now >95% re-invested since March; avg. yield c.0.3%; No impact on unwound hedge NII profile
Prudent balance sheet well positioned for an uncertain outlook
- Maintained considerable credit provisions of £721m (FY20: £735m); total coverage ratio of 1.00% (FY20: 1.02%)
- Fully updated economic scenarios: remain cautiously positioned despite greater optimism in recent economic data
- Arrears across most portfolios increased from subdued FY20 levels but remain at low levels
- Low remaining payment holidays representing <1% of balances across mortgages & personal; vast majority returned to payments
- Robust capital base: transitional CET1 ratio strengthened to 14.4% or 13.9% excluding software intangible benefit:
- Improved 99bps in the half driven by stronger profitability and limited RWA inflation to date
- Significant c.£1.3bn management buffer above regulatory minimum of 9.2%; CET1 ratio 13.2% on fully loaded basis
Good progress on strategic execution
- Innovative propositions launched: Brighter Money bundles campaign drove >90% increase in monthly PCA sales vs H2 20; c80k total sales in H1; 100k credit card cashback signups; re-launched BCA with Working Capital Health solutions to launch in H2;
- Laying the foundations for future growth: rebranding substantially complete; expanded digital distribution capability with c.90% of Personal sales now digital; Mortgage APIs now integrated across c.6k brokers;
- Building long-term customer loyalty: Virgin Red programme pilot launched – ability to earn and spend Virgin Points, significant customer opportunity; Virgin Money Rewards positively received, reflected in strong customer advocacy
- Momentum on ESG agenda: Improved Board-level gender diversity; leading edge initiatives on the Poverty Premium; reducing operating emissions; progressing climate scenario analysis and TCFD disclosure; sustainable product development underway
Outlook and guidance
- Net interest margin expected to be around 160bps for FY21
- Structural hedge programme restarted: Expected benefit to NII of c.£25m in FY21; c.£60m of benefit in FY22
- Underlying operating expenses expected to be <£890m in FY21 reflecting the impact of COVID restrictions and updated phasing; committed to long-term cost reduction and will provide a further update on incremental cost opportunities from digital transformation alongside FY21 results
- Cost of risk expected to be subdued in the near term through FY21
- CET1 ratio expected to continue to exceed 13% (excluding software intangible benefit) at FY21
- SST outcome in December and impairment outlook will be key inputs into our approach to considering dividends; expect a further update on our capital framework post-SST
- Clear path to delivering double digit statutory returns on tangible equity in the medium term
