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6
VIRGIN MONEY
GROUP
ANNUAL REPORT
AND ACCOUNTS
2016
Issued by Virgin Money
Holdings (UK) plc.
Registered office:
Jubilee House, Gosforth,
Newcastle upon Tyne NE3 4PL
Registered in England
and Wales no.03087587
THERE’S MONEY
AND THERE’S
VIRGIN MONEY
At Virgin Money,
our ambition is to build
a bank that makes
‘everyone better off.’
Customers, colleagues, communities,
corporate partners and our company.
About us
With a powerful brand, strong balance sheet,
customer-focused culture and an experienced
team, we have created a business which delivers
our unique approach to banking and financial
services to 3.3 million customers.
Virgin Money Lounge, Sheffield
1 I Virgin Money Group Annual Report 2016
What's in this report?
Strategic Report
2012-2016 Highlights
2016 Highlights and strategic priorities
Business overview
Chairman’s statement
Chief Executive’s review
Women in Finance Charter
Market overview
Business model and strategy
Delivering to our stakeholders
Risk overview
Financial results
Summary of Group results
Divisional results
Governance
Board of Directors
Virgin Money Executive
Corporate Governance Report
Directors’ Remuneration Report
Directors’ Report
Risk Management Report
The Group’s Approach to Risk Management
Risk Management Framework
Emerging Risks
Risk Classes
Full Analysis of Risk Classes
Financial Statements
Independent Auditors’ Report
Consolidated Financial Statements
Parent Company Financial Statements
Alternative Performance Measures
Glossary
Abbreviations
Shareholder Information
The 2016 Annual Report and Accounts incorporates the Strategic Report and the
consolidated financial statements, both of which have been approved by the Board of Directors.
On behalf of the Board
Glen Moreno
Chairman
27 February 2017
Cover image: Virgin Money Lounge, Fargate, Sheffield
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267
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272
2 I Virgin Money Group Annual Report 2016
2012 - 2016 Highlights
5 years of making 'everyone better off'
This has helped us deliver significant growth in shareholder
returns and a solid double-digit return on tangible equity.
As a result of the strength of the business and our continued
ability to manage costs and optimise operational leverage, we
remain well positioned to continue to grow in a wide range of
market conditions.
We are proud of what we have achieved over the last five years
and we look forward to continuing our journey to make
banking better for all of our stakeholders – the company,
customers, colleagues, corporate partners and the
communities in which we work.
a n y
p
m
C o
Custo
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r
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EVERYONE’S
BETTER OFF
C
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In 2012, five years on from the beginning of the financial crisis,
public confidence and trust in the banking industry was at
an all-time low. In that same year, Virgin Money started on
a journey to make banking better with an ambition to make
‘everyone better off’ (EBO).
Virgin Money acquired the loss-making Northern Rock
plc from HM Treasury in January 2012, and work began on
creating a new force in UK banking.
The business transformation began straightaway. We
launched a customer manifesto, all Northern Rock branches
were turned into Virgin Money Stores and the integration of
the businesses was completed successfully.
We returned the business to a solid footing by deploying our
core competencies of risk management - focused on balance
sheet and asset quality - product design and pricing, and
multi-channel distribution.
We now have 3.3 million customers and our overall
Net Promoter Score (NPS), the likelihood of customers
recommending us, has improved considerably to +29 since
2012, making us one of the leading UK retail banks for
customer satisfaction.
We created Virgin Money Lounges – spaces designed for
customers to relax and for local communities to come
together. With a total footfall of around 50,000 per month
across all seven Virgin Money Lounges, they drive excellent
customer satisfaction ratings and an NPS of +86.
We have helped tens of thousands of people get onto and
move up the housing ladder and more than doubled mortgage
balances to £29.7 billion. We have a thriving savings business
and have grown deposit balances from £16.2 billion to
£28.1 billion. We have also created a credit card business from
scratch and now have £2.4 billion in customer balances.
Virgin Money Giving, our not-for-profit online donation
service, has helped fundraisers raise more than £500 million
since it launched, and we set up the Virgin Money Foundation
in 2015, an independent charitable foundation focused on
housing, homelessness and youth employment.
When we listed on the London Stock Exchange in 2014,
we said that we would deliver a strategy founded on three
fundamental and equally important principles: growth, quality
and returns. Despite a number of headwinds, including the
introduction of the bank tax surcharge and the lower for
longer interest rate environment, we have continued to deliver
strong asset growth, while maintaining our high-quality
balance sheet and prudent risk appetite.
Virgin Money Group Annual Report 2016 I 3
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Chief Executive’s review
Women in Finance Charter
Market overview
Business model and strategy
Delivering to our stakeholders
Risk overview
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Eliud Kipchoge KEN, the winner of the Elite Men’s Race with
second place athlete Stanley Biwott KEN just after crossing the line.
Photo: Virgin Money London Marathon
4 I Virgin Money Group Annual Report 2016
2016 Highlights
and strategic priorities
Results 2012-16
2016
2015
2014
2013
2012
Growth
Gross mortgage lending
Mortgage balances
Credit card balances
Total assets
Deposit balances
Quality
Cost of risk
Common Equity Tier 1 capital ratio
Total capital ratio
Leverage ratio
Returns
Underlying total income
Statutory total income
Underlying profit/(loss) before tax
Statutory profit before tax
Net interest margin
Cost: income ratio
Return on tangible equity
Statutory basic earnings per share
Underlying basic earnings per share
£bn
£bn
£bn
£bn
£bn
%
%
%
%
£m
£m
£m
£m
%
%
%
p
p
8.4
29.7
2.4
35.1
28.1
0.13
15.2
20.4
4.4
586.9
581.4
213.3
194.4
1.60
57.2
12.4
29.4
32.7
7.5
25.5
1.6
30.2
25.1
0.12
17.5
20.2
4.0
523.5
521.9
160.7
138.0
1.65
63.5
10.9
22.9
26.8
5.8
21.9
1.1
26.5
22.4
0.07
19.0
22.1
4.1
438.1
438.3
104.7
34.0
1.50
72.5
7.4
(0.4)
18.5
5.6
19.6
0.8
24.6
21.1
0.15
15.5
18.6
3.8
365.1
383.0
43.6
185.4
1.26
80.1
2.6
42.4
5.6
4.9
16.8
–
21.8
18.0
0.02
15.5
19.1
3.6
233.8
261.6
(10.0)
160.2
0.54
103.0
(1.2)
59.3
(2.0)
TOTAL CUSTOMER
LOAN BALANCES
GREW BY
19%
LOW COST OF
RISK OF
0.13%
COMMON EQUITY
TIER 1 RATIO OF
15.2%
LEVERAGE
RATIO OF
4.4%
RETURN ON
TANGIBLE EQUITY
OF
12.4%
Alternative performance measures
These results have been prepared in
accordance with International Financial
Reporting Standards (IFRS). Aspects of
the results are adjusted for certain items,
which are listed below, to reflect how the
Executive assesses the Group’s underlying
performance
> IPO share based payments;
> Strategic items;
> Simplification costs; and
> Fair value (losses)/gains on
financial instruments.
Underlying profit and total income are
now presented excluding the fair value
(losses)/gains on financial instruments,
which reflect timing differences on fair
value movements on derivatives where
these are held to maturity. Prior periods
presented have been adjusted, however
the change has no material impact
on those periods. Further information
on the underlying results, including
reconciliations of the Group’s statutory
and underlying results, is reported on
page 54 and in note 2 to the consolidated
financial statements.
A number of other Alternative
Performance Measures (APMs), in
addition to underlying profit, are used in
the analysis and discussion of the Group’s
financial performance and position. APMs
do not have standardised definitions and
may not be directly comparable to any
measures defined within IFRS. Details
of all APMs disclosed, including the
rationale for their use and their bases of
calculation, are set out on page 267.
Virgin Money Group Annual Report 2016 I 5
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Business overview
Chairman’s statement
Chief Executive’s review
Women in Finance Charter
Market overview
Business model and strategy
Delivering to our stakeholders
Risk overview
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In 2016, we delivered strongly to all of our stakeholders,
living up to our ambition to make everyone better off.
Highlights include:
COMPANY AND SHAREHOLDERS
Growth of
33%
in underlying profit before tax
to £213.3 million, with return
on tangible equity increasing
from 10.9% to 12.4%.
Growth of
41%
in statutory profit before tax
to £194.4 million.
Final Dividend
Recommended final dividend payment of 3.5 pence per ordinary share. This will result in a total dividend
for 2016 of 5.1 pence per ordinary share, an increase of 13% compared to 2015.
COLLEAGUES
CUSTOMERS
Over
3,000
colleagues now work for Virgin Money,
and we maintained our excellent
engagement score of 81%.
Increased our overall customer
base by 15 per cent to
3.3 million
We delivered growth in customer numbers across every product
category and improved our customer experience, satisfaction and
advocacy, with an overall NPS of +29, from +19 in 2015.
COMMUNITIES
CORPORATE PARTNERS
Virgin Money Giving helped
to raise
£92 million
Our not-for-profit online donation
service has helped to raise more
than £500 million for charities since
launching in 2009.
Awarded
5 stars
at the 2016 Financial Adviser Service
Awards and awarded the ‘Best Lender for
Partnership’ at the L&G Mortgage Club
annual awards for the second year in a row.
6 I Virgin Money Group Annual Report 2016
Financial highlights
Strong financial performance
Underlying net interest income
14%
growth
Statutory profit before tax
41%
growth
2016
2015
2014
£519.0m
2016
£194.4m
£456.1m
£336.1m
2015
£138.0m
2014
£34.0m
Underlying total income
12%
growth
2016
2015
2014
Return on tangible equity
14%
growth
2016
2015
12.4%
10.9%
£586.9m
£523.5m
£438.1m
2014
7.4%
Underlying profit before tax
33%
growth
2016
2015
2014
£213.3m
£160.7m
£104.7m
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Virgin Money Group Annual Report 2016 I 7
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Business overview
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Chief Executive’s review
Women in Finance Charter
Market overview
Business model and strategy
Delivering to our stakeholders
Risk overview
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Positive JAWS
11%
12% growth in underlying total income against
1% growth in expenses
Cost: income ratio
6.3pp
reduction
Income
£586.9m
Expenses
£336.0m
Income
£523.5m
Expenses
£332.5m
2016
2015
2014
Income
£438.1m
Expenses
7.4%
£317.6m
2016
2016
2015
2015
2014
2014
2014
57.2%
63.5%
72.5%
Underlying earnings per share
22%
growth
Statutory basic earnings per share
28%
growth
2016
2015
2014
32.7 pence
26.8 pence
18.5 pence
2016
2015
2014
29.4 pence
22.9 pence
(0.4) pence
8 I Virgin Money Group Annual Report 2016
Customer highlights
During 2016, we delivered
£1.5bn
growth in customer numbers
across every product category
and increased our overall
customer base by 15 per cent
to 3.3 million.
Customers
During 2016, we have seen strong growth in our customer
numbers, increasing by 15 per cent to 3.3 million customers.
While the number of customers in every product category has
grown, the main driver for our successful expansion has been
the accelerating growth in our credit card, travel insurance
and current account businesses.
Our aim is always to provide our customers with competitive
and straightforward products, supported by outstanding
customer service. During the year, we have seen our continued
focus on improving our offer to customers lead to new highs in
customer satisfaction and advocacy. Our overall Net Promoter
Score (NPS) improved from +19 in 2015 to +29 in 2016.
During the year, a real focus on enhancing the customer
experience in our mortgage and credit card businesses, as
well as a whole-bank focus on customer service, improved
our transactional NPS, which measures specific points of
customer engagement, from +60 to +64 year-on-year.
We increased customer acquisition by 32 per cent and at
the same time saw account closures fall by around 7.5 per
cent. Sales to existing customers grew by 50 per cent and our
improvements in retention reflect the successes we have seen
in our customer engagement activity, which have allowed us
to make customers more aware of the unique benefits of being
a Virgin Money customer.
The use of mobile devices to access our products and services
increased to over 50 per cent and we continue to see this
increasing on a quarter by quarter basis.
Our customers want to be able to access our products
when, where and how they like and our focus on constantly
improving our digital journeys across all platforms
reflects this.
Whilst we are continually developing our in-store sales, our
website remains the most popular channel for customers,
with over 22 million website visits, up from 17 million in 2015.
82 per cent of sales were carried out digitally in 2016.
The Virgin Money Lounges continued to be a standout
success and we opened our seventh Lounge in Sheffield in
July. Lounges deliver strong customer satisfaction with an
NPS of +86. Around 50,000 customers visit our Lounges every
month and footfall increased by 34 per cent in 2016. Stores
co-located with a Lounge broadly outperform the overall
network based on sales performance.
Customer satisfaction (NPS)
Strong and improving customer advocacy, with
an increase to +29 in our overall NPS in 2016.
2016
2015
2014
+19
+16
+29
Virgin Money Group Annual Report 2016 I 9
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Business model and strategy
Delivering to our stakeholders
Risk overview
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Increased our customer base to
3.3 million
customers
New products sales
to existing customers
2016 growth rate
49.9%
Mortgages
2016 growth rate
10.3%
Savings
2016 growth rate
5.5%
Investments and pensions
Insurance
2016 growth rate
0.3%
2016 growth rate
27.1%
Credit cards
2016 growth rate
38.1%
Essential Current
Account
2016 growth rate
203.2%
Our digitally led business model, supported by our
efficient national Store footprint, continues to be
a key factor in growing the business cost effectively.
22 million
website visits
82%
digital sales
50%
use their mobile device to access our
products and services
Stores
Lounges
Offices
10 I Virgin Money Group Annual Report 2016
Strategic priorities
We will continue to build on our customer-focused
strategy of Growth, Quality and Returns
Growth
Delivering sustainable growth
We will continue to grow our customer base and balance sheet strongly within our existing risk
appetite. We focus on prime mortgage business and target 3 to 3.5 per cent of high-quality gross
mortgage lending, ahead of our market share of stock. We will maintain the application of strict
underwriting standards to protect asset quality as we progress towards our target of £3 billion credit
card balances by the end of 2017. We will continue to increase the penetration of our insurance,
investment and financial services to our existing customer base, acquire new customers and explore
the potential for further growth in this business line. Our customers want to be able to access our
products when, where and how they like and our focus on constantly improving our
digital capability across all platforms reflects this.
Quality
Maintaining our high-quality balance sheet
Maintaining our high-quality balance sheet is at the core of our strategy. Our approach to risk
management is based on rigorous and continuous data analysis and takes a far-sighted approach
to asset quality, including strict affordability metrics and prudent underwriting. Supported by our
risk appetite and strong risk culture, we maintain stringent control over a range of criteria including
credit scoring, customer indebtedness, geographic concentration, business mix and loan-to-value
ratios for mortgages. We are proud of our unique position as a customer-focused, low risk UK retail
bank, unburdened by legacy conduct issues and we will continue to protect that position and provide
our customers with good value, straightforward and transparent products, supported by outstanding
customer service.
Returns
Improving returns to shareholders
Our disciplined pursuit of growth and continuing operational leverage are at the heart of our strategy
to generate strong and sustainable returns for shareholders. We will maintain a consistently
low appetite for risk, continue our resolute focus on cost management and operational efficiency
and explore opportunities for further growth in our financial services business.
EBO
Business as a force for good
Our aim is to make ‘everyone better off’ (EBO) by delivering good value to our customers, treating
colleagues well, making a positive contribution to society, building positive relationships with our
partners and delivering sustainable profits to our shareholders.
Virgin Money Group Annual Report 2016 I 11
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Business overview
Chairman’s statement
Chief Executive’s review
Women in Finance Charter
Market overview
Business model and strategy
Delivering to our stakeholders
Risk overview
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Iwan Thomas MBE, Dame Kelly Holmes, Danny Mills, James Cracknell OBE,
at the start of the Virgin London Marathon 2016
Photo: Virgin Money London Marathon
12 I Virgin Money Group Annual Report 2016
Business overview
Mortgages
Mortgages are sold primarily through our intermediary
partners. Intermediated distribution is supplemented by
direct distribution. The quality of our intermediary service
was recognised by winning numerous awards in 2016.
Savings
Savings are sold primarily through our digital channels,
supplemented by our Store network. Our lending growth was
supported by a strong performance in retail deposits in 2016.
Mortgage balances increased to
£29.7 billion growth of 17%
Market share
3.4% of gross mortgage lending
Retention
70% compared to 64% in 2015
Supporting first time buyers
21% growth in lending to first time buyers
Mortgage portfolio LTV
55.4% stable year-on-year
Cost of risk
0.01% flat year-on-year
Deposit balances increased to
£28.1 billion growth of 12%
Strong cash ISA performance
33% share of new market flows
Retention
89% compared to 85% in 2015
Total cost of funds
130bps from 143bps in 2015
Essential Current Account
3 times the number of ECA accounts opened,
compared to 2015
Mortgage balances
Deposit balances
£bn
35
30
25
20
15
10
5
0
2014
2015
2016
£bn
30
25
20
15
10
5
0
2014
2015
2016
Virgin Money Group Annual Report 2016 I 13
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Chief Executive’s review
Women in Finance Charter
Market overview
Business model and strategy
Delivering to our stakeholders
Risk overview
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Credit cards
Credit cards are sold primarily through our digital channels.
Our card portfolio comprises of a mix of balance transfer and
retail credit cards.
Financial Services
We work with a number of partners to provide insurance,
investment and currency services.
Card balances increased to
£2.4 billion 55% higher than 2015
Market share
3.5% share of the £68 billion cards market
Retail cards made up
30% of new accounts during the year
Cost of risk
1.70% compared to 2.00% in 2015
Funds under management
£3.4 billion 12% higher than 2015
Travel insurance
450,000 new sales in 2016
Home insurance
17,000 new sales in 2016
Credit card balances
Funds under management
£bn
3.0
2.5
2.0
1.5
1.0
0.5
0
2014
2015
2016
£bn
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
2014
2015
2016
14 I Virgin Money Group Annual Report 2016
Chairman’s statement
Glen Moreno Chairman
During a year of significant political
change and economic uncertainty, I am
pleased to report that Virgin Money
continued to deliver on its promises to
shareholders as a result of our continuing
focus on growth, quality and returns.
The excellent performance of the
business in 2016 demonstrates the
benefits of the Group’s position as a
customer-focused, low risk UK retail
bank, unburdened by legacy conduct
issues.
As a result of our business performance,
the Board has recommended a final
dividend of 3.5 pence per ordinary share.
This will result in a total dividend for 2016
of 5.1 pence per ordinary share.
In 2016, we delivered a strong financial performance,
demonstrating the benefits of our customer-focused
strategy, low risk business model and differentiated
approach to banking.
Despite expectations to the contrary, the UK economy proved
resilient during the second half of the year and the housing
market remained stable, with residential sales increasing
slightly year-on-year. Two significant influences on the
housing market in 2016 were the introduction of stamp duty
for second homes and the EU referendum result.
The Government's policy to tackle the UK's housing shortage
and control house price inflation resulted in the introduction
of higher rates of stamp duty on additional properties in
April 2016. This led to a surge in housing transactions in the
first quarter of the year. In the months following the change,
activity levels reduced and then weakened further in the wake
of the referendum. The Bank of England took swift action to
mitigate the uncertainty related to the outcome of the vote,
with transactions and approvals recovering towards the
end of the year.
Given the turbulent external environment and the
changing shape of the mortgage market, I was particularly
pleased that we continued to grow strongly, with
£8.4 billion of gross lending written to our high-quality credit
standards, representing a 3.4 per cent share of the total
mortgage market.
Our strategic objective as we progress towards our target of
£3 billion credit card balances by the end of 2017 is to ensure
the high quality of the book. As a result, we strengthened
our credit card underwriting in the second half of the year to
protect asset quality against the uncertain economic outlook
and continued to make solid progress towards our target as
card balances increased to £2.4 billion.
During the year we continued to take advantage of our
operating leverage, whilst providing outstanding service to all
of our customers. We delivered strong growth across our core
markets, maintained the high quality of our balance sheet and
delivered significant growth in underlying profitability.
Our three strategic pillars of growth, quality and returns give
us the platform to adapt to potential changes in the operating
environment. To mitigate against the impact of adverse
macro-economic conditions that may transpire, the Board
and Executive Team decided to strengthen the balance sheet
further with the issuance of £230 million of Additional Tier 1
(AT1) capital. This resulted in a leverage ratio of 4.4 per cent at
the end of 2016, compared to 4.0 per cent at the end of 2015.
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We also established contingency plans and implemented
appropriate risk monitoring and oversight activities.
I would like to extend my thanks to the Board, the
management team and all colleagues across the Group for
their contribution.
Dividends and shareholders
As a result of the outstanding performance of the business,
the Board has recommended a final dividend of 3.5 pence
per share. This will result in a total dividend for 2016 of
5.1 pence per ordinary share, an increase of 13 per cent
compared to 2015. Our objective is to continue to increase
dividend distributions over time as we grow our capital
base and earnings.
Having been a long-term shareholder in Virgin Money, WL
Ross and Co. sold down its remaining holding in November.
I would like to thank them for their support over a number
of years, which was an important factor in the development
of Virgin Money into the business it is today.
Governance
The Board has made a firm commitment to high standards
of corporate governance and this is explained further in the
corporate governance report on page 79.
We believe that strong governance should prevail throughout
the business and we pay particular attention to supporting our
EBO philosophy and culture, a vital ingredient in the long-term
success of the Group.
EBO sits at the heart of our business model and strategy
and means delivering good value to our customers, treating
colleagues well, making a positive contribution to society,
building positive relationships with our partners and
delivering sustainable profits to our shareholders.
We have a strong and skilled management team, a well-
balanced, experienced Board and a strong commitment
to good governance, enabling us to continue to deliver
sustainable success for all of our stakeholders.
Directors
In December 2016, we announced the appointment of two
new Independent Non-Executive Directors to the Board, Eva
Eisenschimmel and Darren Pope. Eva brings to the Board an
extensive background in strategic marketing across retail
banking, financial services, digital and the fast moving
consumer goods (FMCG) industry. Darren has significant
retail banking knowledge and experience of transformational
change. These appointments form part of our medium-term
Board succession plan and will help to ensure the Board is well
placed to meet the challenges and opportunities ahead as we
continue to grow the business.
Marilyn Spearing, an Independent Non-Executive Director and
Chair of the Remuneration Committee, notified the Company
of her intention to retire from the Board and stand down at the
2017 annual general meeting (AGM).
Upon Marilyn’s retirement from the Board, Norman McLuskie,
Senior Independent Director, will become Chairman of the
Remuneration Committee and Darren Pope will become
Chairman of the Audit Committee during 2017, following
an orderly transition. I would like to thank Marilyn for her
significant contribution to the Board over the last three years
and for her leadership of the Remuneration Committee.
Colleagues and diversity
We have highly-engaged colleagues who are focused on
delivering the needs of our customers and stakeholders.
The Board is clear that diversity helps to improve the quality
of decision making and we are committed to increasing
the diversity of Independent Non-Executive Directors
on the Board.
Diversity at all levels of the business remains a priority as we
strive to ensure that those who work for our business reflect
the customers we serve, enabling us to provide a relevant,
practical and personal banking service. In order to achieve
this we have set targets, broadened our use of technology
to support and enable flexible working and invested in the
development of our people managers to ensure they value and
enable diversity.
A responsible business
We are dedicated to supporting the communities in which we
work to help them flourish, both socially and economically.
Our commitment to being a socially responsible business,
not just through our lending to customers, but also through
our investment in the communities we serve, is epitomised
by Virgin Money Giving and the Virgin Money Foundation, an
independent charitable foundation.
Remuneration
The remuneration structure at Virgin Money is designed to
ensure rewards are aligned with the long-term success of the
business and the interests of our shareholders. Variable pay
for Senior Executives is delivered through a combination of
annual bonus and a Long Term Incentive Plan linked to future
business performance (both with appropriate deferral).
16 I Virgin Money Group Annual Report 2016
Chairman’s statement
Our position as a straightforward bank, unburdened by legacy
conduct issues, benefiting from ongoing operational leverage,
and generating returns in excess of our cost of equity, makes
us unique in UK banking. This differentiates us from the
major banks and other mainstream challengers and will
enable us to compete effectively throughout any economic
uncertainties ahead.
Our plan to invest in new digital capability will provide
further differentiation and enhance our position as a leading
competitor in the UK retail banking market.
I would like to reiterate my thanks to colleagues across the
Group for their hard work, commitment and contribution
to everything we have achieved together in 2016.
Glen Moreno
Chairman
27 February 2017
All deferred awards are subject to a further risk assessment
before release, with clawback provisions applying thereafter.
More information on how we ensure our approach to
remuneration supports the business strategy can be found
in our remuneration report on page 105.
Looking ahead
Notwithstanding the uncertainty in the wake of the vote to
leave the European Union, we believe the strength of our
franchise – a robust capital position, strong asset quality and
operating leverage – combined with our highly-skilled and
engaged colleagues, give us the platform and flexibility to
adapt to possible changes in the operating environment.
Whilst we continue to see strong customer demand and
no evidence of material changes in customer behaviour,
the outcome of the EU referendum has created a period of
economic uncertainty which is likely to continue until the UK’s
exit strategy is clear. We are subject to inherent risks arising
from macro-economic conditions in the UK, including inflation
and rising unemployment, and the lower for longer interest
rate environment.
Our strategic planning addresses the new structural and
regulatory changes which come into force over the next
few years. We will continue to work with our regulators as
requirements evolve, and our position on CRD IV capital
buffers and MREL is well understood and reflected in our
strategic plans. We are also mindful of the increased threat
of cyber-crime. Our resilience strategy was approved by the
Board during the year and we will continually enhance our
control environment to protect the business.
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Finishers of the Virgin London Marathon 2016
Photo: Virgin Money London Marathon
18 I Virgin Money Group Annual Report 2016
Chief Executive’s review
Results overview
Delivering Growth, Quality and Returns
The strong performance of the business in uncertain and
challenging conditions demonstrates the strength of the
business and the benefits of our customer-focused strategy of
growth, quality and returns, which continues to deliver excellent
financial performance.
Against the backdrop of the UK’s decision to leave the European
Union and the resulting economic and political uncertainty,
we continued to focus on providing outstanding service to
our customers and intermediaries, growing our balance sheet
carefully, protecting asset quality and delivering solid double-
digit shareholder returns. Our underlying profit before tax
increased by 33 per cent to £213.3 million.
We protect our unique position as a low risk UK retail bank,
unburdened by legacy conduct issues, with a far-sighted
and data driven approach to risk management and asset
quality. Our low cost of risk at 13 basis points was supported
by our prudent risk appetite, consistent underwriting and
rigorous use of credit data analytics as well as the benign
economic environment.
Growth in mortgage and credit card lending was delivered
without compromising asset quality, which remained within our
risk appetite. Total customer loan balances grew by 19 per cent
and our portfolios demonstrated stable or improving trends
across a variety of credit metrics year-on-year.
Looking ahead, we believe our low-risk business model and
strong balance sheet, combined with a continued focus
on operational excellence, including strong cost and risk
management, means we remain well positioned to continue to
grow in a wide range of market conditions.
Jayne-Anne Gadhia CBE Chief Executive
Our customer focused strategy
continues to deliver excellent financial
performance. We delivered record
lending in 2016, a 33 per cent increase
in underlying profit before tax to
£213.3 million and our return on
tangible equity strengthened from
10.9 to 12.4 per cent.
Underpinned by our commitment to
responsible and prudent lending, we
have grown our mortgages and credit
cards businesses successfully and
without compromising asset quality.
Our continued focus on delivering
excellent customer service led to new
highs in customer satisfaction and
supported growth in customer numbers
across every product category. Our overall
Net Promoter Score (NPS) improved from
+19 in 2015 to +29 in 2016.
We will continue to put EBO at the
heart of everything we do and remain
on track to sustain a double-digit return
on equity in 2017.
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Delivering high-quality growth
Mortgages
UK mortgage market activity remained strong in 2016, with
gross lending of £245 billion, 11 per cent higher than in 2015.
While housing market activity slowed slightly following the EU
referendum, demand returned strongly to the market in the
second half of the year and there was an increase in remortgage
activity following the reduction in Bank Base Rate in August.
Despite a highly competitive market, we were able to take a
gross lending market share of 3.4 per cent, protect spreads and
maintain our excellent asset quality.
We delivered gross mortgage lending of £8.4 billion, 12 per
cent higher than 2015. This was driven by the strength of our
intermediary relationships and our ongoing focus on developing
and improving our mortgage proposition. We remained strong
in the remortgage market and expanded our New Build purchase
lending to 7 per cent of completions.
We improved our overall completion spread to 187 basis points,
up from 186 basis points in 2015, despite competitive pressure
on margins. This was achieved without venturing up the risk
curve and all new mortgage business was written within our
risk appetite.
Net mortgage lending increased to £4.3 billion, a market
share of almost 11 per cent, as a result of strong gross lending
and improved customer retention. Our improved retention
performance was driven by a new retention platform for
intermediaries, delivered by our innovative Mortgage Lab, as
well as investment in our retention capability for our direct
mortgage customers.
The combination of strong new lending and significantly
improved retention allowed us to grow the mortgage book
to £29.7 billion. Balance growth of 17 per cent significantly
outpaced the market.
Intermediary partnerships remain a key part of our strategy.
This channel continues to deliver high credit quality mortgage
customers with higher than average loan sizes. The quality
of the service we provide to intermediaries was recognised
by winning numerous awards, including receiving 'Five Stars'
at the Financial Adviser Service Awards and the prestigious
‘Best Lender for Partnership’ award from the Legal & General
Mortgage Club.
As a responsible lender we apply strict affordability criteria,
combined with prudent and consistent underwriting, to
deliver growth and returns without compromising the
quality of our book.
We remain focused primarily on residential mortgages and the
portfolio is comprised of 82 per cent residential and 18 per cent
buy-to-let mortgages, in line with the market. Prudent
underwriting and a focus on non-portfolio landlords continued
to drive the quality of the buy-to-let portfolio.
The average loan-to-value (LTV) of the mortgage book was 55.4
per cent, flat year-on-year. The average LTV of new residential
lending was 69.8 per cent and the LTV of new buy-to-let lending
was 60.5 per cent.
As a result of the high-quality mortgage assets acquired from
Northern Rock in 2012 and our subsequent focus on maintaining
excellent asset quality, our arrears levels of 0.15 per cent are
significantly below the CML industry average of 1.00 per cent.
The consistent application of our lending criteria and robust
underwriting give us confidence that our mortgage book would
be highly resilient in the event of a downturn.
Our mortgage expertise and dynamic commercial management
give us confidence that we can continue to optimise our lending
mix within our risk appetite to drive strong risk adjusted returns
in a range of market conditions.
Credit cards
We continued to make significant progress with our
credit card business in 2016, the first full year operating
from our own platform. Our customer-focused approach
and proposition resulted in card balances increasing to
£2.4 billion, 55 per cent higher than 2015. This growth
represented a 3.5 per cent share of the £68 billion market.
Robust underwriting principles and credit management,
aligned to our overall strategy, improved the excellent asset
quality of the portfolio.
Although the market remained competitive, we did not need
to maintain best buy pricing during the year to deliver volume.
We continued to operate in the prime segment of the market,
offering a mix of balance transfer and retail spending cards to
high-quality applicants. We broadened our card proposition
and launched our new Manchester United Football Club
branded cards.
20 I Virgin Money Group Annual Report 2016
Chief Executive’s review
New lending during the year was strong and we opened
295,000 customer accounts in 2016, a 7 per cent share of
new account sales with retail cards making up 30 per cent of
our new accounts. Retail spend increased by just under 40
per cent during the year, supported by a fourfold increase in
contactless usage. The potential for further growth, without
compromising quality, is significant.
We have a prime customer base with no credit builder
products in the portfolio. During the year, a downward trend in
the standard of UK wide credit card lending was evident, with
lower credit scores being accepted. We deliberately avoided
this and maintained the application of strict underwriting
standards to protect asset quality as we progressed towards
our target of £3 billion balances by the end of 2017.
Our diligent approach means that we continue to target and
lend to more low risk and less indebted customers and our
unsecured debt-to-income ratio of 20.8 per cent compares
favourably to the market average of 27.4 per cent.
To support our approach, we strengthened our underwriting
standards further in the second half of 2016 and introduced
a new eligibility checker for customers. This increased the
credit quality of applicants and lifted our approval rate to
87 per cent resulting in over 86 per cent of new accounts in
the highest credit score ranges.
The cost of risk improved to 1.70 per cent in 2016, from 2.00
per cent in 2015, reflecting the continued high quality of our
credit card business.
We were delighted to win several awards including Best
Overall Customer Service and Best Application Process from
uSwitch and the Judges Award at the 2016 Card and Payment
Industry Awards.
Deposits
Our lending growth was supported by a strong performance in
retail deposits in 2016.
The UK savings market continued to grow and saw a
significant uplift in activity driven by the EU referendum,
as households held more savings to protect against
future uncertainty.
We delivered 12 per cent growth in retail deposit balances
to £28.1 billion, exceeding market growth of 3 per cent. This
was achieved through £4.8 billion of new customer deposits
and was supported by strong retention of maturing fixed rate
bonds and ISAs, which improved to 89 per cent from 85 per
cent in 2015.
As a result of the strength of our ISA proposition, we achieved
a share of over 30 per cent of net market inflows and balances
increased to £13.1 billion. We enjoy a stable retail funding
base with ISA balances comprising 47 per cent and fixed rate
deposits almost 45 per cent of our overall savings balances,
further strengthening our liquidity positioning.
The number of customers increased by 5 per cent year-on-
year to 1.45 million. This growth was supported by competitive
pricing, where we are consistently top quartile but not price-
leading, together with enhancements to the product range.
We delivered an improvement in average cost of retail funds
through close management of pricing and the product mix,
as well as passing on the reduction in Bank Base Rate to
all variable rate customers. We aim to offer our customers
both competitive and sustainable rates. In line with our EBO
philosophy, we provide customers with exclusive fixed term
products to ensure our interest rates remain good value in the
context of the market. This approach continues to deliver fair
margins and strong retention.
During the year, we continued to expand and enhance our
product range, including a suite of new partnership products
with Manchester United Football Club, which provides
access to unique rewards programmes. We launched our
own Virgin Money Regular Saver in September and exceeded
expectations with more than 18,000 accounts opened by
the end of 2016.
Almost 70 per cent of new accounts were opened online, with
the remainder opened through our Store network, postal
and telephone channels. Our online-led distribution model
continues to be a key factor in growing our retail deposit
business cost effectively, and the convenience of our online
sales and servicing capability supported an 11 point increase
in our NPS score to +16.
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Maintaining a high-quality balance sheet
Our balance sheet reflects our straightforward business
model and our lending is comprised primarily of residential
mortgages and credit card advances, funded predominantly
through retail deposits and an element of long term
wholesale funding.
Our approach to responsible lending is driven by our
conservative risk appetite and prudent underwriting. Our low
cost of risk at 13 basis points in 2016 was supported by the
resilience of the UK economy and our data driven approach to
credit risk management to support asset quality.
During the year we strengthened our balance sheet further
with the successful issuance of £230 million of Additional
Tier 1 (AT1) capital. Our Common Equity Tier 1 (CET1) ratio
and leverage ratio are key measures of our financial strength.
At the end of the year, our CET1 ratio was 15.2 per cent, our
total capital ratio was 20.4 per cent and our leverage ratio
was 4.4 per cent, positioning us well for continued growth.
Our funding strategy is to access wholesale funding to
supplement our core retail deposit base in order to extend
tenor, ensure we have appropriate diversification in the
funding base and optimise funding costs.
In 2016, we completed two issues of Residential Mortgage
Backed Securities (RMBS) totalling £1.3 billion and
accessed both the Funding for Lending scheme (FLS) and
the Term Funding Scheme (TFS) to support lending growth.
Our loan-to-deposit ratio increased to 114.5 per cent at
31 December 2016 following our participation in the TFS.
Our liquidity position remains strong and our liquidity
coverage ratio (LCR) was significantly above the regulatory
minimum at 154 per cent. We hold substantial liquidity
resources in the form of high-quality liquid assets.
Essential Current Account
The performance of our Essential Current Account (ECA)
was particularly strong in 2016. We almost trebled the total
number of ECA accounts and customer balances increased
more than fivefold during the year. The ECA attracts younger
customers to our Stores and usage is strong with an average
monthly credit of £1,300.
The ECA is a ‘best in class’ Basic Bank Account, which supports
financial inclusion. It has the main features of a typical current
account, including the ability to deposit and withdraw money
through any UK Post Office, but has no overdraft facility or
unpaid item fees. It is a free basic bank account, paying a
fair rate of credit interest which is designed to help all our
customers stay in control of their money.
Financial Services
We are pleased with the increasing momentum in our
Financial Services business and we continue to explore the
significant potential for further growth in this business area.
Our customers continue to appreciate the simplicity and
transparency that our investment funds provide. Funds
under management increased by 12 per cent to end at
£3.4 billion. Equity ISA applications increased by 2 per cent,
outperforming the decline seen in the market. At the Your
Money Awards ceremony in July we won Best Direct Stocks
and Shares ISA Provider.
The insurance business performed well during the year with
an overall increase in new customers of 27 per cent. Travel
insurance was particularly strong with 450,000 new travel
insurance sales. To meet more customer needs, we extended
the breadth of our travel coverage. This included the option
to cover pre-existing medical conditions, a proposition
which attracted over 100,000 new sales through the
aggregator channel. In addition, we were proud to provide
travel insurance to the UK Invictus Games Team when they
competed in Orlando, Florida.
2016 was the first full year of our refreshed home insurance
proposition which has proved to be popular with our
existing mortgage and online customers.
Over 5,000 customers registered for our new International
Money Transfer service in 2016 and with a strong ongoing
flow of customers signing up for the service, we expect to see
continued growth in 2017.
22 I Virgin Money Group Annual Report 2016
Chief Executive’s review
Improving returns to shareholders
As a result of the successful delivery of our strategy for 2016,
our return on tangible equity strengthened from 10.9 per cent
to 12.4 per cent.
Key contributors to this continued improvement were growing
income across each of our business lines, maintaining credit
and asset quality, the effective management of our funding
base and further gains in operational efficiency.
We maintained the high quality of our mortgage and cards
business, reflected in our low arrears and impairment levels,
and total customer loan balances grew by 19 per cent
compared to 2015.
Effective management of our funding base reduced our
average weighted cost of funds to 130 basis points from 143
basis points in 2015. This partly offset pressure on mortgage
asset spreads and resulted in a net interest margin of 160
basis points for 2016.
The financial contribution across each of our business lines
increased and delivered 12 per cent growth in total underlying
income to £586.9 million. Underlying cost growth was limited
to 1 per cent, despite investment in the future of the business.
Within our flat cost base we opened a new Lounge in Sheffield,
expanding our estate to seven customer Lounges and invested
in our IT capability - to ensure the efficiency and resilience
of our systems.
As a result of our operational leverage and continual
improvements to operational efficiency, including re-
engineering our mortgage and core back office processing
systems, our cost:income ratio improved to 57.2 per cent,
from 63.5 per cent in 2015. We increased our underlying
profit before tax by 33 per cent to £213.3 million. Statutory
profit before tax was £194.4 million, compared to
£138.0 million in 2015.
Colleagues and culture
Our goal is to nurture a high performing, diverse and
committed workforce. We aim to ensure that all colleagues
can reach their full potential, feel valued and empowered to
thrive in a truly inclusive business.
Our latest colleague survey results showed that we
maintained our excellent staff engagement score at 81 per
cent, which compares strongly against industry standards.
As part of the annual pay review cycle colleague pay was
discussed with the union Unite. This resulted in an agreement
which they could progress with their members. Average
colleague pay increased by 4 per cent.
Our EBO culture sustains a virtuous circle based on a
commitment to the communities in which we work and
raises awareness of the Virgin Money brand and business
as a force for good. We believe that our culture cannot be
readily and credibly replicated in the UK banking sector and
it provides the foundation for our strategy and differentiated
approach to banking.
Management team
To support the continued development of the business,
we strengthened the Executive further this year.
Hugh Chater joined the business as Chief Commercial Officer
in June and Tim Arthur joined in September as Creative
Director. Hugh has deep experience of retail banking,
including at MBNA, where he became Managing Director of
their UK Cards business. Tim was previously Global CEO of
Time Out where he transformed an iconic brand into a global
digital business.
Peter Bole joined the business in November and became Chief
Financial Officer (CFO) in January 2017.
Peter was the former Tesco Bank CFO and has extensive
experience in UK retail banking. I would like to thank Dave
Dyer, our former CFO, for his 20 years’ service and I am
delighted that following his retirement he will continue to
support the business on a part-time basis in a strategy role.
Cyber resilience strategy
We have a well-developed Cyber Resilience Strategy to
manage the increasing risk of cyber-crime. During the year
we enhanced our Cyber Operations Centre which monitors
suspicious activity in real time and launched a new Security
Zone on our intranet, providing detailed security advice
to colleagues.
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Business as a force for good
Our contribution to the communities in which we work
is a fundamental part of Virgin Money’s business model
and strategy.
We are sufficiently nimble to adjust to changes in the
operating environment and will continue to target
high-quality growth opportunities in value accretive
market segments.
The success of Virgin Money Giving continued and our
not-for-profit online donation service helped charities raise
£92 million in 2016. Virgin Money Giving has helped to raise
more than £500 million for charities since launch.
Colleagues selected the NSPCC as our corporate charity of the
year for 2015/16 and raised over £2.1 million as the official
charity of the 2016 Virgin Money London Marathon (VMLM).
Runners in the 2016 VMLM raised a record £59.4 million
for good causes.
The Virgin Money Foundation has distributed grants worth
almost £2 million in the North East of England since August
2015. Grants awarded in 2016 focused on organisations
working in the areas of housing and homelessness and
youth employment. The Foundation will extend its reach
nationally over time.
Outlook
As a UK retail bank focused on serving domestic customers,
the decision to exit the European Union does not directly
impact on our business. Whilst the UK economy has been
resilient since the vote to leave the EU, the eventual timing
and nature of the UK’s exit from the EU remains unclear and
the longer-term impact on the economy is uncertain.
Our strategy of growth, quality and returns is clear and
unchanged. We will continue to focus on providing
outstanding service to our customers, pursue disciplined
growth of our balance sheet within our risk appetite, maintain
our prudent underwriting to protect asset quality, and deliver
strong and sustainable shareholder returns.
Our strategy, combined with our straightforward, low risk
retail focused business model and strong balance sheet,
means we remain well positioned to react to prevailing
economic conditions.
We stand ready to take measures to protect asset quality
further in the event of future economic headwinds.
We will continue to grow assets at the right price and quality.
We maintain a target market share of 3 to 3.5 per cent of
gross mortgage lending and £3 billion high-quality credit card
balances of at the end of 2017.
We will continue to access the Term Funding Scheme in 2017
and expect the overall loan-to-deposit ratio to go beyond 115
per cent for the period in which we use the scheme.
In 2016, we decided that it would be prudent to defer our
SME plans and focus investment on enhancing our digital
capability. Should the economic outlook support it in the
future, SME remains a strategic option for the business.
We are delighted to be collaborating with 10x Future
Technologies as part of our digital strategy. This is an exciting
and complex programme which will ultimately create a
fully integrated digital banking platform. Work has begun
in earnest on this long-term project and we will provide an
update on progress in the second half of 2017.
We have a proven track record on operational execution and
we are well positioned to achieve a cost:income ratio of 50 per
cent by the end of 2017.
The strength of our financial performance and capital position
underpins our confidence in achieving our financial targets,
notably continued progress in our return on tangible equity
and a solid double-digit RoTE for 2017.
I would like to extend my thanks to our Virgin Money
colleagues for their hard work and achievements over the
year, and to all of our stakeholders who play such an important
part in our success.
Jayne-Anne Gadhia CBE
Chief Executive
27 February 2017
24 I Virgin Money Group Annual Report 2016
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Virgin Money Lounge, Glasgow
26 I Virgin Money Group Annual Report 2016
Women in Finance Charter
We are passionate about fairness, equality
and inclusion and committed to achieving
a 50:50 gender balance throughout the
business by 2020.
Aim
I was privileged to be asked to review the progress of women
in senior managerial roles in financial services on behalf of
HM Treasury. As part of that review it became clear to me that
there are significant barriers to the progress of women and
that breaking down these barriers would improve results both
for the financial services sector and individual businesses,
including Virgin Money.
As the Chief Executive, I have taken personal responsibility
for addressing this issue at Virgin Money and during the
year we made good progress towards achieving our 2020
target of a 50:50 gender balanced workforce (within a
10 per cent tolerance).
At Virgin Money there are two particular areas that require
focus. The first is the team that reports into the Executive
Committee continues to be dominated by men. Men
account for 68 per cent of the Executive Committee and
its direct reports (excluding personal assistants) and 78
per cent of the wider senior management team. To address
this, all members of the Executive Team have objectives to
improve this balance through recruitment, promotion and
development over the next four years. There is no intention
to promote or hire women over men. The desire is to have a
genuinely level playing field where both men and women can
succeed on merit.
This is consistent with our second area of focus - colleague
gender balance at junior levels. 75 per cent of our colleagues
at the lowest end of our pay scale are women. Many work
in our Stores and contact centres and we are committed
to ensuring these places of work are equally attractive to
men and women.
What gets measured gets done
Gender imbalance has a direct impact on average male
and female salaries and it is measured transparently by the
gender pay gap – the difference between average female
and male pay.
Looking at April 2016 pay, Virgin Money had a gender pay
gap of 36 per cent. We are confident that men and women
are paid on equal terms for doing the same jobs across the
business, but the under-representation of women in the
senior leadership team and of men in more junior areas of the
business, creates this pay gap. This is not acceptable and we
are committed to remedying it.
Empowering productivity
When researching and writing ‘Empowering Productivity:
Harnessing the Talents of Women in Financial Services’, it
became clear there are a number of key issues across the
industry that must be addressed in order to develop a fully
inclusive workforce at all levels.
They include the need to create the right culture, developing
supportive line managers and having the technology to
support a flexible working environment. During 2016 we made
progress on these key issues.
Encouraging a flexible culture
> we introduced a flexible matching recruitment policy
which commits to match senior candidates’ current flexible
working arrangements. We have appointed both male and
female candidates on this basis in 2016;
> we continued to promote Shared Parental Leave which
enables partners to take paid parental leave; and
> we launched a ‘Gender Agenda Network’ with the aim of
delivering events designed to educate colleagues and break
down barriers.
Enhanced line manager capability
> we delivered ‘unconscious bias’ training to all senior
leaders, helping them to understand the potential for
personal bias and highlighting strategies to eliminate it
within their teams;
> we require all recruitment agencies to provide diverse
candidate lists;
> we require all candidate profiles to be anonymised so that
hiring managers make recruitment decisions based on skills
and experience alone; and
> we incorporated a gender analysis tool in our annual pay
process, helping managers clearly see the impact salary and
bonus decisions have on the gender pay gap of their team.
Using technology to encourage flexibility
> we upgraded our technology to make flexible and home
working easier;
> we accelerated the replacement of desktops with laptops
and we have improved the ease with which resources can be
accessed remotely;
> we launched an app that enables employees on maternity
or paternity leave to stay in touch and easily access
personalised advice and information; and
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> we improved access to our learning materials through a
mobile platform which can be accessed from personal
devices, supporting the development of colleagues without
the restriction of being in the office.
> increase job sharing through the establishment of a flexible
working register; and
> continue to upgrade our IT to enable more colleagues to
work flexibly.
Meeting the Charter commitments
I am responsible and accountable for gender diversity and
inclusion at Virgin Money. A gender-balanced workforce is
good for business, customers, profitability and workplace
culture. To meet our Charter commitments:
> we have committed to achieve 50:50 gender balance
(within a 10% tolerance) throughout the business by 2020;
Removing barriers
> enhance the skills of our future business leaders through
gender balanced development programmes;
> establish mentoring and coaching support for women
who are seen as being potential successors to Executive
Committee roles, targeting improved balance at a senior
level across all business areas;
> we will publish our progress against our 50:50 target
> offer maternity mentoring for all colleagues following a
annually; and
successful pilot in 2016; and
> we have linked part of annual performance related pay to
commitments to promote gender diversity for all members
of the Executive Committee.
> develop insight and build confidence through our ‘Gender
Agenda Network’, including events to profile and discuss
the key issues relating to fairness and inclusion.
The last commitment reflects the fact that having a fairer
gender balance should be addressed as a business issue
and rewarded as such. As the CEO one of my five personal
objectives in 2016 was to lead the business towards fairness,
equality and balance across gender and the other diversity
categories. As a result, any bonus that I receive in respect
of 2016 business performance will reflect the progress
that we have made.
Priorities for 2017
Looking ahead to 2017 we intend to make further progress
and we will continue our focus on management capability, a
flexible working culture and identifying and removing barriers
to fairness, equality and inclusion within the business. In
particular, we will:
Management capability
> set bonus targets for all senior leaders to improve
gender balance;
> extend ‘unconscious bias’ training to all people managers;
> have a formal requirement for a gender mix in all interview
panels and candidate shortlists; and
> include diversity training as part of preparing colleagues to
undertake people management duties.
Flexible working culture
> promote flexible working arrangements – for example,
where possible we will commit to any full time colleague
who is able, to work from home one day each week;
I believe that it is important to be held to account to deliver
the Charter commitments both at Virgin Money and across
the financial services industry. We will continue to report on
our progress in the years ahead, both within our annual report
and on our website and supplement this with disclosure and
an explanation of our April 2017 gender pay gap in the first
half of 2017.
I will continue to champion HM Treasury’s Women in Finance
Charter and I encourage all financial services companies to
sign up to its recommendations.
Jayne-Anne Gadhia CBE
Chief Executive
27 February 2017
28 I Virgin Money Group Annual Report 2016
Women in Finance Charter
Reporting gender balance
Senior management (including CEO) gender balance
The table below shows progress against our stated aim of
achieving a 50:50 gender balance (within a 10% tolerance)
throughout the business by 2020:
1 8 %
22 %
%
2
8
8 %
7
%
0
5
5
0
%
Level
Reward
Group
Headcount %
Male
2016
Male
2015
73%
Female
2016
Female
2015
27%
27%
Executive
Exec 1
73%
2015 baseline
2016 progress
2020 target
Exec 2
79%
83%
21%
17%
Management Band A 78%
82%
22%
18%
Non
Management
Band B 57%
60%
43%
40%
Band C 66%
65%
34%
35%
Band D 48%
48%
52%
52%
Band E 25%
26%
75%
74%
We support the Hampton-Alexander report
recommendation for companies to disclose the gender
balance of the management group comprising the
Executive Committee and their direct reports (excluding
personal assistants). As at 1 January 2017, this group
comprises 43 males and 19 females – 31 per cent female
representation.
The full year 2016 gender breakdown, on a statutory
basis, is as follows:
Gender
Male
Female
Male
2016
Number
5
3
114
Female
31
Male
Female
1,381
1,758
2016
%
62.5%
37.5%
78.6%
21.4%
44.0%
56.0%
Board
Senior
management
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CEO)
All
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The start line for the Virgin Money Giving Mini London Marathon.
Photo: Virgin Money London Marathon
30 I Virgin Money Group Annual Report 2016
Market overview
As a UK retail bank we are focused on
serving domestic customers and continue
to support and benefit from the robust UK
economy and housing market.
UK economy
The UK economy showed considerable momentum in the first
half of the year and has shown significant resilience since.
The vote to leave the European Union initially cast a shadow
over the country’s growth prospects and its position in the
global economy.
Despite the volatility, uncertainty and fears of a recession in
the immediate aftermath of the referendum, the Office for
National Statistics (ONS) estimated that the economy grew
by 0.6 per cent in the fourth quarter of 2016, with robust
consumer demand and the expansion of the services sector
underpinning the economy. The UK economy grew by 2 per
cent in 2016, down from 2.2 per cent in 2015.
Given the period of uncertainty after the EU referendum, the
Bank of England announced a package of measures in August
2016 to support the economy, including a cut in the Bank Base
Rate to the historic low of 0.25 per cent.
To help reinforce the transmission of the rate cut and ensure
that households, firms and the real economy would benefit,
the Monetary Policy Committee (MPC) launched the Term
Funding Scheme (TFS) to provide funding for banks at interest
rates close to Bank Base Rate.
Supported by the measures announced by the MPC and more
positive economic activity indicators, financial conditions and
asset prices recovered from the deterioration seen straight
after the Brexit vote and shored up consumer confidence.
UK unemployment fell to 1.6 million in December 2016 – the
lowest level since September 2005. The number of people in
jobs remains at its highest ever level of 31.8 million.
Although the UK economy performed better than expected
after the EU referendum, economic prospects are likely to
remain uncertain until a clear picture emerges regarding Brexit
plans and future trading arrangements.
Headwinds to economic growth include higher inflation and
stagnant wage growth. According to the ONS, rising air fares
and food prices helped to push the annual rate of Consumer
Prices Index (CPI) inflation to 1.6 per cent in December 2016,
its highest rate since July 2014. Consumer-led growth in the
UK economy is likely to be tempered by higher inflation and
growing household debt weighing on consumer spending.
As a UK retail bank focused on serving domestic customers
the decision to exit the EU does not directly impact on
our business. We have however, implemented monitoring
activities and established contingency plans to mitigate
against a deterioration in the macro-economic environment,
should it materialise.
Based on the HM Treasury consensus view, which we use and
consider in our strategic planning, we believe the most likely
outlook is slightly slower GDP growth in 2017, compared
to 2016. The current consensus for 2017 GDP growth
is 1.4 per cent.
Housing and mortgages
During 2016, household spending remained resilient and the
housing market was stable.
The Council of Mortgage Lenders (CML) estimates that
gross mortgage lending for 2016 was £245 billion, an 11 per
cent increase on 2015 and the highest annual gross lending
figure since 2008.
The resilience of the UK economy, strong employment levels
and low mortgage rates continue to support customer
affordability. Developments in the housing market and
consumption are closely linked given decisions to consume or
buy property are driven by common factors such as confidence
and income growth.
The current benign environment, with lower-for-longer
interest rates and rising house prices, combined with the
consistent application of our prudent underwriting criteria,
contributed to our low arrears performance and low cost
of risk in 2016.
The Government’s housing agenda is targeting several key
segments – including shared ownership and starter homes.
This will give supply-side support to stock and transaction
growth. The CML expects gross lending of £248 billion in
2017, which reflects general economic uncertainty as well as
regulatory changes in the housing and mortgage markets.
Buy-to-let transactions may cool slightly in 2017 given the
changes to the tax regime, both those implemented, such
as the extra 3 per cent in stamp duty from April 2016, and
forthcoming changes to mortgage interest tax relief from
April 2017. While lenders have tightened underwriting
practices and affordability criteria recently, the fundamental
consumer demand for rented accommodation remains strong,
and this will continue to underpin this segment of the market.
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Overall, we anticipate house purchase transactions to remain
broadly flat, remortgage activity to grow as customers
take advantage of price incentives to get a better deal and
buy-to-let to see modest growth, primarily as a result of
remortgage activity.
Savings
During 2016, the UK savings market continued to grow. There
was a substantial increase in activity immediately before and
after the EU referendum, as households held more savings to
protect against future uncertainty.
The potential for higher inflation, lower employment levels,
and subdued wage growth is likely to put pressure on
household disposable incomes which could impact savings
levels in 2017.
Government policy, including increased ISA limits, the new
personal savings allowance, Help to Buy ISA and reduced
pension tax relief should continue to increase the relative
attractiveness of cash savings.
The lower-for-longer interest environment is challenging for
savers. We take our responsibility to our savings customers
very seriously and aim to offer them both competitive and
fair rates in the context of prevailing market conditions.
V
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32 I Virgin Money Group Annual Report 2016
Business model and strategy
Our business model
Our ambition to make 'everyone better off' is at the heart of our business model. By
leveraging our strategic assets and capabilities we aim to deliver good value to our
customers, treat colleagues well, build positive and mutually beneficial relationships with
our corporate partners, make a positive contribution to society and deliver solid double-
digit returns for shareholders.
Company, Customers, Colleagues,
Corporate Partners and Community:
> Our powerful brand and EBO ethos differentiate
us strongly in the market. We are well
positioned to continue disrupting the market
and compete effectively with the major
incumbent banks.
> Our experienced management team and highly-
engaged colleagues underpin our differentiated
approach to banking.
> We continue to protect our unique position as
a low risk UK retail bank, unburdened by legacy
conduct issues. As a result, we aim to offer
good value, straightforward and transparent
products, supported by prudent underwriting
and outstanding customer service.
> Our customers want to be able to access our
products when, where and how they like and
our focus on constantly improving our digital
journeys across all platforms reflects this.
> We continue to protect our high-quality
balance sheet. The application of strict
underwriting and our data driven approach
to risk management supports controlled
and high-quality asset growth. We are
unburdened by legacy conduct issues that
continue to weigh down other UK banks.
> Our size and scale is a competitive advantage.
We are big enough to compete strongly and
take our planned share in our core markets
and more agile than the major banks. Our
strategic commercial approach and agility
allows us to optimise business volume and mix
and selectively target growth opportunities
in specific value accretive market segments,
according to customer needs and prevailing
economic and market conditions.
> We benefit from ongoing operational leverage. Strong cost
discipline, operational efficiency and leverage minimises cost
growth. Maximising operational leverage creates value for
everyone – it flows through into pricing efficiency, shareholder
returns, our capacity to invest in good causes and the
sustainability of our business model.
> Our EBO culture sustains a virtuous circle based on a commitment
to the communities in which we work and raises awareness of the
Virgin Money brand and business as a force for good.
Core strengths of our operating model
BALANCE SHEET
STRENGTH
POWERFUL BRAND
WITH MASS APPEAL
OPERATIONAL LEVERAGE
& COST DISCIPLINE
STRONG FOCUS ON EBO
CULTURE & COLLEAGUE
ENGAGEMENT
SCALE &
COMMERCIAL
AGILITY
DATA DRIVEN RISK
MANAGEMENT
•
y
o m p a n
C
Custom
ers
•
EBO
•
C
o
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p
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a
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p
a
rtners • C o m m u
C
o
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l
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a
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u
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s
•
nities
STRAIGHTFORWARD
& TRANSPARENT
PRODUCT DESIGN
LOW RISK
UK RETAIL BANK
MUTUALLY BENEFICIAL
PARTNERSHIPS
CUSTOMER-FOCUSED
OUTCOMES
VIRGIN MONEY GIVING
& VIRGIN MONEY
FOUNDATION
MULTI-CHANNEL
DISTRIBUTION
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Our strategy
Progress in 2016
Strategic intent
Continued to deliver strong growth across core markets
Growth
We have:
Delivering sustainable growth
Delivered a strong gross mortgage lending performance of £8.4 billion,
12 per cent higher than in 2015, and a net lending performance of £4.3
billion, 20 per cent higher than 2015;
Achieved 17 per cent growth in mortgage balances to £29.7 billion;
Achieved 55 per cent growth in credit card balances, representing
a 3.5 per cent share of the £68 billion card market;
Increased deposit balances by 12 per cent to £28.1 billion, demonstrating
the strength of our franchise; and
Increased our customer base by 15 per cent to 3.3 million customers.
We will continue to grow our customer base and balance sheet
strongly within our existing risk appetite. We focus on prime
mortgage business and target 3 to 3.5 per cent of high-quality
gross mortgage lending, ahead of our market share of stock. We will
maintain the application of strict underwriting standards to protect
asset quality as we progress towards our target of £3 billion credit
card balances by the end of 2017. We will continue to increase the
penetration of our insurance, investment and financial services to
our existing customer base, acquire new customers and explore
the significant potential for further growth in this business line.
Our customers want to be able to access our products when, where
and how they like and our focus on constantly improving our digital
capability across all platforms reflects this.
Maintained excellent asset quality
Quality
We have:
Maintained the excellent quality of our mortgage portfolio:
> Mortgages over three months in arrears of 0.15 per cent compared
with latest industry average of 1.00 per cent
> The average loan-to-value of the overall portfolio is now 55.4 per cent.
> The average loan-to-value of our buy-to-let book is now 54.8 per cent
Maintained the high quality of our credit card book:
> Credit card balances two or more payments in arrears of 0.78 per cent,
compared with latest industry average of 2.4 per cent
> Maintained our low cost of risk at 13bps reflecting excellent asset quality.
Maintaining our high-quality balance sheet
Maintaining our high-quality balance sheet is at the core of our
strategy. Our approach to risk management is based on rigorous
and continuous data analysis and takes a far-sighted approach
to asset quality, including strict affordability metrics and prudent
underwriting. Supported by our risk appetite and strong risk
culture, we maintain stringent control over a range of criteria
including, credit scoring, customer indebtedness, geographic
concentration, business mix and loan-to-value ratios for
mortgages. We are proud of our unique position as a customer-
focused, low risk UK retail bank, unburdened by legacy conduct
issues and we will continue to protect that position and provide
our customers with good value, straightforward and transparent
products, supported by outstanding customer service.
Delivered a 33 per cent increase in underlying PBT
Returns
Improving returns to shareholders
Our disciplined pursuit of growth and continuing operational
leverage are at the heart of our strategy to generate strong
and sustainable returns for shareholders. We will maintain a
consistently low appetite for risk, continue our resolute focus
on cost management and operational efficiency and explore
opportunities for further growth in our financial services business.
We have:
Reduced our average weighted cost of funds to 130bps from 143bps in
2015, resulting in a net interest margin of 160bps for 2016;
Limited underlying cost growth during the year to 1 per cent, reflecting
our operating leverage and stringent cost management;
Improved our cost:income ratio to 57.2 per cent, from 63.5 per cent in 2015;
Delivered a 33 per cent increase in underlying profit before tax as a result
of strong growth in lending, excellent asset quality and strong customer
satisfaction and retention;
Delivered statutory profit before tax of £194.4 million, compared to
£138.0 million in 2015; and
Strengthened our return on tangible equity from 10.9 per cent to 12.4 per
cent as a result of the successful delivery of our business plan for 2016.
34 I Virgin Money Group Annual Report 2016
Delivering to our stakeholders
Customers
We always look to build strong, lasting
relationships with our customers by
treating them as individuals not numbers,
delivering a consistently high standard of
service and continually striving to exceed
their expectations.
Aim
Our aim is to be positively different from the major banks and
traditional providers by offering straightforward products
with fair and transparent pricing, supported by the delivery of
outstanding customer service.
Achievements in 2016
> delivered growth in customer numbers across every product
category and increased our overall customer base by
15 per cent to 3.3 million;
> attracted younger and more affluent customers, driven by
our credit card, insurance and current account businesses
and saw consistently strong customer growth in our
mortgage and savings businesses;
> delivered superior customer satisfaction and advocacy with
an overall Net Promoter Score (NPS) of +29, and resolved
99 per cent¹ of complaints within eight weeks;
> opened a new Lounge in Sheffield, in July 2016. The NPS for
our award-winning Lounges was +86;
> won four credit card awards at the uSwitch awards,
including Best Overall Customer Service, Best Application
Process and Best for Balance Transfers;
> won Best Use of Voice of the Customer (VoC) at the
prestigious 2016 Engage Awards;
> winner of the UK Business Awards in the customer centric
organisation category for our VoC initiatives; and
> recognised by the Reputation Institute as one of Britain’s
most trusted banks;
1Excluding speculative PPI complaints.
Priorities for 2017
> continue to invest in building our customer service
capability and maintain a culture where customer service
is a priority;
> empower colleagues to deliver market-leading
customer satisfaction;
> continue to provide straightforward, transparent products
that result in positive outcomes for customers;
> continue to recognise issues relating to accessibility,
financial inclusion and responsible lending; and
> continue to develop our digital strategy and capability
for customers.
Award winning year
“Virgin Money is the perfect case study to
highlight what can be achieved when an
organisation and all of its colleagues are
focused on listening and responding to the
Voice of the Customer. Virgin Money is more
than deserving of the accolades it has received
from the Engage and UK Business Awards.”
John O'Hara
President of NICE - EMEA
Virgin Money Group Annual Report 2016 I 35
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Financial inclusion
Opening a Basic Bank Account can be the first step towards
financial inclusion for many people. As part of our ambition to
make ‘everyone better off’ we launched the Virgin Essential
Current Account (ECA) in 2015. The ECA supports financial
inclusion by setting a new standard for Basic Bank Accounts
in the UK with no unpaid item fees and a fair rate of credit
interest. It is a free basic bank account designed to help our
customers stay in control of their money. The performance
of the ECA was particularly strong during the year. We almost
tripled new accounts opened, compared to 2015. We work at
a local level with partners such as ScotCash, Citizens Advice
Bureau, the Job Centre and a number of debt charities to raise
the visibility of the ECA. We will continue to build on this and
will target both local and national partners in 2017.
Virgin Money Lounges
Virgin Money Lounges continue to deliver strong customer
satisfaction with an NPS of +86 and we opened our seventh
Lounge in Sheffield in the second half of the year. Stores
co-located with a Lounge broadly outperform the overall
network based on sales performance.
Customer satisfaction (NPS)
Strong and improving customer advocacy, with an increase
to +29 in our overall NPS in 2016.
Net Promoter Score (NPS)
2016
2015
2014
+19
+16
+29
We measure customer satisfaction using the industry
standard Net Promoter Score. We also use internal customer
dashboards, which provide monthly information about
customers’ experiences and opinions relating to our products
and services. We aim to continually improve our customer
service, experience and advocacy.
Virgin Money Stores
co-located with a Lounge
broadly outperform
the network
50,000 visitors
per month
Free Wi-Fi, iPads,
Newspapers and
Magazines
Exclusive for
Virgin Money
customers and
community groups
7 Lounges
V
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36 I Virgin Money Group Annual Report 2016
Delivering to our stakeholders
Colleagues
Virgin Money's success is built firmly on the
commitment, skill and attitudes of all our
people and our shared purpose of building
a better bank which will make ‘everyone
better off’.
Aim
Our colleagues are integral to our success and it is through
their strong engagement and advocacy that we are able to
deliver a strong and sustainable business performance. We aim
to provide an environment which nurtures a high performing,
diverse and committed workforce, enabling all colleagues to
reach their full potential.
Achievements in 2016
Investing in colleague development
> our ‘Future Business Leaders’ talent acceleration programme
created a pipeline of talent for leadership succession, winning
the Personnel Today award for Talent Management; and
> we made our online Learning Lounge accessible from
any device to improve colleague access to learning and
development solutions.
Building colleague commitment
> we maintained strong colleague engagement with an overall
engagement score of 81 per cent, which benchmarks strongly
against UK high performing companies; and
> we improved transparency on our approach to determining
pay and bonus outcomes through personalised ‘Total Reward’
statements, a ‘Pension Planner’ and a series of roadshows.
Creating a diverse workforce
> we held our first ‘mental health awareness week’, showcased
the work of Heads Together, our Corporate charity for
2016/17, and we achieved the new Disability Confident
accreditation; and
> we committed to matching flexible working arrangements
for senior positions, to ensure those joining the business can
balance their work/life commitments.
2016 gender pay gap analysis
(cid:21)
(cid:25)
(cid:8)
(cid:8)
(cid:22)
(cid:25)
(cid:22)
(cid:26)
(cid:8)
(cid:8)
(cid:28)
(cid:23)
(cid:8)
(cid:22)
(cid:22)
(cid:24)
(cid:20)
(cid:8)
(cid:8)
(cid:23)
(cid:26)
(cid:25)
(cid:26)(cid:8)
Lowest
Quartile 2
Quartile 3
Highest
0.6% pay gap
1.7% pay gap
2.5% pay gap
13.8% pay gap
Further information on how we aim to achieve gender parity
throughout the business - a 50:50 split - by 2020 can be
found on page 26.
2016 gender pay gap
Virgin Money welcomes the UK government initiative to improve
pay equality through collecting and reporting gender pay data,
as at April each year. Whilst these requirements come into effect
from April 2017, we are voluntarily disclosing our gender pay gap,
as at April 2016.
We have reviewed gender pay across the Company in 2016 and
are confident men and women are paid fairly for the same and
similar jobs. Virgin Money’s mean gender pay gap in April 2016
was 36 per cent (median 39 per cent). As explained by the Chief
Executive on page 26, the gender pay gap at Virgin Money is
driven primarily by two factors:
> The under representation of women in the senior
leadership team; and
> The under representation of men in more junior roles.
Consistent with the regulations we show below the gender
distribution across four equally sized quartiles based on pay.
We are committed to addressing gender imbalance and the
resulting gender pay gap.
Priorities for 2017
Investing in colleague development
We will continue our investment in colleague development through:
> our new Apprenticeship Programme, which creates career
development opportunities for colleagues and provides a
diverse pipeline of entry level talent;
> our ‘My Career’ programme, which provides colleagues with
the ability to develop skills and expertise for both their current
role and possible future roles;
> our ‘Coaching Academy,’ which provides all colleagues with
access to targeted coaching and mentoring to accelerate the
development and progression of under-represented groups;
This illustration divides staff into four groups based
on pay and discloses the gender balance in each
quartile. There are significantly more women in the
lowest quartile and the average pay for men and
women is the same. In the highest quartile there
are more men and the average gender pay gap is
13.8 per cent.
Virgin Money Group Annual Report 2016 I 37
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> our ‘Me As A Manager’ programme, which develops people
managers and aspiring people managers to create the right
conditions for all colleagues to flourish; and
> our ‘Me As A Leader’ programme, which builds senior team
capability through the development of key skills such as
personal resilience and a growth mind-set.
Building colleague commitment
Our annual colleague survey told us that we need to listen more
carefully to all minority groups to understand their needs better.
We will continue to seek higher levels of engagement from all
colleagues through:
> our colleague Affinity Group, which will be a catalyst for
colleagues to come together to identify and support minority
colleague interests;
> we will work with external experts to ensure we take action
that will make a real difference to minority colleague
interests; and
> we have appointed Executive sponsors for each minority
group to ensure that debate and action is championed at the
highest level:
- Tim Arthur, Creative Director (LGBT+)
- Marian Martin, Chief Risk Officer (Ethnicity)
- Hugh Chater, Chief Commercial Officer (Disability)
Creating a diverse workforce
We believe a diverse workforce will drive better business
outcomes, bring different perspectives to our decision making,
and create a colleague base which is more representative of
broader society. Colleague engagement and performance will
be enhanced if colleagues feel able to be themselves at work,
in an inclusive environment which promotes both physical and
mental wellbeing.
In 2016 we improved the representation of ethnic minority and
LGBT+ colleagues within the company. To maintain this progress
in 2017, we will:
> set targets and deploy recruitment strategies to drive a
greater diversity of candidate interest in roles;
> develop all our people managers to value and enable diversity
and be mindful of their own unconscious bias;
> broaden our use of technology to support and enable flexible
working and improve contact with absent colleagues; and
"We are passionate about creating a bank that
reflects the diversity of broader society and
engages people of all backgrounds equally.
During 2016, we improved the diversity of our work
force and narrowed the difference in engagement
levels of our ethnic minority and LGBT+ colleagues
to the Company average. We remain committed
to improving both greater diversity and equal
inclusion across the Company in 2017.
We will continue to support the British Black
Business Awards which recognise and celebrate
the outstanding achievements of black people
in UK business. In 2017, this partnership will
extend to delivering a pan-industry programme
to improve BAME representation at senior levels.
We will also be a founding partner of EMpower,
which will promote equality of opportunity and
inclusion through the empowerment of ethnic
minority employees.
Support of our LGBT+ community will continue
through our new Affinity Group, ongoing
participation in Pride events across the UK, and
partnerships with OUTstanding, the Scottish
Business in the Community Network and
Stonewall.
We intend to be early adopters of the UK
government’s new gender pay gap reporting
requirements and support the findings of both
the Hampton-Alexander and Parker reports, which
advocate action to generate improved gender
and ethnic equality in business.
We will continue to celebrate difference and work
to ensure every colleague feels equally valued
and able to thrive at Virgin Money."
> deliver an online portal where colleagues can receive greater
support in relation to physical and mental wellbeing.
Matt Elliott
People Director, Virgin Money
Initiatives relating to gender equality are covered in the Women
in Finance update on page 26.
38 I Virgin Money Group Annual Report 2016
Delivering to our stakeholders
Corporate partners
We look to partner with businesses that
genuinely understand and share our
philosophy of making ‘everyone better off ’.
Aim
We aim to maintain our strong track record in managing
mutually beneficial relationships with corporate partners
in order to complement our own business and core banking
capabilities with our partners’ technical product expertise and
infrastructure.
Achievements in 2016
> delivered a new retention platform for intermediaries
and our direct mortgage business through our innovative
‘Mortgage Lab’. Net mortgage lending increased by 20 per
cent to £4.3 billion, driven by both strong gross lending and
improved customer retention during the year;
> won the ‘Best Lender for Partnership with Mortgage Club’
at the L&G Mortgage Club annual awards for the second
year in a row and our intermediary NPS improved from +40
in 2015 to +55;
> won ‘Best Intermediary Lender Award’ at the Mortgage
Finance Gazette Awards;
> received 'Five Stars' in the Mortgage category at the
Financial Adviser Service Awards;
> won the ‘Innovation Culture’ Award at the Corporate
Entrepreneur Awards and the ‘Innovation Award’ at the
Mortgage Finance Gazette Awards for our Mortgage Lab;
> won the Best Direct Travel Insurance provider at the
Your Money Awards and we were proud to provide travel
insurance to the UK Invictus Games Team when they
competed in Florida; and
Priorities for 2017
> continue to innovate and deliver outstanding levels
of service to our network of professional mortgage
intermediary partners;
> continue to strengthen relationships with, and oversight of,
our corporate partners;
> enhance our customer communication strategy through our
print and communications partner, Communisis,
with a focus on enhancing our digital communication
capabilities; and
> continue to strengthen our non-interest income product
lines, including the launch of a new Life Insurance
proposition and creating broader awareness of our Travel
Money and International Money Transfer services.
Strategic corporate partners
We operate strategic partnerships that enable us to combine
the Virgin Money philosophy, brand and core banking
capabilities with partners’ technical product expertise and
infrastructure. We also partner with a number of providers
to support our non-interest income product lines. This
is particularly relevant when it is more efficient for us to
partner with an established provider, than to build our own
infrastructure.
Modern Slavery statement
Virgin Money has a zero tolerance towards slavery, servitude,
forced labour and human trafficking (Modern Slavery) and is
committed to conducting business with honesty and integrity
and treating everyone with dignity and respect. The review
of our existing policies, processes and contracts showed that
they embrace the principles of the act and we work closely
with our partners and suppliers to ensure this is the case.
> signed a four-year deal with Manchester United Football
Club to become its official UK retail financial services
partner. Our Champions Bond was shortlisted at the
Financial Innovation Awards and the partnership has been a
strong commercial success.
We will continually review our policies, processes and controls,
improve the mapping of our supply chain to identify areas of
risk and develop key performance indicators (KPIs) to measure
the effectiveness of our approach. To read our Modern Slavery
statement in full please visit virginmoney.com.
Virgin Money Group Annual Report 2016 I 39
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"Virgin Money continues to put the
Intermediary at the heart of everything they
do. They have invested heavily in the right
systems and processes to make it easier for
an Intermediary to do business and have been
working with brokers in their Mortgage Lab to
make sure that this happens every time."
Stephen Smith
Director, Housing Partnerships
Legal & General
“Mapfre Asistencia is proud to be a long
standing partner of Virgin Money for the
delivery of the Travel Insurance proposition.
We’ve shared a strong and profitable
relationship over several years, which
has delivered a market leading customer
proposition and strong growth to both parties.
Virgin Money’s EBO philosophy and customer
focus mirrors that of Mapfre Group and we
continue to enjoy a successful and transparent
trading relationship.
Our partnership with Virgin Money is our
pre-eminent market relationship and we look
forward to extending that relationship and
continuing to support the business in its
exciting plans for development and growth.”
Jair Marrugo
Managing Director UK & IRE
Mapfre
40 I Virgin Money Group Annual Report 2016
Delivering to our stakeholders
Communities
Our community activity raises awareness
of the Virgin Money brand and business
as a force for good and covers four
key areas; fundraising; investing in
education, employability and enterprise;
supporting local communities, and
supporting colleague engagement in their
local communities.
Aim
We are committed to supporting the communities in which we
work to help them flourish, both socially and economically.
Achievements in 2016
> £92 million was donated to charities through Virgin Money
Giving, our not-for-profit online donation service, taking
the total raised for charities since its launch in 2009 to over
£500 million;
> runners in the 2016 Virgin Money London Marathon raised
£59.4 million for charity, up from £54.1 million in 2015,
setting a new world record for an annual, single day charity
fundraising event for the tenth successive year;
> the Virgin Money Foundation, launched in August 2015,
awarded grants totalling almost £1 million in 2016 to
organisations in the North East of England working in the
areas of housing and homelessness and youth employment;
> the national roll-out of the ‘LifeSavers’ financial education
programme commenced. With Virgin Money’s financial
support it will help 30,000 children learn more about money
over the next three years. The ‘LifeSavers’ programme
supports primary schools to embed financial education
within the whole school curriculum and encourages parents
and the wider community to get involved in children’s
financial education;
> over 350 schools and over 17,000 young people participated
in our Make £5 Grow programme, and the launch of a new
website extended the reach of the programme. Make £5
Grow is Virgin Money’s enterprise education programme
which aims to give young people aged between nine and
eleven years old the experience of starting a small business
using a £5 loan from Virgin Money;
> over 48,000 young people participated in the 2016 ‘Fiver
Challenge’, delivered by Young Enterprise and funded
by Virgin Money. The ‘Fiver Challenge’ is a national
competition for primary schools aimed at introducing the
world of enterprise to young people;
> Virgin Money participated in two new Business in the
Community programmes; a UK-wide initiative to promote
the benefits of employing ex-servicemen and women,
and the National Action Plan for Responsible Business
in Scotland; and
> colleagues volunteered 1,679 days to good causes.
Priorities for 2017
> continue to invest in Virgin Money Giving to help charities
and fundraisers raise more for good causes in the UK;
> extend the reach of the Virgin Money Foundation beyond
the North East of England;
> continue to invest in a range of programmes which
support young people in developing financial and
entrepreneurial skills; and
> support colleagues engaging in local community projects.
Over £500 million
raised through Virgin Money Giving, since
launch in October 2009
Charity of the year
Chosen by colleagues, our Charity of the Year for 2015/2016
and the official charity of the 2016 Virgin Money London
Marathon was the NSPCC. The NSPCC is the leading
children’s charity fighting to end child abuse in the UK and
Channel Islands. They raised over £2.1 million through their
partnership with Virgin Money, including £218,933 raised
by Virgin Money colleagues. The money raised helped the
NSPCC’s Childline service to recruit and train more counsellors
to reduce waiting times and ensure they can provide support
to every child who needs them.
Our Charity of the Year for 2016/2017 and the official
charity of the 2017 Virgin Money London Marathon is the
‘Heads Together’ campaign, spearheaded by The Duke and
Duchess of Cambridge and Prince Harry to end stigma around
mental health.
Virgin Money Group Annual Report 2016 I 41
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“The NSPCC was delighted to raise over
£2 million from the 2016 Virgin Money
London Marathon. The money raised is
going towards a project to transform our
Childline service. The money raised by our
incredible marathon runners will pay for
our trained volunteer counsellors to answer
500,000 children’s calls for help to Childline.
Thank you to Virgin Money for giving us this
fantastic opportunity to make a difference
to the lives of so many vulnerable children.”
Peter Wanless
Chief Executive
NSPCC
Kenenisa Bekele at the Virgin Money London Marathon
Photo: Virgin Money London Marathon
42 I Virgin Money Group Annual Report 2016
Delivering to our stakeholders
Environment
At Virgin Money we are committed
to taking positive action to eliminate
the impact our activities have on the
broader environment and target Net Zero
Greenhouse Gas (GHG) Emissions by 2030.
Aim
Our aim is to protect the environment by conducting our
business in a sustainable, ethical and responsible way. We will
contribute towards a lower carbon, more resource efficient
economy by measuring, monitoring and controlling our
consumption of resources.
Achievements in 2016
> finalised a transparent methodology to define total GHG
Emissions for the Group;
> engaged with the Major Energy Users Council, Energy
Savings Trust and Business in the Community to help
develop our strategic proposals and made progress against
our plan to achieve Net Zero GHG Emissions by 2030 by:
- completing the deployment of modern desktop and
mobile software to all colleagues, enhancing both
efficiency and security;
- commencing a programme of removing over 200 servers
from our infrastructure; and
- securing 100% renewable energy for electricity contracts
within our direct control.
> raised awareness of environmental initiatives across the
Company to ensure that all colleagues are empowered
to make a difference. This included the provision of new
tools such as ‘Skype for business’ which reduces the
need for travel;
> ensured all suppliers understand the part they can
play in reducing the impact their operations have on
the environment by incorporating an environmental
assessment into our procurement process; and
> completed our first submission to the Carbon Disclosure
Project (CDP) and achieved a C rating, a solid base from
which to progress.
Priorities for 2017
> finalise the strategy to achieve Net Zero GHG
Emissions by 2030;
> continue to reduce the need for unnecessary business travel
and be more conscious regarding the way we allocate and
consume our resources;
> continue the streamlining of our internal processes and
promote the behavioural changes required to drive a
reduction in energy use;
> incorporate further environmental considerations into the
assessment process for all new contracts; and
> engage CDP to help us to identify areas for improvement
in our supply chain and further reduce our impact on
the environment.
Managing our emissions
The Group is required to report on GHG emissions under the
Companies Act 2006 (Strategic Report and Directors’ Report)
Regulations 2013 (the Regulations). The Group follows the
principles of the GHG Protocol Corporate Standard and the
Department for Environment, Food and Rural Affairs (DEFRA)
Voluntary Reporting 2012 Guidelines (the Guidelines) to
calculate its emissions in Scope 1, 2 and 3.
We have reported comprehensive data on GHG emissions
within Scope 1 and 2, and business travel within Scope 3,
since 2014. During 2016, we have continued to improve our
performance and reduce our total GHG emissions.
Scope for disclosure
> Reported Scope 1 emissions: cover emissions generated
from the gas and oil used in all buildings from which
the Group operates; emissions generated from Group-
owned vehicles used for business travel; and fugitive
emissions arising from the use of air-conditioning and
chiller/refrigerant equipment to service the Group’s
property portfolio;
> Reported Scope 2 emissions: cover emissions generated
from the use of electricity in all buildings from which the
Group operates; and
> Reported Scope 3 emissions: relate to business travel
undertaken by all colleagues using rail, private vehicles,
hired vehicles, contracted taxi services and air travel.
Virgin Money Group Annual Report 2016 I 43
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Independent assurance
Although not required by the Regulations, we appointed
PricewaterhouseCoopers LLP (PwC) in 2016 to undertake a
limited assurance engagement under the ISAE 3410 assurance
standards for Scope 1 GHG data highlighted in this report with
a (*). Their assurance report is available on virginmoney.com¹.
Use of resources
The table below shows actual consumption in 2016 compared
with 2015.
Energy
Travel
Waste
Stated in Gwh
% from renewable sources
Total miles travelled
Tonnes produced
% sent to landfill
2016
19.6
56%
5.7m
567.6
2%
Restated
2015
20.2▲
51%
6.4m
532.9
6%
Water
Cubic metres per FTE
12.7
18.7
Energy – % renewable energy use stated for office, Store and Lounge locations.
Travel – includes all air, rail, taxi and public transport processed through either
our corporate travel provider or claimed through personal expenses.
Waste – includes trade and secure waste for offices, Stores and Lounges.
Water – consumption is for metered sites only, the 2015 leak which was highlighted
at the main office site in Gosforth has been fully resolved.
▲ Identifies figures which have been restated.
Omissions
The data gathering process for figures within our Scope 1
and 2 reporting is continuous and calculated using the most
accurate information available at the time. If more accurate
data becomes available or updated CO2 emission factors are
applied, this may lead to a restatement of data. As a result of
a comprehensive energy consumption review at our Gosforth
site performed during 2016, we have restated the Scope 2
comparative disclosure.
Compliance with the Regulations
We have achieved full compliance with the Regulations for
the whole of its property portfolio. Estimated emissions relate
to energy consumption in two properties where the supply
is controlled by the landlord and the Group is subsequently
recharged. In these properties, energy costs are allocated on a
floor area basis.
Fugitive emissions arise from the use of air conditioning and
chiller/refrigerant equipment to service our property portfolio.
Leakage rate and emission factors from the Guidelines have
been applied to each asset on the register according to the
gas type used. This information is gathered and reported by
the Group’s maintenance supplier. The data is included within
the Scope 1 segment of the GHG table listed below.
GHG emissions CO²e tonnes
Scope
Scope 1
Scope 2
Scope 3
Total
2016
Restated
2015
1,753.8*
1,868.7
4,933.0
5,720.7▲
998.8
1,188.7
7,685.6
8,778.1
Intensity ratio
We have chosen to use an intensity ratio of GHG per Full Time
Equivalent (FTE). FTE is straightforward to calculate and verify
and also normalises consumption in a growing business. We
are encouraged by the reduction in this ratio in 2016.
Scope
GHG emissions per
average FTE
2016
2.66 tCO²e
Restated
2015
3.11 tCO²e
1 The level of assurance provided for a limited assurance engagement is substantially lower than a reasonable assurance agreement. A summary of the work PwC performed is included
within their assurance opinion. Non-financial performance information, GHG quantification in particular, is subject to more inherent limitations than financial information. It is important
to read the data in the context of PwC’s full statement and Virgin Money’s reporting guidelines available at virginmoney.com.
44 I Virgin Money Group Annual Report 2016
Risk overview
Risk management
Effective risk management is a core part of our strategy.
> Secured 3+ arrears levels were 0.15 per cent at the end of
The Board-approved risk appetite reflects our tolerance for
risk in pursuit of our strategic objectives. It is designed to
achieve an appropriate balance between risk and reward.
Risk appetite is embedded in the business through delegation
of authority from the Board to the Executive. Our risk
management approach is fully aligned with Board risk appetite,
regulatory requirements and industry good practice. Risks are
identified, managed and mitigated using our risk management
framework (see page 135).
We use a ‘Three Lines of Defence’ model which describes
clear accountabilities, appropriate segregation of duties and
effective independent assurance. The principal risks which
could impact the delivery of our strategy are outlined on
pages 48 to 51.
Risk culture
Our risk culture and values are aligned to our EBO philosophy
and emphasise accountability. A strong and independent Risk
function helps to ensure adherence to our risk management
framework. Our risk culture is founded on a clear articulation
of risk appetite, an effective governance structure, rapid
escalation of threats and the sharing of information
across the Group.
Risk as an enabler of growth, quality and
returns
As a UK retail bank we are focused on serving domestic
customers. We are subject to risks arising from macro-
economic conditions in the UK, geopolitical uncertainty and
new structural and regulatory changes which will come into
force over the next few years.
The way in which we manage risk through the economic cycle
is a core part of our strategy and an enabler of growth, quality
and returns. Our ongoing focus on maintaining a high-quality
balance sheet is supported by our prudent risk appetite and our
robust approach to risk management.
Achievements in 2016
The emphasis placed on protecting a high-quality balance
sheet, with focus on credit quality, was maintained in 2016.
The application of strict affordability requirements and
prudent underwriting standards across our mortgage and
credit card lending ensured that our lending continued to be
high quality and within our asset quality guardrails.
Credit
The high quality of our mortgage business is reflected in our
low arrears levels.
2016, compared to 0.22 per cent in 2015; substantially below
the latest Council of Mortgage Lenders industry average of
1.00 per cent. Additionally, the proportion of secured assets
classified as neither past due nor impaired improved by 0.1
per cent during 2016, to 99.1 per cent.
> Our impairment provision coverage improved to 11.4 per
cent during 2016, compared to 10.3 per cent in 2015.
> The consistent application of our lending criteria and robust
underwriting give us confidence that our mortgage book
would be highly resilient in the event of a downturn. In H2
2016, we further strengthened our lending criteria in relation
to buy-to-let lending.
> The portfolio LTV remained broadly stable at 55.4 per cent at
the end of 2016, compared to 55.0 per cent in 2015.
The quality of our credit card business was reinforced in 2016.
> Following the EU referendum, we further strengthened our
credit card underwriting standards in H2 2016. As a result,
86 per cent of new accounts during the year were in the high
or very high credit score range, reflecting the strong credit
quality of our cards portfolio.
> Unsecured book quality continued to improve with a 0.4
per cent increase in the percentage of the book currently
classified as neither past due nor impaired to 98.7 per cent.
Unsecured 2+ arrears levels continued to fall, reducing by
18 bps compared to 2015.
> Our low unsecured cost of risk of 1.7 per cent reflects a
rigorous approach to underwriting, account management
and credit decisioning, supported by the benign
economic environment.
Capital and funding strength
Maintaining a well-capitalised business supports stable
balance sheet growth, our credit rating and regulatory
requirements. Our capital structure is managed to ensure that
the business is well placed to react to current and forecast
economic and regulatory conditions, as well as material
downturns in the economy.
Our funding strategy is retail deposit led and we fund before
we lend. We hold high quality liquid assets (HQLA) appropriate
to our view of liquidity risks in the business and this level is
approved by the Board.
> We strengthened our balance sheet further with the
successful issuance of £230 million Additional Tier 1
(AT1) capital.
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> We maintained our strong capital position and, as at
31 December 2016, our Common Equity Tier 1 (CET1) ratio
was 15.2 per cent, our total capital ratio was 20.4 per cent
and our leverage ratio was 4.4 per cent, positioning us well
for continued growth.
> We completed two issues of Residential Mortgage Backed
Securities (RMBS), totalling £1.3 billion, which extended
our reach in the wholesale markets beyond Sterling and
Euro into US Dollars. Wholesale funding supplements our
core retail deposit base, extends tenor, ensures we have
appropriate diversification in the funding base and optimises
funding costs.
Priorities in 2017
Macro-economic environment
The outcome of the EU referendum in June 2016 has created
a period of economic uncertainty in the UK and Europe and
this is likely to continue until the UK’s exit strategy is clear.
Whilst we continue to see strong customer demand and no
evidence of material changes in customer behaviour, the
potential risks around inflation, a slowing housing market and
rising unemployment remain. We are subject to inherent risks
arising from macro-economic conditions in the UK, including
geopolitical uncertainty and the lower for longer interest
rate environment.
> During the final quarter of the year, we made three
> The current low interest rate environment is unprecedented
drawings from the Bank of England’s (BoE) Term Funding
Scheme (TFS) totalling £1.3 billion. This low-cost funding
creates additional lending capacity and supports our
overall funding plan.
> Our strong funding position is reflected in a liquidity
coverage ratio of 153.7 per cent as at 31 December 2016.
Regulatory change
> The findings from the Financial Conduct Authority’s (FCA)
final Credit Card Market Study were published during
2016. We endorsed these and will implement the limited
changes required for us to achieve full compliance with their
recommendations.
> We achieved compliance with the rules and guidance relating
to the FCA’s Cash Market Study, which came into force in
December 2016.
> The processes, controls and ongoing management training
required for the Senior Managers and Certification Regime
have been designed and implemented.
> Full compliance with the Deposit Guarantee Scheme
Directive was achieved and we received full regulatory
permissions under the FCA Consumer Credit
Sourcebook (CONC).
Cyber-crime
We have a well-developed Cyber Security Strategy to
manage the increasing risk of cyber-crime. In addition to
this, during 2016:
> We enhanced our Cyber Operations Centre, which monitors
suspicious activity in real time, and launched a new Security
Zone on our intranet, providing detailed security advice
to colleagues.
> We became members of the Global Cyber Alliance; a broad
international community of organisations working together
to tackle cyber-crime.
and as such further reductions to central bank rates or
rapid rises from current levels both represent risk to future
financial performance. We have an ongoing programme
of stress testing to assess our vulnerability to changing
macro-economic conditions. The results are used to inform
the strategic planning process and ensure that adequate
resources are available in the event of a downturn.
> 2017 is likely to bring further political uncertainty across
Europe and we remain alert to the business impact that
may have. We will continue to monitor key exposures and
regularly review earnings in light of the prevailing economic
outlook. We have implemented additional oversight
activities, alongside contingency plans, which are designed
to respond to and mitigate the impact of adverse macro-
economic conditions that may emerge.
Management of the credit card portfolio
During 2016, our credit card book grew substantially,
increasing our market share to 3.5 per cent. We will continue
to focus on strong credit management of these exposures,
particularly in light of the current uncertain economic
environment, where a rise in unemployment could result
in pressure on disposable incomes leading to increased
impairments. Although we are resilient to these risks as a
result of our strong asset quality, we will monitor this closely
in 2017, supported by our strong risk management and
analytical capability.
Macro-structural changes
Our strategic planning fully addresses the new structural
and regulatory changes which come into force over the next
several years. We will continue to work with our regulators as
requirements evolve. These changes include:
> Capital buffers: CRD IV introduced new capital limits
and buffers for banks, and includes a requirement to hold
CET1 capital to account for capital conservation and
countercyclical buffers. A capital conservation buffer of
46 I Virgin Money Group Annual Report 2016
Risk overview
Risk management
0.625 per cent was introduced on 1 January 2016. This
will increase each year to a maximum of 2.5 per cent in
2019, in line with regulations. The countercyclical buffer
applied to UK exposures is currently 0 per cent, however,
this could grow to a maximum of 2.5 per cent by 2019. We
understand our position and the strategic plan has been
assessed against this.
> Minimum Requirements for Own Funds and Eligible
Liabilities (MREL): will be fully phased in by 1 January 2022.
The BoE provided our MREL guidance, including transitional
arrangements, during 2016. Prior to 31 December 2019
MREL will be equal to our minimum regulatory capital
requirements. From 1 January 2020 until 31 December 2021,
MREL will be equal to 18 per cent of our risk-weighted
assets. This guidance has been fully reflected in our strategic
planning process.
> The Financial Services Banking Reform Act 2013: will
result in the ring-fencing of retail and commercial banking
operations to separate them from investment banking
activities. We are in the process of agreeing our detailed
ring-fence compliance plans with the Prudential Regulation
Authority (PRA) and do not anticipate any material change
to our structure or business model as a result.
> IFRS 9: will be implemented in 2018 and will result in
new calculations of expected credit loss and additional
disclosure requirements. We are in the process of
developing new models and business practices to meet
these requirements.
> EU legislation: the outcome of the EU referendum
introduces uncertainty in relation to regulation derived
from EU legislation. The material items of regulatory
change deriving from EU legislation include the EU Market
Abuse Directive, Payment Services Directive 2 (PSD2) and
General Data Protection Regulation (GDPR).
Regulatory change programmes
The delivery of the following regulatory change programmes
will be a core focus in 2017:
> FCA Asset Management Market Study: The FCA is
consulting on a package of proposed remedies designed
to improve the way asset management services
and products could work better for both retail and
institutional investors.
> General Data Protection Regulation: The General
Data Protection Regulation (GDPR) provides an updated
EU data protection framework to replace the existing
1995 Data Protection Directive (the Directive). We will
implement the changes required to ensure compliance
with the requirements of GDPR prior to its implementation
date in May 2018.
> Fourth Money Laundering Directive: The EU’s Fourth
Money Laundering Directive (4MLD) requires European
member states to update their money laundering laws
and transpose the new requirements into local law by
June 2017. We are working to ensure compliance with this
directive prior to its implementation date.
Cyber-crime
Cyber-crime remains a material risk for all banks and
we recognise the pace of change in the external threat
environment. We will continue to monitor this changing
external threat landscape and develop our capability to
protect against cyber-crime through enhancement of our
control environment.
Stable balance sheet growth
Our focus on asset quality and balance sheet stability will
continue as the business grows. Credit policy and decision
systems are regularly reviewed and tested to ensure they
develop in response to changes in customer and competitor
behaviours, maintaining the quality of the portfolios. This
focus will continue throughout 2017.
Buy-to-let
During 2016, the Financial Policy Committee sought
further powers of direction over buy-to-let mortgage
lending. Buy-to-let lending accounts for 18 per cent of our
mortgage portfolio, focusing on retail customers rather
than portfolio landlords. Our affordability and rental cover
requirements are prudent.
Third party administration
Outsourced relationships with parties which support the
credit card, investment and insurance business lines, such
as IFDS for Unit Trust Management and TSYS/TMS for our
credit card business, are fundamental to the success of the
business and remain a significant area of management focus.
Reliance on key corporate partners and strategic suppliers
involves the potential risk of disruption to service arising
from the failure of a third party. Thorough risk assessment
during the onboarding process, and robust ongoing
oversight, are key to managing this risk.
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The Red Start. The Virgin Money London Marathon.
Photo: Virgin Money London Marathon
48 I Virgin Money Group Annual Report 2016
Risk overview
Principal risks
Key mitigating actions
Credit risk
We provide residential and buy-to-let mortgages and credit
cards to customers across the UK. There is a risk that any
adverse changes in the macro-economic environment and/
or the credit quality or behaviour of borrowers results in
additional impairment losses, thereby reducing profitability.
Wholesale exposures arise through our liquid asset portfolio
and the use of derivative instruments to manage interest
rate risk.
> credit risk is managed through risk
appetite and risk limits reflected in
approved credit policy;
> a robust credit risk framework helps
ensure that the credit quality and
composition of the portfolios remain
within risk appetite limits. This is
monitored and reported through
governance committees regularly;
> stress and scenario testing allows us
to confirm portfolio resilience;
> credit risk metrics are benchmarked
against competitors and industry
averages; and
> credit risk arising from derivatives
and from securities financing
transactions is mitigated by
collateralising exposures on a daily
basis.
Market risk
Market risk is the risk that unfavourable market movements
lead to a reduction in earnings or value. We do not trade or
make markets. Interest rate risk in the banking book is the
only material category of market risk.
> market risk is managed through
Board-approved risk appetite limits
and policies;
> stress and scenario testing focuses
on the impacts of differing interest
rate environments.
> exposures are mitigated through
the use of natural offsets and
derivatives; and
Operational risk
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, people and systems or from external
events, including legal risk. The management of third party
relationships, cyber-crime and information security remain a
key focus for Virgin Money.
> risk appetite is focused on maturing
> we continue to invest in and develop
the control environment and
therefore managing operational risk;
risk management frameworks,
systems and processes; and
> a programme of investment in
> we monitor external events
security infrastructure is in place to
mitigate threats including cyber-
attack;
impacting other financial services
companies to inform stress testing.
Conduct risk and compliance
Conduct and compliance risk is defined as the risk that our
operating model, culture or actions result in unfair outcomes
for customers. This could result in regulatory sanction,
material financial loss or reputational damage if we fail to
design and implement effective operational processes,
systems and controls which maintain compliance with all
applicable regulatory requirements.
> compliance is maintained through
an effective and timely response
to changes in the regulatory
environment;
> the customer is placed at the heart
of decision-making by ensuring fair
outcomes through comprehensive
risk assessment and testing;
> we continue to invest in and develop
risk management frameworks,
systems and processes; and
> we focus on training to ensure
colleague performance is aligned
with the regulatory responsibilities
and enable an awareness of good
customer outcomes.
Strategic and financial risk
Strategic risk is the risk of significant loss or damage arising
from business decisions that impact the long-term interests
of stakeholders or from an inability to adapt to external
developments.
Financial risk is focused primarily on concentration risk. Credit
concentration risk is managed for retail and wholesale credit
exposures at portfolio, product and counterparty levels.
> Board focus is on ensuring alignment
> active focus is on asset origination
of business development and
planning with risk appetite;
> we invest in processes, systems,
recruitment and training to support
new business developments;
> we use robust risk and project
management disciplines to ensure
that implementation is delivered
safely;
and portfolio management
to eliminate inappropriate
concentration risk; and
> regular validation and review of
models is performed.
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Key risk indicators
Commentary
Future focus
0.31%
0.33%
2016
2015
Impaired as a % of total
secured balances
40.0%
35.6%
1.7%
1.3%
2016
2015
Impaired as a % of total
unsecured balances
97%
95%
2016
2015
2016
2015
Provisions as a % of impaired balances
Debt securities % AA or above
£34.2m
£32.2m
2016
2015
IRRBB - Capital at Risk
£3.4m
£2.2m
2016
2015
Operational losses
3.65
3.66
2016
2015
Total complaints
(per 1,000 accounts)
Impaired loans as a percentage
of overall balances has remained
stable in 2016.
We will continue to deliver
strong asset quality aligned to
growth of the mortgage and
credit card books.
Wholesale credit quality
remains strong with 97%
of debt security counterparties
rated AA or above.
We will maintain our ‘no loss’
position for the wholesale
credit portfolio.
Capital at Risk has remained
stable in a positive rate shock
scenario and has reduced as a
proportion of our capital base.
The interest rate risk exposure
remains safely within limits.
We will look to refine our
interest rate risk management
systems and approaches to
reflect the evolving regulatory
landscape.
As expected, the absolute
amount of losses has increased,
as the balance sheet has grown,
but has remained low.
We will continue to invest in
cyber-crime defence, fraud
and anti-money laundering
infrastructure.
Complaints per 1,000 accounts
have remained stable, despite
significant book growth.
We will focus on our
Complaints Transformation
project to continue to improve
the volume of complaints
resolved at point of contact.
33%
28%
33%
28%
8%
6%
25%
8%
7%
24%
Mortgage concentration
2016
Mortgage concentration
2015
The average LTV in Greater
London (49.3 per cent) and
South East (53.8 per cent)
is lower than the average
portfolio LTV of 55.4 per cent.
Focus will be on the
development of our customer
proposition and digital
capability.
Greater London
South East
Scotland
South West
Other Regions
50 I Virgin Money Group Annual Report 2016
Risk overview
Principal risks
Key mitigating actions
Funding and liquidity risk
Liquidity risk represents the inability to accommodate liability
maturities and withdrawals, fund asset growth, and otherwise
meet contractual obligations to make payments as they fall due.
Funding risk represents the inability to raise and maintain
sufficient funding in quality and quantity to support the delivery
of the business plan.
> Board-approved risk appetite
> stress and scenario testing
considers threats to funding
plans and changes in consumer
behaviour.
and funding and liquidity policies
define a limit structure;
> liquid resources are maintained in
adequate quantity and quality to
meet stressed outflows;
> a prudent mix of funding sources
is maintained with a maturity
profile set in risk appetite and
policy limits; and
Capital risk
Capital risk is defined as the risk that we have a sub-optimal
amount or quality of capital or that capital is deployed
inefficiently across the Group.
> Board-approved risk appetite
> capital procedures are subject to
ensures we are holding sufficient
capital within regulatory
requirements;
> the capital management policy
sets out minimum standards for
the management of capital;
independent oversight; and
> stress and scenario testing
assesses capital adequacy under
a range of severe market wide
stress scenarios and idiosyncratic
stress events.
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Key risk indicators
Commentary
Future focus
5%
4%
10%
5%
11%
Customer accounts
Wholesale – TFS
Wholesale – Other
Total equity
Improved diversity of funding
has been achieved through
RMBS issuance and TFS
drawings.
We will continue to improve
balance sheet efficiency and
resilience through measured
diversification of wholesale
funding.
81%
84%
Funding mix 2016
Funding mix 2015
Capital metrics
CET 1
Total capital ratio
Leverage ratio
2016
15.2%
20.4%
4.4%
2015
17.5%
20.2%
4.0%
Our total capital and leverage
ratios have increased as a result
of the AT1 capital raise
in November 2016.
We will continue to maintain
a high-quality capital base
with ratios in excess of
regulatory requirements.
52 I Virgin Money Group Annual Report 2016
Financial results
53 Summary of Group results
62 Divisional results
Virgin Money Lounge, Sheffield.
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environment in the UK, it undoubtedly reflects our continued
disciplined approach to credit risk management across both
our mortgage and cards portfolios. The growth has been
achieved without any deterioration in the quality of new
lending or the credit characteristics of the portfolios as a
whole. Across all key credit metrics both portfolios exhibit
either stable or improving trends and this is reflected in low
arrears experience.
Leverage and total capital ratios were increased both by
higher retained earnings and the successful issuance of
£230 million Additional Tier 1 (AT1) capital. The Common
Equity Tier 1 (CET1) ratio remained strong at 15.2 per cent,
reflecting the quality of the capital base. The liquidity and
funding profile benefited from access to the Term Funding
Scheme and we extended our term wholesale funding
programme beyond Sterling and Euro to include US Dollars for
the first time.
Our commercial agility allowed us to optimise asset and
liability pricing during the course of the year resulting in a NIM
of 160 basis points despite a 25 basis point reduction in Bank
Base Rate. The combination of strong lending growth, stable
NIM, improved operational leverage and our low cost of risk
delivered an increase in underlying profit of 32.7 per cent, to
£213.3 million.
As a consequence of this continued progression, measures of
shareholder returns were materially improved. Unburdened by
legacy issues, growth in underlying profit flowed to statutory
profit before tax, which increased by 40.9 per cent to
£194.4 million. Return on tangible equity increased to 12.4 per
cent, underlying earnings per share rose by 22.0 per cent to
32.7 pence and our Board has recommended a final dividend
that takes the total dividend relating to financial performance
in 2016 to 5.1 pence per ordinary share.
Summary of Group results
The financial results in 2016 further reinforced the strength
of our business model with significant progression across the
three pillars of our strategy – Growth, Quality and Returns:
> Growth – market share of new business continued to
outstrip our share of stock resulting in significant growth in
receivables with mortgages and card balances increasing
by 16.8 per cent and 55.0 per cent respectively. This growth
was funded predominantly by the continued strength of
the retail deposit franchise with customer deposits growing
11.8 per cent;
> Quality – we maintained a disciplined approach to
managing growth with consistently high underwriting
standards leading to our low cost of risk. Balance sheet
growth was carefully managed with lending growth
supported by stable deposit funding and diversified long
term wholesale funding. Capital resources grew both
through retained earnings and the issue of £230 million of
AT1 securities in the fourth quarter; and
> Returns – higher lending drove income growth which,
combined with disciplined cost control, resulted in strong
operational leverage. As a consequence our cost:income
ratio fell by 6.3 percentage points to 57.2 per cent which,
combined with our growth and low cost of risk, resulted in
a 32.7 per cent increase in underlying profit before tax and
RoTE increasing to 12.4 per cent.
Gross mortgage lending of £8.4 billion was combined with
strong retention performance to deliver mortgage stock
balances of £29.7 billion at year end. That growth was
carefully managed within our target range of 3 to 3.5 per
cent of gross lending to support returns, with new-business
mortgage spread 1 basis point higher than 2015 at 187
basis points. Card receivables increased by 55.0 per cent
to £2.4 billion, continuing to demonstrate the strength of
the franchise.
The scalability of the mortgage and card platforms continued
to enhance Group operational leverage, with only a 1.1
per cent increase in underlying costs compared to income
growth of 12.1 per cent – generating the 6.3 percentage
point improvement in cost:income ratio to 57.2 per cent. This
increase in cost efficiency, achieved across both operational
areas and central functions, was achieved while continuing to
invest in the business with investment spend maintained in
line with income.
Growth did not come at the expense of quality. Cost of risk
increased by only 1 basis point to 13 basis points, entirely
as a consequence of higher card receivables. While this
low cost of risk benefits, in part, from the benign economic
54 I Virgin Money Group Annual Report 2016
Summary of Group results
Consolidated income statement
Net interest income
Other income
Total income
Costs
Impairment
Underlying profit before tax
IPO share based payments
Strategic items
Simplification costs
Fair value losses on financial instruments
Statutory profit before tax
Taxation
Profit for the year – statutory
Basic earnings per share – statutory (pence)
2016
£m
519.0
67.9
586.9
(336.0)
(37.6)
213.3
(2.0)
(2.4)
(5.6)
(8.9)
194.4
(54.3)
140.1
29.4
2015
£m
456.1
67.4
523.5
(332.5)
(30.3)
160.7
(10.5)
(8.1)
(3.7)
(0.4)
138.0
(26.8)
111.2
22.9
Basis of preparation of financial results
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). Aspects of
the results are adjusted for certain items, which are listed below, to reflect how the Executive assesses the Group’s underlying
performance without distortions caused by items that are not reflective of the Group’s ongoing business activities. Charges
for such items were lower by 55.2 per cent in 2016, as the reduction in share based payments related to the IPO more than
offset an increase in the cost of simplification and investment in strategic items. The following items have been excluded from
underlying profits:
> IPO share based payments
These costs relate to share based payment charges triggered by our successful IPO in 2014, which we are recognising over
their vesting period. By their nature, these payments are not reflective of ongoing trading performance and are not, therefore,
considered part of the underlying results.
> Strategic items
We incurred strategic investment costs of £6.7 million in 2016, largely related to digital investment spend. These costs have
been partly offset by fair value adjustments of £4.3 million arising from the Northern Rock acquisition which will not occur in
future periods. Investments in building our digital capability are strategic investment items that are not considered part of the
underlying results.
> Simplification costs
Now that our organisational structure is well established we have taken the opportunity to focus on simplification activity,
including de-layering our organisation structure, the benefit of which is seen in our stable underlying cost base. This has led to
one-off costs incurred in 2016 including those in relation to a number of senior leavers. These costs include accelerated share
based payment charges. These are not considered part of the underlying results.
Financial results Virgin Money Group Annual Report 2016 I 55
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Divisional results
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> Fair value losses on financial instruments
Fair value gains and losses on financial instruments reflect the results of hedge accounting and the fair value movements on
derivatives in economic hedges to the extent that they either do not meet the criteria for hedge accounting or give rise to
hedge ineffectiveness. Where these derivatives are held to maturity, fair value movements recorded in this heading represent
timing differences that will reverse over their lives, but can result in volatility within and between specific reporting periods.
Therefore, excluding these from underlying profit better represents the underlying performance of the Group.
Before 2016 fair value gains and losses on financial instruments were included within the underlying performance. These are
now excluded from underlying results to remove this volatile item from the underlying business result. Prior periods presented
have been adjusted to ensure consistency, however the change has no material impact on those periods.
Our effective tax rate in 2016 was 27.9%. The overall tax rate for UK banks increased by 8 percentage points in 2016 as a result of
the bank tax surcharge, adding £12.5 million to the Group’s tax charge. In 2016, the Group recognised a corporation tax charge
of £54.3 million.
The reconciliations of the Group’s statutory and underlying results are reported above and in note 2 to the consolidated
financial statements.
The Group uses a number of Alternative Performance Measures (APMs), in addition to underlying profit, in the analysis and
discussion of its financial performance and financial position. APMs do not have standardised definitions and may not be directly
comparable to measures defined within IFRS. A full list of APMs used by the Group, including their bases of calculation, are set
out on page 267.
56 I Virgin Money Group Annual Report 2016
Summary of Group results
Consolidated balance sheet
Assets
Cash and balances at central banks
Loans and receivables
Available-for-sale financial assets
Other
Total assets
Liabilities and equity
Deposits from banks
Customer deposits
Debt securities in issue
Other
Provisions
Total liabilities
Total equity
Total liabilities and equity
Key ratios
Net interest margin
Cost:income ratio
Cost of risk1
Statutory basic earnings per share
Tangible net asset value per share
Total Capital Ratio
Common Equity Tier 1 ratio
Leverage ratio
Return on tangible equity
1 Defined as impairment charges net of debt recoveries divided by average gross balances for the period.
Key ratios are presented on an underlying basis except where stated.
2016
£m
2015
£m
Change
%
786.3
888.6
33,003.4
27,724.6
858.8
407.1
1,296.9
318.9
35,055.6
30,229.0
2,132.5
1,298.7
28,106.3
25,144.9
2,600.0
2,039.4
537.8
8.5
397.3
8.4
33,385.1
28,888.7
1,670.5
1,340.3
35,055.6
30,229.0
(11.5)%
19.0%
(33.8)%
27.7%
16.0%
64.2%
11.8%
27.5%
35.4%
1.2%
15.6%
24.6%
16.0%
2016
2015
Change
%
%
%
p
£
%
%
%
%
1.60
57.2
0.13
29.4
2.73
20.4
15.2
4.4
12.4
1.65
63.5
0.12
22.9
2.54
20.2
17.5
4.0
10.9
(5)bps
(6.3)pp
1bps
6.5 pence
19 pence
0.2pp
(2.3)pp
0.4pp
1.5pp
Financial results Virgin Money Group Annual Report 2016 I 57
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Strong balance sheet growth
Loans and advances to customers
Customer deposits
Wholesale funding
Wholesale funding <1 year maturity
Loan-to-deposit ratio
High Quality Liquid Assets1
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Divisional results
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At 31 Dec
2016
£m
At 31 Dec
2015
£m
32,367.1
27,109.0
28,106.3
25,144.9
4,718.0
575.0
114.5%
4,222.6
3,314.3
1,274.9
107.5%
4,238.6
Change
19.4%
11.8%
42.4%
(54.9)%
7.0pp
(0.4)%
1 These include Funding for Lending Scheme drawings which are held off balance sheet but are available for repo and hence count towards liquidity resources.
The continuing strength of our lending franchise led to 19.4
per cent growth in total loans and advances to customers
in 2016. We achieved record gross mortgage lending of
£8.4 billion during the year, up 11.9 per cent from 2015. There
was particular focus on growing the mortgage portfolio, where
we delivered an increase of £4.3 billion, or 16.8 per cent.
Growth in the credit card book reflected the strength of our
brand, our scalable in-house platform and the continued
development of our credit card offering. As a result, balances
increased by 55.0 per cent from 2015, to reach £2.4 billion.
This significant asset growth was facilitated by the continued
success of our retail and wholesale funding franchises.
Customer deposits grew by 11.8 per cent or £3.0 billion, which
was well in excess of market growth at 3.2 per cent. Our core
retail deposit base is supplemented by wholesale funding.
During the year, we completed two issues of Residential
Mortgage Backed Securities (RMBS) totalling £1.3 billion
through our established Gosforth programme, made up
of Sterling, Euro and US Dollar tranches. Both offerings
saw strong demand, reflecting the quality of our collateral
and positive investor sentiment towards our low risk UK
focused strategy.
In addition, we accessed the Government’s Term Funding
Scheme (TFS) with £1.3 billion drawn during the year to
support lending growth.
The result of this funding approach was a lower cost of
funds, a diversification of wholesale sources and an increase
in the loan-to-deposit ratio to 114.5 per cent, from 107.5
per cent at the end of 2015. We expect the loan-to-deposit
ratio to go beyond 115 per cent for the period during which
we participate in TFS. This is within our Board approved
risk appetite.
The Group’s liquidity position remains strong, with high
quality liquid assets of £4.2 billion at 31 December 2016
consistent with the prior year. Our liquidity coverage ratio
(LCR) was significantly above the 90 per cent regulatory
minimum from 1 January 2017 at 154 per cent. Our liquidity
position resulted in high quality liquid assets representing
more than 7 times our wholesale funding with a maturity of
less than one year. This provides us with a substantial buffer in
the event of market dislocation. In addition, in the short term,
we have significant, immediately available, funding capacity
from TFS if required.
58 I Virgin Money Group Annual Report 2016
Summary of Group results
Income benefited from growth in asset balances
Net interest income
Other income
Total income
Net interest margin
Average interest earning assets
2016
£m
519.0
67.9
586.9
1.60%
32,521
2015
£m
456.1
67.4
523.5
1.65%
27,577
Change
13.8%
0.7%
12.1%
(5)bps
17.9%
During 2016 we increased net interest income by 13.8 per cent to £519.0 million. This was driven by strong balance growth across
the mortgage and card books, reflecting the strength and potential of our lending franchise.
The continued strong growth in mortgage lending was a key driver of income growth in the year. Growth in the credit card portfolio
and further optimisation of our funding base continued to support net interest margin (NIM). Ongoing active management of
retail funding costs in the context of lower pricing in the market, and initial drawings from TFS, contributed to a reduction in the
weighted average cost of funds from 143 basis points in 2015 to 130 basis points in 2016. This benefit was however tempered by
the continued strength of growth in our mortgage portfolio, where new business was priced below back book spread, as well as by
the one-off impact of the 25 basis point reduction in Bank base rate in August 2016, arising from the delay in repricing deposits
compared to repricing assets.
Taken together, these factors moderated NIM to 160 basis points in 2016.
Other income increased by 0.7 per cent to £67.9 million reflecting an increase from our investment funds business.
Costs remained tightly controlled
Costs
Cost:income ratio
2016
£m
336.0
57.2%
2015
£m
332.5
63.5%
Change
1.1%
(6.3)pp
Our operational leverage is derived from our scalable operating model, which combined with disciplined management of costs,
continued to deliver enhancements to our operating profitability.
Set against lending and income growth of 19.4 per cent and 12.1 per cent respectively, cost growth (including the FSCS levy) in
2016 was constrained to just 1.1 per cent. This produced positive JAWS of 11.0 per cent and reduced the cost:income ratio by 6.3
percentage points to 57.2 per cent. Improvements were made across the business with the ongoing programme of operational
efficiency initiatives and the ability to leverage our central functions being key drivers. As a consequence, the cost per customer
in each product category reduced in the year. Excluding the cost of the FSCS levy, operating costs increased by 2.6 per cent
year on year. Our strong cost performance did not come at the expense of investment into the business. In 2016 the level of
investment spend was grown in line with income.
Financial results
Virgin Money Group Annual Report 2016 I 59
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Divisional results
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600
500
523.5
586.9
103.0%
80.1%
72.5%
63.5%
57.2%
2012
2013
2014
Cost: income ratio
2015
2016
400
300
200
100
0
Impairments reflected rigorous credit risk management
332.5
336.0
Underlying
income (£m)
Underlying
costs (£m)
2015
2016
Operating JAWS
Mortgages
Impairment charge
Cost of risk
Impaired loans as a % of loans and advances
Provisions as a % of impaired loans
Cards
Impairment charge
Cost of risk
Impaired loans as a % of loans and advances
Provisions as a % of impaired loans
Group
Impairment charge
Cost of risk
Impaired loans as a % of loans and advances
Provisions as a % of impaired loans
2016
£m
2.8
0.01%
0.3%
11.4%
34.8
1.70%
1.3%
2015
£m
3.0
0.01%
0.3%
10.3%
27.3
2.00%
1.7%
121.6%
113.5%
37.6
0.13%
0.4%
40.0%
30.3
0.12%
0.4%
35.6%
Change
(6.7)%
–
–
1.1pp
27.5%
(30)bps
(0.4)pp
8.1pp
24.1%
1bps
–
4.4pp
We maintained a low cost of risk in 2016 through our established risk appetite framework, ongoing focus on underwriting rigour
and the origination of high credit quality customers and prime assets.
The cost of risk for mortgages was flat between 2015 and 2016 at 0.01 per cent and the underlying impairment charge fell in
absolute terms. This stability reflected the continued high asset quality of the mortgage portfolio and our strategic approach to
risk management, combined with the benign economic environment, leading to a further reduction in the low level of defaults.
Impaired loans as a percentage of mortgage loans and advances were unchanged from 2015 at 0.3 per cent. Against that stable
level of impairments, the coverage ratio of provisions to impaired mortgage loans increased to 11.4 per cent in 2016 from
10.3 per cent in the prior year.
60 I Virgin Money Group Annual Report 2016
Financial results
Summary of Group results
In credit cards, set against growth of 55.0 per cent in balances, the impairment charge for the portfolio increased by only 27.5 per
cent to £34.8 million. The resulting cost of risk for credit cards decreased by 30 basis points to 1.70 per cent in 2016, from 2.00
per cent in 2015. This underlines the continued high credit quality of new and existing cards and the low rate of default during
the early stages of card lives. Performance of individual cohorts of cards remains strong with all cohorts showing a cost of risk in
line with or better than expectations.
In the credit card book, impaired loans as a percentage of loans and advances decreased to 1.3 per cent in 2016 from 1.7 per
cent in 2015. Similarly to the mortgage book, the coverage ratio of provisions to impaired credit card balances increased to
reach 121.6 per cent in 2016 from 113.5 per cent in 2015. Impaired loans as a percentage of loans and advances for the Group
was unchanged from 2015 at 0.4 per cent at 31 December 2016. Provisions as a percentage of impaired loans increased to 40.0
per cent at 31 December 2016, from 35.6 per cent at 31 December 2015. This rise reflects the increased proportion of card
receivables, where provisions as a percentage of impaired loans are higher than for secured mortgage lending.
Continued strong progression in returns
Return on tangible equity
Return on assets1
1 Statutory basis.
2016
12.4
0.40
2015
10.9
0.37
Change
1.5pp
3bps
%
%
The strength of income growth and improved operational leverage, combined with our rigorous approach to underwriting
and asset quality, has driven material enhancement to returns achieved in 2016. This growth has been achieved despite the
introduction of the bank tax surcharge for the first time in 2016.
Return on tangible equity increased to 12.4 per cent in 2016, higher than both our cost of capital and the 10.9 per cent
generated in 2015. At the same time, the statutory return on assets grew by 3 basis points to 0.40 per cent in 2016, from
0.37 per cent in 2015.
Capital strength
Capital ratios and risk-weighted assets
Common Equity Tier 1 capital (CET1)
Risk-weighted assets (RWAs)
Common Equity Tier 1 ratio
Tier 1 ratio
Total capital ratio
Leverage ratio
2016
2015
Change
1,172.7
7,694.8
1,070.0
6,110.4
15.2
20.2
20.4
4.4
17.5
20.1
20.2
4.0
9.6%
25.9%
(2.3)pp
0.1pp
0.2pp
0.4pp
The evolution of capital ratios during 2016 continued to
reflect our strategy of ensuring strong capital adequacy
while optimising the capital structure as the business grows.
Our objective is to enhance returns for shareholders while
maintaining an overall quality and quantity of capital in line
with our low risk profile. Consistent with that objective, we
issued a further £230 million of AT1 capital in November 2016
to support future asset growth. This issuance was multiple
times over-subscribed, reinforcing the market’s confidence in
our business strategy, asset quality and financial strength.
Our strong profitability resulted in CET1 capital resources
increasing by 9.6 per cent. Loan book growth, increased
card receivables and new mortgage lending were the drivers
of the 25.9 per cent increase in risk-weighted assets. As a
consequence of the growth in RWAs our CET1 ratio reduced to
15.2 per cent at the end of 2016 compared with 17.5 per cent
at the end of 2015 but remained well in excess of our target
minimum ratio of 12 per cent.
The combination of organic earnings performance plus the
issuance of new AT1 capital meant that the Total capital
Virgin Money Group Annual Report 2016 I 61
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ratio improved to 20.4 per cent despite our significant
loan book growth.
The leverage ratio was 4.4 per cent at the end of 2016,
compared with 4.0 per cent at the end of 2015. Growth in the
asset base was more than offset by the impact of the issuance
of the new AT1 capital and the strength of retained earnings
growth. The AT1 issuance provides us with significant capacity
for future high credit quality mortgage growth that is, relative
to other lending types, leverage intensive.
Dividend
The strength of both our profitability and our capital base
continues to give the Board confidence to recommend the
payment of a dividend. In addition to the interim dividend for
2016 of 1.6 pence per ordinary share, paid to shareholders
on 23 September 2016, the Board has recommended a final
dividend of 3.5 pence per ordinary share in respect of 2016
which will be paid, subject to approval at our AGM, in May
2017. Our intention is to pay an interim and final dividend for
2017, subject to performance.
Conclusion
2016 represents a further year of significant financial progress
for Virgin Money. The strong high quality lending growth
combined with further operational leverage has driven
improved returns for our shareholders. This has been achieved
with no degradation of asset quality, further diversification of
the funding base and with continued focus on the strength of
the capital base and capital ratios.
As a consequence, we are well placed to continue growing
our business, generating further operational leverage and
continuing to generate attractive and sustainable returns
for shareholders.
Peter Bole
Chief Financial Officer
27 February 2017
62 I Virgin Money Group Annual Report 2016
Divisional results
2016
Net interest income
Other income
Total income
Total costs
Impairment charge
Underlying Contribution
Net interest margin
Cost of risk
Key balance sheet items at 31 December 2016
Loans and advances to customers1
Customer deposits
Total customer balances
Risk-weighted assets
1 Excluding fair value of portfolio hedging.
2015
Net interest income
Other income
Total income
Total costs
Impairment charge
Underlying contribution
Net interest margin
Cost of risk
Key balance sheet items at 31 December 2015
Loans and advances to customers2
Customer deposits
Total customer balances
Risk-weighted assets
1 Restated to exclude fair value gains and losses on financial instruments from costs.
2 Excluding fair value of portfolio hedging.
Mortgages &
Savings
£m
Credit Cards
£m
Financial
Services
£m
Central
Functions
£m
383.0
2.0
385.0
(97.4)
(2.8)
284.8
1.38%
0.01%
29,740.8
28,106.3
57,847.1
5,204.5
136.0
17.7
153.7
(37.8)
(34.8)
81.1
6.69%
1.70%
2,447.1
–
2,447.1
2,012.3
358.5
2.5
361.0
(92.7)
(3.0)
265.3
1.52%
0.01%
25,453.6
25,144.9
50,598.5
4,284.5
97.6
18.0
115.6
(37.1)
(27.3)
51.2
8.22%
2.00%
1,578.7
–
1,578.7
1,334.7
Group
£m
519.0
67.9
586.9
(336.0)
(37.6)
213.3
1.60%
0.13%
32,187.9
28,106.3
60,294.2
Group
£m
456.1
67.4
523.5
(332.5)
(30.3)
160.7
1.65%
0.12%
27,032.3
25,144.9
52,177.2
–
37.5
37.5
–
10.7
10.7
(15.6)
(185.2)
–
21.9
–
(174.5)
–
–
–
–
–
–
–
–
–
–
–
36.6
36.6
(16.7)
–
19.9
–
–
–
–
–
–
10.3
10.3
(186.0)
–
(175.7)
–
–
–
–
–
51.6
439.6
6,110.4
50.4
427.6
7,694.8
Mortgages &
Savings
£m
Credit Cards
£m
Financial
Services
£m
Central
Functions1
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Financial results
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Mortgages and Savings
We provide mortgages, savings and current accounts to more
than 1.5 million customers. Mortgages are sold primarily
through our intermediary partners and retail deposits are
largely originated directly through our digital channel. Our
Mortgage & Savings business (including Current Accounts) is
an important profit driver for the Group, contributing 65.6 per
cent of total income in 2016.
Mortgage Strategy
In what remains a very competitive market, our approach to
mortgages is very straightforward. We offer a wide range
of mortgage products to prime credit quality customers
who are supported by excellent service, acquired primarily
through our intermediary partners and supplemented by
direct distribution.
Within our existing risk appetite we have continued to
develop our residential mortgage proposition to broaden our
presence across segments of the market where we are under-
represented. We aim to maintain our stock share for buy-to-
let mortgages in line with the overall market. We will continue
to strengthen our intermediary proposition to enrich existing
intermediary relationships, which have been a driver of value
for us during 2016. Additionally, we will continue to invest in
the retention of our existing customers.
Key developments – Mortgages
We were pleased to deliver strong growth in balances, driven
by new lending of £8.4 billion in the year to 31 December 2016.
This represented an increase of 11.9 per cent on 2015 and was
equivalent to a 3.4 per cent market share of gross lending, in
line with the 3.4 per cent share in 2015 and at the upper end of
our target range of 3 to 3.5 per cent of gross lending.
Mortgage retention rates at product maturity have improved
substantially with 70 per cent of customers with maturing
fixed rate or tracker products successfully retained during
2016, an increase from 64 per cent in 2015.
The combined effect of new business and retention
performance resulted in year-on-year net lending growth of
20.2 per cent in 2016, equating to net lending of £4.3 billion.
This represented a 10.5 per cent market share of net lending,
consistent with 10.0 per cent in 2015. This stable progression
continues to bring our share of stock towards our target
share of flow.
Mortgage balances increased by 16.8 per cent to £29.7 billion
in 2016, materially outperforming growth in the market of
2.8 per cent over the same period. Prime residential balances
grew by 15.3 per cent to £24.3 billion. Residential lending
represented 82 per cent of the overall mortgage book and
81 per cent of new lending in 2016. Buy-to-let balances of
£5.5 billion represented 18 per cent of the overall mortgage
book at year end, which is consistent with our strategy to
maintain stock share in line with the market.
Growth in mortgage balances was delivered while increasing
the completion spread to an average of 187 basis points,
compared to 186 basis points in 2015. This performance
was supported by our dynamic approach to adjusting pricing
in response to competitor movements and also by tangible
benefits from improvements in intermediary relationships.
Geographically we lend broadly in line with the market, and
we continue to remain strong in more affluent areas such
as London and the South East. Arrears emergence is lower
in London and the South East and our underwriting ensures
a lower LTV of new business in these areas. This affords us
protection should we see house prices fall in future.
We continue to deliver enhancements that make it
increasingly straightforward for a mortgage broker to do
business with Virgin Money. We have further strengthened
the intermediary proposition with new retention capability
at product maturity and commenced the rollout of a digital
front end to allow intermediary partners to access Virgin
Money using a device of their choice. Our partnerships with
key national intermediaries continue to deliver over 90 per
cent of our new business loans. Our share of the intermediary
market increased to 4.6 per cent and we increased the volume
of business with each of our top 5 intermediary partners as we
continued to invest in our mortgage proposition.
We remain committed to helping customers achieve
their home ownership aspirations and made a number
of enhancements to our First Time Buyer and New Build
propositions during the year. The response from customers
was very positive, with the value of gross lending in 2016 to
First Time Buyers increasing by 26 per cent year-on-year
and the value of gross lending to New Build customers
representing 7 per cent of new lending, reflecting our focus on
building our capability in these key segments. All lending over
90 per cent LTV during the year was made under the Help to
Buy guarantee scheme and represented just 3 per cent of our
new business loans. Customer demographics were very stable
and performance remained robust.
64 I Virgin Money Group Annual Report 2016
Divisional results
The quality of our mortgage franchise was recognised
with several industry awards over the course of the year:
Yourmoney Best Online Mortgage Provider; Moneyfacts
Best Buy-To-Let Lender and Best Service From A Mortgage
Provider; Best Remortgage Lender at the Your Mortgage
awards; and we were reinstated as a 5* lender at the Financial
Adviser Service awards for 2016.
Savings strategy
Our savings products are simple and transparent, with no
hidden catches. We have avoided ‘teaser’ products with
bonus rates which subsequently fall to sub-market levels and
provoke customer churn. Instead, we encourage customer
retention with enduring, good value offers. We offer
customers a range of competitively-priced instant access and
fixed term savings products, both available as ISAs. Whilst
customers predominantly choose to open their accounts
through our digital channels, we also offer multi-channel
distribution via postal, telephony and Store propositions.
Key developments – Savings
We grew retail savings and current account balances by
11.8 per cent to £28.1 billion at 31 December 2016, up from
£25.1 billion at 31 December 2015, opening more than
300,000 new savings accounts in the year. At the end of 2016
we had more than 1.2 million savings customers and balances
continued to grow to new record levels. We continued to beat
growth in the savings market, with balance growth of 11.8
per cent compared to market growth of 3.2 per cent over the
course of 2016.
Net inflows equated to a 2.8 per cent market share, broadly
in line with 3.0 per cent in 2015 growing our market share of
savings stock from 1.5 per cent at 31 December 2015 to 1.6
per cent at 31 December 2016. Cash ISA performance was
particularly strong in 2016, taking a 32.6 per cent share of net
inflows in the market which reflected the strong appeal of our
customer proposition. This performance resulted in our Cash
ISA market share of 4.8 per cent at the end of December 2016,
an improvement from 4.1 per cent at the end of 2015.
In July we introduced our first savings products in our ‘Red
Devil’ range as official UK financial services partner of
Manchester United Football Club. In this range we launched
three savings products, including The Champions Bond,
which pays a higher rate of interest dependent on the team’s
performance, an Easy Access product and the ‘Fred the Red’
children’s account. All of these accounts provide access to
unique rewards programmes. We also won the Best Cash ISA
Provider award in the ‘What Investment’ readers’ poll.
We launched a new Regular Saver product in H2 2016,
available to all customers and providing unrestricted access
and an attractive fixed rate of interest. We sold more than
18,000 Regular Savers in 2016, supporting those customers in
developing a savings habit. Customers continue to save into
our Help to Buy ISA. Since launch in December 2015, we have
helped over 27,000 customers take their first steps towards
owning a home.
Our Essential Current Account is a best in class basic bank
account that demonstrates our commitment to making
‘Everybody Better Off’. The product is available to all
customers and is easy to apply for in any of our Stores. During
the year we developed partnerships with Scotcash (a Glasgow
based financial inclusion charity) and other organisations in
our local communities to provide wider distribution of the ECA
proposition and raise visibility of the product amongst those
in society it could help most. We are working to expand our
community partnerships in 2017.
2016 financial highlights
> net interest income increased by 6.8 per cent to
£383.0 million, driven by growth in mortgage balances more
than offsetting the reduction in mortgage NIM. Combined
with a £0.5m reduction in other income, total income in this
segment rose by 6.6 per cent to £385.0 million;
> our scalable platform and diligent cost control resulted
in positive JAWS of 1.5 per cent, with income rising by
6.6 per cent and cost growth constrained to 5.1 per cent
in this segment;
> combined with ongoing high asset quality, these factors
combined to increase contribution by 7.4 per cent in 2016;
> NIM for the full year 2016 was 1.38 per cent in the mortgage
and savings business. The moderation of NIM relative to
2015 reflects the dilutive effect of strong new lending.
This was partially mitigated by active management of
pricing and mix in both mortgages and savings markets;
> the high quality of our mortgage business continues to be
reflected in our low arrears levels, which reduced further in
2016. The percentage of loans over three months in arrears
was 0.15 per cent at the end of 2016, compared to 0.22 per
cent in 2015. Our impaired provision coverage increased to
11.4 per cent, compared to 10.3 per cent in 2015;
Financial results Virgin Money Group Annual Report 2016 I 65
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> at £2.8 million, the impairment charge in 2016 was lower
than 2015, reflecting our strong credit management and
resulting high-quality mortgage book, supported by benign
economic conditions. Impaired loans as a percentage of
mortgage loans and advances remained flat year on year
at 0.3 per cent; and
> risk-weighted assets at the end of 2016 increased by
21.5 per cent to £5.2 billion, primarily reflecting increased
lending and new business coming onto the book at risk
weights higher than stock.
Performance summary – Mortgages and Savings
Net interest income
Other income
Total underlying income
Total costs
Impairment
Contribution
Mortgages and savings net interest margin
Cost of risk
Key balance sheet items at 31 December
Loans and advances to customers
– of which prime residential
– of which buy-to-let
Customer deposits2
Total customer balances
Risk-weighted assets
2016
£m
383.0
2.0
385.0
(97.4)
(2.8)
284.8
1.38%
0.01%
2016
£m
20151
£m
358.5
2.5
361.0
(92.7)
(3.0)
265.3
1.52%
0.01%
2015
£m
29,740.8
25,453.6
24,273.6
21,052.7
5,467.2
4,400.9
28,106.3
25,144.9
57,847.1
50,598.5
5,204.5
4,284.5
Change
6.8%
(20.0)%
6.6%
5.1%
(6.7)%
7.4%
(14)bps
–
Change
16.8%
15.3%
24.2%
11.8%
14.3%
21.5%
1 2016 includes Current Accounts; in 2015 Current Accounts were reported under ‘Current Accounts, Insurance and Investment’ (renamed Financial Services).
2 2016 and 2015 include current accounts. In the 2015 Annual Report and Accounts Current Accounts were reported under ‘Current Accounts, Insurance and Investment’
(renamed ‘Financial Services’).
66 I Virgin Money Group Annual Report 2016
Divisional results
Credit Cards
We provide credit card products, predominantly online, to
over 800,000 customers. Our portfolio is a mix of balance
transfer and retail credit cards, and the offering continues to
develop. Our Credit Card business contributed 26.2 per cent of
total income in 2016, an increase of over 4 percentage points
from 22.1 per cent in 2015 due to growth in receivables.
Strategy
Our Credit Card business has continued to build on the
foundations laid by the successful migration onto our own
platform in early 2015 of the book purchased from MBNA
in 2013. The functionality of our own credit card platform
has allowed us to continue to grow the business through
simple, transparent products offered to high credit quality
applicants, supported by strong risk management and
analytical capability.
The product portfolio has been expanded to cater for different
customer needs in the balance transfer and retail card
segments. We have achieved this with a range of products
that focus on core customer needs: debt consolidation,
borrowing and everyday spending. The strength of financial
performance and asset quality in the cards business during
2016 means that £3 billion of receivables remains our target
for the end of 2017.
Key developments
2016 marked the first full year of operating the cards business
on our own platform and we continued to deliver growth,
a stable customer profile and improving credit quality.
Balances from customers originated on our new platform
overtook those from the migrated book during 2016. This
was supported by further enhancements to the customer
journey, notably the introduction of Card Checker – a tool
allowing consumers to check their eligibility for our Cards
before submitting an application, without affecting their
credit history. This enables customers to apply for a card
with confidence.
Card balances increased to £2.4 billion representing a 3.5
per cent share of the £68 billion credit card market. This
represented a 1.0 percentage point increase from our 2.5
per cent market share in 2015. As a result of our continued
success, we ended the year with over 295,000 new customers.
This represents an increase of 100,000 over the number of
new customers acquired in 2015, representing 8 per cent
market share of new cards and underlines our ability to attract
customers in a competitive market. The number of new cards
written is consistent with meeting our 2017 target of £3 billion
of receivables.
Despite the increase in unsecured borrowing evident in the
UK credit card market, our indebtedness scores remained
significantly below the market average, driven by strong
affordability criteria. Our ongoing analysis of customer
spending, borrowing and repayment behaviour, demonstrated
stable usage and a highly consistent pattern of activity. Early
arrears continued to positively outperform the industry, as
did portfolio arrears levels. The profile of newly acquired
customers has remained broadly stable and the average credit
score has increased slightly following proactive tightening of
credit score cut-offs since the EU referendum. We continue
to take our fair share of the strongest credit quality applicants
and do not book customers outside our stable credit
risk appetite.
Our new account proposition is strongly supported by the
Virgin brand and does not have to be top of the price tables
to attract excellent customer quality and volume. These
features, together with improvements in customer service,
have led to customer NPS improving to +42 points. The
strength of the customer proposition and experience was
recognised by winning the Judges Award at the 2016 Card and
Payment Industry Awards.
Financial results Virgin Money Group Annual Report 2016 I 67
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2016 financial highlights
> the strength of our customer proposition increased
credit card balances by 55.0 per cent to £2.4 billion at
the end of 2016;
> net interest income grew by 39.3 per cent to £136.0 million
reflecting this growth in balances;
> net interest margin decreased by 1.53 percentage points
to 6.69 per cent as a result of the growth in the number of
front book customers, where the yield is lower than the
mature acquired portfolio;
> other income reduced by 1.7 per cent. This decrease was
driven by the reduction in interchange income, earned as a
commission on retail spend, reflecting the impact of the EU
ruling effective December 2015 that capped the domestic
interchange rate in the UK at 30 basis points;
> these factors combined to increase total income by
33.0 per cent;
> 2016 represented the first full year of our cards operating
platform and, despite significant volume growth, stringent
cost control constrained cost growth to just 1.9 per cent
delivering JAWS of 31.1 per cent;
> the impairment charge for credit cards increased by 27.5
per cent to £34.8 million – comparing favourably to the
55.0 per cent growth in balances and demonstrating stable
credit quality. This translated to a cost of risk for credit
cards that decreased by 30 basis points to 1.70 per cent in
2016, from 2.00 per cent in 2015;
> taken together, these factors increased contribution
in the segment by 58.4 per cent, to £81.1 million from
£51.2 million in 2015; and
> risk-weighted assets in the segment increased by 50.8 per
cent, driven by the growth of receivables.
68 I Virgin Money Group Annual Report 2016
Divisional results
Performance summary – Credit Cards
Net interest income
Other income
Total income
Total costs
Impairment charge
Contribution
Credit cards net interest margin
Cost of risk
Key balance sheet items at 31 December
Credit card balances
Total customer balances
Risk-weighted assets
2016
£m
136.0
17.7
153.7
(37.8)
(34.8)
81.1
6.69%
1.70%
2016
£m
2015
£m
97.6
18.0
115.6
(37.1)
(27.3)
51.2
8.22%
2.00%
Change
39.3%
(1.7)%
33.0%
1.9%
27.5%
58.4%
(153)bps
(30)bps
2015
£m
Change
%
2,447.1
2,447.1
2,012.3
1,578.7
1,578.7
1,334.7
55.0%
55.0%
50.8%
The financial metrics in this section are presented on an underlying basis unless labelled as statutory.
Financial results Virgin Money Group Annual Report 2016 I 69
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2016 financial highlights
> the majority of income in the Financial Services segment
continues to come from our successful investment
funds business;
> funds under management stood at £3.4 billion at
31 December 2016. The Group currently mitigates the risk
associated with stock market movements and their impact
on earnings through the use of a FTSE hedge;
> our insurance and other income in 2016 grew 16.0 per cent,
reflecting our expanded product range and the continued
success of our more mature travel insurance line;
> stringent cost control in the business contributed to a
6.6 per cent reduction in costs; and
> taken together, these factors improved the contribution from
the Financial Services business by 10.1 per cent on 2015.
Financial Services
The Financial Services business manages and develops our
insurance and investment offerings. We work with a number
of partners to deliver these products, which typically require
limited capital and generate attractive returns.
This part of our business contributed 6.4 per cent of total
income in 2016.
Strategy
Our Financial Services strategy is based on a partnership
model. We seek partners who share our commitment to
straightforward, transparent and good value customer
propositions. We leverage their capabilities with our brand
and marketing expertise to access profitable sectors and
capital-light product lines, whilst limiting our exposure to
financial risk.
Key developments
The insurance business performed well in 2016, delivering
an increase in new customers of 27 per cent. Our successful
travel insurance business continued to flourish, adding
450,000 new travel insurance sales, supported by the launch
of underwriting for pre-existing medical conditions in March
2016. Following the launch of our home insurance product
with Ageas in late 2015, we have focused on building customer
engagement and optimising price.
Our newly launched travel money and international money
transfer services gained momentum and awareness in 2016
as we helped customers to transfer £30 million overseas and
access £1 million of holiday spending money.
Our customers continued to appreciate the transparency
and choice our investment funds provide. Funds under
management increased by 12 per cent to end at £3.4 billion.
Equity ISA applications increased by 2 per cent, outperforming
the decline seen in the market and we won Best Direct Stocks
and Shares ISA Provider at the Your Money Awards in July.
The financial metrics in this section are presented on an underlying basis unless labelled as statutory.
70 I Virgin Money Group Annual Report 2016
Divisional results
Performance summary – Financial Services
Investments and pensions
Insurance and other
Total income
Total costs
Contribution
Key balance sheet items at 31 December
Loans and advances to customers
Customer deposits
Total customer balances
Risk-weighted assets
1 2015 results include Current Accounts; in 2016 Current Accounts is reported under Mortgages and Savings.
2016
£m
31.7
5.8
37.5
(15.6)
21.9
2016
£m
–
–
–
20151
£m
31.6
5.0
36.6
(16.7)
19.9
2015
£m
–
–
–
Change
%
0.3%
16.0%
2.5%
(6.6)%
10.1%
Change
%
–
–
–
50.4
51.6
(2.3)%
Financial results
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In July 2016 we opened our seventh Lounge, this time in
Sheffield. This expands our established network of Lounges
and Sheffield has continued the successful trends of our
other six Lounges. The highly visible presence on a primary
retail site has proved to be very popular with new and existing
customers, as well as the local community, as demonstrated
through very strong net promoter scores. We will continue to
use the lessons that we learn to further optimise our Store and
Lounge strategy.
2016 financial highlights
> interest income and expense incurred from Treasury
funding and liquidity operations is allocated to the
Mortgage and Savings and Cards businesses;
> other income is primarily driven by gains on the sale of
investment securities from within the Treasury portfolio;
> a £1.4 million increase in depreciation and amortisation
arose from capital expenditure in prior years, as we
continued to invest in our future; and
> despite the cost of increased depreciation, amortisation
and continued investment, the cost of running Central
Functions reduced by 0.4 per cent – continuing to
evidence the benefits of our stringent cost control and
operational leverage.
Central Functions
Our Central Functions provide shared support services to
each of our business lines. These services include Information
Technology and Property, together with functions such as
Risk, Finance, Treasury, Human Resources and the Group’s
Executive. It is not our policy to allocate the cost of these
shared functions to each business line.
Our segmental view of the business allocates directly
attributable costs to the main income lines, with the
remainder of overheads in central functions.
This part of our business contributed 1.8 per cent of total
income in 2016.
Key developments
Management of central overhead is a key discipline for the
business. Further simplification and efficiency activity across
a number of central functions in the year more than offset
the cost of increased investment in the development of the
business through both the project portfolio and enhanced
distribution activity.
The scope of simplification and efficiency improvements was
broad. Fixed costs efficiencies were driven by holding people
costs flat with targeted delayering especially at the senior
levels and other operational efficiencies offsetting inflationary
and volume driven increases. Property and IT costs were
managed carefully through contract negotiations and the
disposal of our ATMs. Operational cost efficiencies were
driven by contact centre economies of scale. The benefits of
these improvements can be seen not only in the reduction
in cost:income ratio but also in the reduction of cost per
customer across all product lines.
We have continued to optimise and prioritise our project
delivery in 2016, using our £50 million investment budget
effectively to deliver a wide range of initiatives that
helped grow and protect our business, as well as meet key
regulatory requirements. This includes the development of
our mortgage proposition via our successful ‘Mortgage Lab’,
further advancing our fraud, financial crime and anti-money
laundering capability and improvements to our complaints
management system, reducing the time it takes us to resolve
complaints. We have integrated multiple third party solutions
and developed our core systems this year, leaving us well
positioned to offer an improved debit card proposition to new
and existing customers in 2017 through a new partnership
with MasterCard.
72 I Virgin Money Group Annual Report 2016
Divisional results
Performance summary – Central Functions
Other income
Total income
Total costs
Contribution
Key balance sheet items at 31 December
Risk-weighted assets
2016
£m
10.7
10.7
(185.2)
(174.5)
2016
£m
2015
£m
10.3
10.3
(186.0)
(175.7)
2015
£m
Change
3.9%
3.9%
(0.4)%
(0.7)%
Change
427.6
439.6
(2.7)%
Financial results
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Virgin Money London Marathon.
Photo: Virgin Money London Marathon
74 I Virgin Money Group Annual Report 2016
Board of Directors
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6
Additional Directors (since 31 December 2016)
91
102
KEY
Member of
Nomination
Committee
Member of Audit
Committee
Member of
Board Risk
Committee
1 From 25 January 2017
2 From 1 March 2017
Member of
Remuneration
Committee
Committee
Chair
N
A
Ri
4
8
Company Secretary
11
3
7
R
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Directors
1 Glen Moreno
Chairman
Appointed:
January 2015 (Board), May 2015 (Chairman)
N
External appointments:
Senior Independent Director and Chair of the Remuneration
Committee of Hiscox Limited, Chairman of Premium Credit
Limited and Independent Non-Executive Director of M&G
Group Limited.
Skills and experience:
Glen has over 40 years’ experience in business and finance
gained from senior positions in a wide range of industries.
He was previously Chairman of Pearson plc, Deputy
Chairman of the Financial Reporting Council, and Senior
Independent Director and Deputy Chairman at Lloyds Banking
Group plc. Glen was also the Chief Executive of Fidelity
International Limited.
External appointments:
Non-Executive Director of Fidelity International Limited and
an Independent Non-Executive Director and Chair of the Audit
Committee of Promotora de Informaciones SA.
2 Norman McLuskie
Senior Independent
Non-Executive Director (SID)
Appointed:
January 2010
N
R
Ri
A
Skills and experience:
Norman has over 35 years of experience in financial services in
the UK listed environment. He is a chartered accountant and
a fellow of the Chartered Institute of Bankers in Scotland. He
previously held a number of Board level roles at the Royal Bank
of Scotland Group (RBS), including Deputy Chief Executive
and a Non-Executive Director of RBS Insurance. He was also
Chairman of MasterCard Europe.
External appointments:
None.
3 Colin Keogh
Independent Non-Executive Director (INED)
N
A
Ri
Appointed:
January 2010
Skills and experience:
Colin has an extensive knowledge of banking operations drawn
from over 30 years in financial services, during which he has
held a number of senior management and board positions.
Colin was Chief Executive of Close Brothers plc. He previously
held Non-Executive Director roles at Bràit SE (a specialist
investment company listed in Johannesburg and Luxembourg),
New World Resources plc and Emerald Plantation Holdings Ltd.
4 Marilyn Spearing
Independent Non-Executive Director (INED)
N
A
Ri
R
Appointed:
January 2014
Skills and experience:
Marilyn’s specialist knowledge in payments, cash management
and related technology platforms has been acquired over
a lengthy executive career. She also has extensive general
financial services experience, particularly in managing
organisational, operational and structural change. Marilyn
was the Global Head of Trade Finance and Cash Management
at Deutsche Bank AG and Global Head of Payments and Cash
Management at HSBC. She also held positions on the Boards of
Swift (UK) Limited and VOCA Limited.
External appointments:
None.
5 Geeta Gopalan
Independent Non-Executive Director (INED)
Ri
A
R
N
Appointed:
June 2015
Skills and experience:
Geeta has wide-ranging experience and knowledge of the
financial services industry, particularly around payments and
digital innovation. Geeta was Director of Payment Services
with HBOS plc and previously Managing Director, UK Retail
Bank and Business Development Head EME at Citigroup. Geeta
was formerly the Chair of Monitise Europe. She is a chartered
accountant.
External appointments:
Independent Non-Executive Director of Vocalink Holdings
Limited and its subsidiary Advanced Payment Technology
Limited, and Non-Executive Member and Vice Chair of the
England Committee of the Big Lottery Fund.
76 I Virgin Money Group Annual Report 2016
Board of Directors
Directors and Company Secretary
6 Gordon McCallum
Non-Executive Director
Appointed:
January 1998
Skills and experience:
Gordon has extensive board, financial and management
experience from a range of sectors including media,
telecommunications, financial services and aviation. As
a senior executive in the Virgin Group, he led its strategic
development from 1998 to 2012. He was previously a
management consultant at McKinsey & Company and an
investment banker at Baring Brothers in London and Asia.
External appointments:
Non-Executive Director at Virgin Atlantic Limited and serves
in a Non-Executive capacity on the boards of a number of
non-Virgin companies. These include John Swire & Sons
Limited and Hunter Boot Limited in the UK and the Advisory
Board of Aldo Group in Canada. He is also a Senior Advisor to
private equity firm, Searchlight Capital.
7 Patrick McCall
Non-Executive Director
Appointed:
January 2012
Skills and experience:
As a senior executive in the Virgin Group, Patrick has extensive
board, financial and management experience across a range
of sectors including financial services, retail, travel and
healthcare. Patrick was previously an investment banker at
SG Warburg.
External appointments:
Senior Managing Director of the Virgin Group and Non-
Executive Director at Virgin Active, Virgin Rail Group, Virgin
Trains East Coast, Virgin Galactic and OneWeb.
8 Jayne-Anne Gadhia CBE
Executive Director and Chief Executive
Appointed:
March 2007
Skills and experience:
Jayne-Anne has nearly 30 years of experience in finance
and banking. She was one of the founders of Virgin Direct,
launching the Virgin One Account in 1998. Following the
acquisition by RBS of the Virgin One Account, she went on to
lead a number of RBS business units, ultimately joining the RBS
Retail Executive Board where she was responsible for RBS’s
mortgage business. Jayne-Anne re-joined Virgin Money as
Chief Executive in 2007. She is a chartered accountant.
N
External appointments:
Trustee of Tate3 (Government appointment), Deputy Chairman
of The Great Steward of Scotland’s Dumfries House Trust,
and Non-Executive Director of Scottish Business in the
Community3. Jayne-Anne has a number of advisory roles and
is the Government’s Women in Finance Champion.
9 Eva Eisenschimmel
Independent Non-Executive Director (INED)
Ri
A R N
Appointed:
January 2017
Skills and experience:
Eva has 30 years’ experience as a brand and marketing
professional. She was previously Managing Director of
Marketing, Brands and Culture at Lloyds Banking Group plc,
Chief Customer Officer at Regus plc, and Chief People and
Brand Officer at EDF Energy. Eva has also held senior executive
positions at Allied Domecq and British Airways.
External appointments:
Independent Non-Executive Director of Water Plus Limited,
a joint venture between Severn Trent and United Utilities.
10 Darren Pope
Independent Non-Executive Director (INED)
Ri
A R N
Appointed:
To be appointed on 1 March 2017
Skills and experience:
Darren has over 30 years’ experience in retail banking and
financial services. He has held executive and senior roles
during recent transformational projects, having taken a lead
role in the design and divestment of the TSB business from
Lloyds Bank, and its subsequent IPO and takeover. Darren was
previously Chief Financial Officer of TSB.
External appointments:
Independent Non-Executive Director of Equiniti Group plc.
11 Katie Marshall
Company Secretary
Appointed:
September 2013
Skills and experience:
Katie joined Virgin Money in 2009, following ten years as a
corporate lawyer at Eversheds LLP. Katie was appointed Company
Secretary in September 2013. She is a qualified solicitor.
3 Body not for commercial purposes.
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Board member
1 Jayne-Anne Gadhia CBE
Chief Executive
Jayne-Anne joined the Board in March 2007 as Chief Executive.
Further details can be found on page 76.
Non Board members
2 Peter Bole
Chief Financial Officer
Peter is a chartered accountant. Following roles with Deloitte
and Standard Life, Peter joined RBS where he held a variety
of senior finance roles, latterly in RBS Insurance. In 2009, he
joined Tesco Bank where he established the finance function
and played a key role in the leadership of the business as it
was migrated from RBS infrastructure. Peter joined Virgin
Money in 2016, bringing his extensive retail financial services
experience and expertise. Peter became Chief Financial Officer
in January 2017.
3 Marian Martin
Chief Risk Officer
Marian is a chartered accountant and qualified with Ernst and
Young. She joined the Britannia Building Society where she
was an Internal Audit Manager, before spending four years at
the Britannic Group where she was Head of Group Audit and
Risk. Marian joined RBS in 2004 and served as Risk Director
of RBS’s consumer finance businesses, the RBS mortgage
business and then Tesco Personal Finance. Marian joined
Virgin Money as Chief Risk Officer in 2007 and has been
in that role throughout the period of business growth and
development.
4 Matt Elliott
People Director
Matt’s early career was at RBS, where he worked on HR
policy and employment issues, before supporting the HR
transformation programme following the acquisition of
NatWest. Matt held senior HR roles in several RBS operating
businesses including the Consumer Finance division and
Tesco Personal Finance. In 2007, Matt moved to BP as Senior
Manager for Corporate and Functions before becoming HR
Vice President for BP in North Africa. Matt joined Virgin Money
as People Director in 2011.
2
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3
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78 I Virgin Money Group Annual Report 2016
Virgin Money Executive
5 Michele Greene
Director of Strategic Development
9 Caroline Marsh
Director of Culture
Caroline has over 30 years’ experience in banking. Her
early career was at Barclays where she spent 12 years in
management roles. In 1999, she joined Virgin One as Sales
Director. Following the acquisition of Virgin One by RBS in
2001, Caroline became Sales and Operations Director for
the RBS consumer finance business, before leading RBS’s
intermediary mortgage business. Caroline returned to Virgin
Money in 2007 and has led the cultural agenda for the Virgin
Money business as Director of Culture since the acquisition of
Northern Rock in 2012.
10 Tim Arthur
Creative Director
Prior to joining Virgin Money, Tim was Global Chief Executive
(CEO) of Time Out. He led its expansion across Asia and the US
and was responsible for transforming the brand from a print
media business to a global digital platform. Before Time Out,
Tim was CEO of Cardboard Citizens, and CEO/Artistic Director
of two arts venues. He is also a playwright and author. Tim
joined Virgin Money in 2016.
Michele is a chartered accountant and qualified with KPMG.
She spent three years at Credit Lyonnais as a financial
accountant before joining Goldman Sachs as group
accountant. Michele then spent over 15 years at MBNA, most
recently as Chief Finance Officer, where she was a member
of the board and closely involved in setting the strategic
direction of the business. Michele joined Virgin Money in
October 2013.
6 Hugh Chater
Chief Commercial Officer
Hugh has over 25 years’ experience in financial services.
He was an executive founder at MBNA Europe, joining in
1993 from KPMG Management Consulting. At MBNA Hugh
held executive roles in HR, Credit Management, Customer
Satisfaction and Marketing before becoming Chief Operating
Officer and then UK Managing Director. In 2007 Hugh joined
RBS Retail to run the consumer credit card business. He
subsequently ran the current account, savings, investments
and insurance products. Hugh joined Virgin Money in
June 2016.
7 Mark Parker
Chief Operating Officer
Mark’s first IT Director role was at British Sugar. In 2001,
Mark joined the HBOS Group, now part of Lloyds Banking
Group. After serving as Group Services Director and Chief
Information Officer, he then became Managing Director
of Intelligent Finance. Mark joined Northern Rock as Chief
Operating Officer in 2009 and subsequently joined Virgin
Money in January 2012.
8 Andrew Emuss
General Counsel
Andrew qualified as a solicitor in 1996. He started his career
at Clifford Chance, qualifying as a corporate lawyer, and has
spent 20 years acting on corporate and capital markets deals.
He spent over ten years at Nomura and served as its Head of
Corporate Development for EMEA, executing strategic deals.
Andrew joined Virgin Money as General Counsel in June 2014.
Corporate
Governance Report
“We believe that strong
governance should prevail
throughout the business, and we
pay particular attention to
supporting our EBO philosophy
and customer-focused culture,
vital ingredients in the long-term
success of the Group.”
Dear Shareholders
I am pleased to present our Corporate Governance Report
for 2016. This report sets out our approach to governance in
practice, the work of the Board in 2016 and includes reports
from the Nomination Committee, the Audit Committee and
the Board Risk Committee. Information about the work of
the Remuneration Committee is included in the Directors’
Remuneration Report on pages 105 to 125.
This report also explains how the Group applies the highest
principles of corporate governance, in particular those laid
down in the 2014 edition of the Financial Reporting Council
UK Corporate Governance Code (the Code). The Code can be
accessed at www.frc.org.uk.
I am pleased to report that during the year the Board and
its Committees met their objectives and carried out their
responsibilities effectively. Set out below are the principal
corporate governance matters considered in 2016.
Culture
At Virgin Money, we are proud of our culture, at the heart
of which is our ambition to make ‘everyone better off’
(EBO). This means delivering good value to our customers,
treating colleagues well, making a positive contribution to
society, building positive relationships with our partners and
delivering sustainable profits to other shareholders.
Part of the Board’s responsibilities is to ensure that this strong
culture is at the core of everything that Virgin Money does.
Virgin Money Group Annual Report 2016 I 79
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Board focus in 2016
The Board has spent considerable time in 2016 discussing the
strategic priorities for the business over the next four years.
The Group’s focus remains on strong organic growth,
maintaining our excellent asset quality and building the
Virgin Money Digital Bank. We also decided during the year
that it would be prudent to defer our small and medium-sized
enterprise (SME) plans and focus investment on enhancing our
digital capability. Should the economic outlook support it in
the future, SME remains a strategic option for the business.
Although the UK economy has performed better than
expected in 2016, economic prospects are likely to remain
uncertain as a result of geopolitical uncertainty and the
UK’s exit from the European Union. Against this backdrop,
the Board and the Executive have implemented appropriate
monitoring and oversight activities and have established
contingency plans to mitigate the impact of adverse macro-
economic conditions that may result. Further detail can be
found in the Risk Management Report.
A key emerging risk relates to the threat of cybercrime. The
use of technology has become critical in delivering customer
services, and we need to be able to respond effectively to
the increased threat of cybercrime associated with digital
expansion whilst maintaining pace with industry trends.
As such, the Board spent time considering our information
technology strategy, including investment in our existing
systems, as well as our cyber resilience strategy. The Board
will review delivery against both plans in the coming years.
Board composition and succession
During 2016, succession planning and the composition of the
Board and its Committees have remained a key focus. I am
pleased to be welcoming Eva Eisenschimmel and Darren Pope
as Independent Non-Executive Directors. Eva joined the Board
on 25 January 2017, and Darren will join the Board on 1 March
2017. Eva and Darren bring extensive banking and financial
services experience, helping to ensure the Board is well placed
to make the most of the opportunities that exist and meet the
challenges of the future.
Marilyn Spearing has notified the Board that she does not
intend to seek re-election at our 2017 Annual General
Meeting (AGM) and therefore will retire from the Board in
80 I Virgin Money Group Annual Report 2016
Corporate Governance Report
May. Marilyn leaves with the Board’s thanks and best wishes
for the future. Norman McLuskie will become Chair of the
Remuneration Committee in May 2017, with Darren Pope
becoming Chair of the Audit Committee during 2017 following
an orderly transition.
2016 Governance Focus
Corporate Governance Framework
Our corporate governance framework is reviewed annually to
ensure it remains effective and appropriate as the business
evolves.
Board effectiveness
I am pleased to report that the changes introduced and
implemented from the 2015 Board Effectiveness Evaluation
have led to improvements in a number of areas. Details of
the 2016 Board Effectiveness Evaluation, together with
information about our progress against the 2016 roadmap
(recommendations and priorities) are on pages 89 and 90.
Board effectiveness will remain a key focus.
Looking ahead
We will implement the actions from the 2016 Board
Effectiveness Evaluation, including making further progress
on the longer-term Board succession planning. We will also
ensure we are ready for the implementation of structural
reform (ring-fencing) and other regulatory capital reform.
Finally, I would like to thank the Board, our employees and our
shareholders for their support and commitment throughout
2016, and as always, I am open to engagement with our
shareholders over the course of 2017.
Glen Moreno
Chairman
27 February 2017
Read more on page 82.
Succession planning
Our approach to succession planning ensures the desired mix
of skills and experience of Board members now and in the
future. The 2016 Board composition review has led to two
new appointments onto the Board.
Read more on pages 94 and 95.
Risk Management and viability statement
The Board, via the Board Risk Committee, is responsible for
the Group’s risk management and internal controls and for
reviewing their effectiveness. The Board, in conjunction with
the Audit Committee, is also responsible for assessing the
going concern and longer term viability of the Company and
the Group.
Read more on page 98.
Audit
The Board, via the Audit Committee, oversees internal and
external audit processes, including the relationship with the
external auditors.
Read more on page 100.
Remuneration
The Board ensures, via the Remuneration Committee, that
there is a clear link between remuneration and the delivery of
the Group’s strategy.
Read more in the Directors’ Remuneration Report on pages
105 to 125.
Diversity
Diversity and inclusion is a strategic priority for Virgin Money.
The Board recognises the importance of diversity in enabling
Board effectiveness.
Read more on the Group’s approach to diversity and
inclusion on page 37 of the Strategic Report and the Board’s
performance against the Board Diversity Policy on page 96.
Virgin Money Group Annual Report 2016 I 81
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The Board, its members and additional support
Purpose and responsibilities
The Board is collectively responsible for the long-term success of Virgin Money. It achieves this by setting the strategy
and overseeing delivery against it. It establishes the culture, values and standards of the Group, effectively managing risk,
monitoring financial performance and reporting and ensuring that appropriate and effective succession planning arrangements
and remuneration policies are in place.
The role of the Directors
Set out below are the key roles and responsibilities of the Chairman and other Board members. There is a clear division of
responsibility at the head of the Group. The Chairman has overall responsibility for the leadership of the Board while the Chief
Executive manages and leads the business.
Chairman
Chief Executive
Glen Moreno was appointed Non-Executive Chairman in May 2015.
Jayne-Anne Gadhia was appointed Chief Executive in March 2007.
The Chairman:
– has overall responsibility for the leadership of the Board and
promotion of the highest standards of corporate governance;
The Chief Executive:
– manages the Group on a day-to-day basis in accordance with the
strategy and long-term objectives approved by the Board;
– has responsibility for leading the development of the Group’s culture
as a whole;
– sets the Board’s agenda to ensure that the Board devotes its time and
attention to the right matters;
– builds an effective and complementary Board;
– plans succession and Board appointments in conjunction with the
Nomination Committee; and
– ensures effective communication with shareholders.
– makes decisions on all areas affecting the operations, performance
and strategy of the Group’s business (with the exception of those
matters reserved to the Board);
– provides leadership and direction to senior management;
– co-ordinates all activities to implement the Group’s strategy and to
manage the business in accordance with the risk appetite set by the
Board; and
– has responsibility for overseeing the adoption of the Group’s culture
in the day-to-day management of the Group.
Non-Executive Directors
Senior Independent Director
The Non-Executive Directors are listed on pages 75 and 76.
Non-Executive Directors:
– challenge constructively;
– help to develop and set the Group’s strategy;
– participate actively in the decision-making process of the Board;
– scrutinise the performance of Management in meeting agreed goals
and objectives;
– provide entrepreneurial leadership of the Group within a framework of
prudent and effective controls;
– satisfy themselves as to the integrity of financial information and
systems of risk management; and
– determine appropriate levels of remuneration of the Executive
Director via the Remuneration Committee.
Norman McLuskie was appointed Senior Independent Director (SID) in
January 2010.
The SID:
– helps resolve any shareholder concerns;
– acts as a sounding board for the Chairman and Chief Executive on
Board and shareholder matters;
– is a conduit, as required, for the views of the other Directors on the
performance of the Chairman;
– is available to shareholders if they have concerns that contact
through the normal channels has failed to resolve or for which such
contact is inappropriate;
– if required, attends meetings with major shareholders and financial
analysts to understand issues and concerns; and
– conducts the Chairman’s annual performance appraisal.
82 I Virgin Money Group Annual Report 2016
The role of the Chief Financial Officer (CFO)
The CFO is responsible for the financial management of the
Group, and the day-to-day management of the balance
sheet. The CFO ensures that the Group meets statutory
reporting obligations, delivers regulatory capital and liquidity
requirements and identifies opportunities to improve the
commercial performance of the business, within the agreed
risk appetite.
In January 2016, the Group announced the appointment of
Peter Bole as CFO. Peter joined Virgin Money in November
2016, and after a period of transition was appointed as CFO on
1 January 2017, following the retirement of Dave Dyer.
The role of the Company Secretary
The Company Secretary is accountable to the Board. The
Company Secretary provides practical support to the Directors,
both as individuals and as a collective, with particular emphasis
on supporting the Non-Executive Directors in maintaining
appropriate standards of probity and corporate governance.
The Company Secretary is also responsible for facilitating
communications with shareholders, as appropriate, and
ensuring due regard is paid to their interests. All Directors,
including Non-Executive Directors, have access to the advice and
services of the Company Secretary in relation to the discharge
of their duties.
Access to advice
The Group also provides access, at its own expense, to the
services of independent professional advisers in order to assist
the Directors in their roles whenever this is deemed necessary.
Authority and delegation
Corporate governance framework
The Group’s corporate governance framework comprises the
Board authority and the delegated executive authority.
Board authority
The Board authority sets out the matters reserved to the Board.
This includes decisions concerning the strategy and long-term
objectives of the Group, capital and financial budgets, significant
contracts and transactions and various statutory and regulatory
approvals. The approval of remuneration policy, risk appetite
and risk management framework are also matters reserved to
the Board. The Board authority delegates responsibility for day-
to-day management of the business to the Chief Executive and
sets out the basis for delegation of authorities from the Board to
Board Committees.
Further details of Board reserved matters can be found at
virginmoney.com/virgin/investor-relations.
Delegated executive authority
The Chief Executive delegates aspects of her own authority,
as permitted under the corporate governance framework, to
members of the Executive.
As well as regularly discussing business performance,
the Executive Committees meet monthly to consider key
business matters. Certain Executive Committees meet more
frequently as required.
The Internal Audit Director and the Company Secretary attend
all Executive Committee meetings to ensure that there is
appropriate internal audit oversight and that the highest
standards of corporate governance are maintained.
(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)
(cid:47)(cid:80)(cid:78)(cid:74)(cid:79)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)
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(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)(cid:3)
(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)(cid:3)(cid:51)(cid:74)(cid:84)(cid:76)
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(cid:51)(cid:70)(cid:78)(cid:86)(cid:79)(cid:70)(cid:83)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)
(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)
(cid:36)(cid:73)(cid:74)(cid:70)(cid:71)(cid:3)(cid:38)(cid:89)(cid:70)(cid:68)(cid:86)(cid:85)(cid:74)(cid:87)(cid:70)
(cid:43)(cid:66)(cid:90)(cid:79)(cid:70)(cid:14)(cid:34)(cid:79)(cid:79)(cid:70)(cid:3)(cid:40)(cid:66)(cid:69)(cid:73)(cid:74)(cid:66)
(cid:38)(cid:89)(cid:70)(cid:68)(cid:86)(cid:85)(cid:74)(cid:87)(cid:70)(cid:3)(cid:66)(cid:79)(cid:69)(cid:3)
(cid:38)(cid:89)(cid:70)(cid:68)(cid:86)(cid:85)(cid:74)(cid:87)(cid:70)(cid:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)(cid:84)
Corporate Governance Report
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The role of the Board Committees
The Board is supported by its Committees which make
recommendations to the Board on matters delegated to them,
in particular in relation to internal control, risk management,
financial reporting, governance, succession planning and
remuneration matters. The current Board Committees are set
out on page 82.
Each Board Committee, other than the Nomination
Committee, comprises Independent Non-Executive Directors
only. The Nomination Committee also comprises the
Chairman and a Non-Executive Director nominated by the
controlling shareholder, the Virgin Group (the Virgin Group
Nominee Director).
Each Board Committee Chair reports to the Board on
the activities of the Committee. Reports from the Board
Committees can be found on pages 93 to 104, and information
about the work of the Remuneration Committee is included in
the Directors’ Remuneration Report on pages 105 to 125. The
terms of reference for each of the Committees can be found
on the website (virginmoney.com/virgin/investor-relations).
The main Board Committees are replicated at the Bank level
with the exception of the Nomination and Remuneration
Committees that operate at the main Board level only and
consider appointments, succession and remuneration matters
on a Group-wide basis.
The Group’s financial services business of investments,
insurance and pensions is conducted through Virgin Money
Unit Trust Managers Limited (VMUTM) and Virgin Money
Personal Financial Service Limited (VMPFS). VMUTM and
VMPFS are both regulated by the FCA.
During 2016, a review of the governance arrangements
of VMUTM was undertaken, leading to a number of
enhancements including the introduction of Group Non-
Executive Directors onto the VMUTM Board to bring further
depth and breadth of experience of investment management.
Virgin Money Giving Limited (VMG) is a not-for-profit
company within the Group and the vehicle for Virgin Money’s
charity fundraising and donations website. VMG has two
Independent Non-Executive Directors on its board.
Subsidiary governance
The Group’s banking business of residential mortgages,
savings and credit cards is conducted through Virgin Money
plc (the Bank) which is regulated by the Financial Conduct
Authority (FCA) and Prudential Regulation Authority (PRA).
The composition of the Board of the Bank replicates that
of the Company, save that the two Non-Independent
Non-Executive Directors are not members. The Chief Risk
Officer (CRO) and CFO (from 30 January 2017) are additional
Executive Directors of the Bank.
Board composition
Board size
The Board is of sufficient size and composition to reflect a
broad range of views and perspectives whilst allowing all
Directors to participate effectively in meetings.
The number and quality of Independent Non-Executive
Directors on the Board facilitates effective challenge to the
Executive. As at 31 December 2016, the Board comprised of
one Executive Director, six Non-Executive Directors (four of
whom are considered to be independent) and the Chairman,
who was independent on appointment.
Further details on independence and succession planning
are set out in the Nomination Committee Report at
pages 94 and 95.
84 I Virgin Money Group Annual Report 2016
Board composition as at 31 December 2016
(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)(cid:3)(cid:68)(cid:80)(cid:78)(cid:81)(cid:80)(cid:84)(cid:74)(cid:85)(cid:74)(cid:80)(cid:79)(cid:3)(cid:67)(cid:90)(cid:3)(cid:83)(cid:80)(cid:77)(cid:70)
(cid:18)
(cid:19)
(cid:81)(cid:3) (cid:38)(cid:89)(cid:70)(cid:68)(cid:86)(cid:85)(cid:74)(cid:87)(cid:70)(cid:3)(cid:37)(cid:74)(cid:83)(cid:70)(cid:68)(cid:85)(cid:80)(cid:83)(cid:3)(cid:9)(cid:18)(cid:19)(cid:15)(cid:22)(cid:6)(cid:10)
(cid:81)(cid:3) (cid:47)(cid:80)(cid:79)(cid:14)(cid:38)(cid:89)(cid:70)(cid:68)(cid:86)(cid:85)(cid:74)(cid:87)(cid:70)(cid:3)(cid:37)(cid:74)(cid:83)(cid:70)(cid:68)(cid:85)(cid:80)(cid:83)(cid:3)(cid:9)(cid:19)(cid:22)(cid:6)(cid:10)
(cid:81)(cid:3) (cid:42)(cid:79)(cid:69)(cid:70)(cid:81)(cid:70)(cid:79)(cid:69)(cid:70)(cid:79)(cid:85)(cid:3)(cid:47)(cid:80)(cid:79)(cid:14)(cid:38)(cid:89)(cid:70)(cid:68)(cid:86)(cid:85)(cid:74)(cid:87)(cid:70)
(cid:3) (cid:37)(cid:74)(cid:83)(cid:70)(cid:68)(cid:85)(cid:80)(cid:83)(cid:3)(cid:9)(cid:23)(cid:19)(cid:15)(cid:22)(cid:6)(cid:10)(cid:3)
(cid:3)
(cid:9)(cid:74)(cid:79)(cid:68)(cid:77)(cid:86)(cid:69)(cid:74)(cid:79)(cid:72)(cid:3)(cid:36)(cid:73)(cid:66)(cid:74)(cid:83)(cid:78)(cid:66)(cid:79)(cid:10)
(cid:22)
(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)(cid:3)(cid:68)(cid:80)(cid:78)(cid:81)(cid:80)(cid:84)(cid:74)(cid:85)(cid:74)(cid:80)(cid:79)(cid:3)(cid:67)(cid:90)(cid:3)(cid:85)(cid:70)(cid:79)(cid:86)(cid:83)(cid:70)
(cid:21)
(cid:19)
(cid:18)
(cid:18)
(cid:81)(cid:3) (cid:17)(cid:14)(cid:19)(cid:3)(cid:90)(cid:70)(cid:66)(cid:83)(cid:84)(cid:3)(cid:9)(cid:19)(cid:22)(cid:6)(cid:10)
(cid:81)(cid:3) (cid:19)(cid:14)(cid:21)(cid:3)(cid:90)(cid:70)(cid:66)(cid:83)(cid:84)(cid:3)(cid:9)(cid:18)(cid:19)(cid:15)(cid:22)(cid:6)(cid:10)
(cid:81)(cid:3) (cid:21)(cid:14)(cid:23)(cid:3)(cid:90)(cid:70)(cid:66)(cid:83)(cid:84)(cid:3)(cid:9)(cid:18)(cid:19)(cid:15)(cid:22)(cid:6)(cid:10)
(cid:81)(cid:3) (cid:23)(cid:12)(cid:3)(cid:90)(cid:70)(cid:66)(cid:83)(cid:84)(cid:3)(cid:9)(cid:22)(cid:17)(cid:6)(cid:10)
(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)(cid:3)(cid:68)(cid:80)(cid:78)(cid:81)(cid:80)(cid:84)(cid:74)(cid:85)(cid:74)(cid:80)(cid:79)(cid:3)(cid:67)(cid:90)(cid:3)(cid:72)(cid:70)(cid:79)(cid:69)(cid:70)(cid:83)
(cid:81)(cid:3) (cid:46)(cid:70)(cid:79)(cid:3)(cid:9)(cid:23)(cid:19)(cid:15)(cid:22)(cid:6)(cid:10)
(cid:81)(cid:3) (cid:56)(cid:80)(cid:78)(cid:70)(cid:79)(cid:3)(cid:9)(cid:20)(cid:24)(cid:15)(cid:22)(cid:6)(cid:10)
(cid:20)
(cid:22)
This Board composition data will change when the 2017 Board
changes referenced below take effect.
Board appointments
There were no changes to the Board’s membership in 2016.
Board and Committee changes in 2017
During 2016, the Nomination Committee continued to keep
under review succession planning and the effectiveness of the
Board and its Committees.
The following changes to the Board and Committees have
been or are to be made during 2017:
> Eva Eisenschimmel joined the Board as an Independent
Non-Executive Director on 25 January 2017 and was
appointed as a member of the Audit, Board Risk,
Remuneration and Nomination Committees;
> Darren Pope will join the Board on 1 March 2017 and will
become a member of the Audit, Board Risk, Remuneration
and Nomination Committees;
> Marilyn Spearing has notified the Board that she
does not intend to seek re-election at the 2017
AGM. Marilyn is currently Chair of the Remuneration
Committee and a member of the Audit, Board Risk and
Nomination Committees;
> Norman McLuskie, SID, will succeed Marilyn as Chair of the
Remuneration Committee, effective in May 2017, on her
retirement from the Board; and
> Darren Pope will succeed Norman McLuskie as Chair of
the Audit Committee during 2017, following a period
of transition.
More information on the Board composition and the
appointment process is set out in the Nomination Committee
Report on pages 93 to 96.
Executive Director service agreement
and Non-Executive Director terms of
appointment
The Chairman and Non-Executive Directors are appointed
for a specified term and are subject to annual re-election
by shareholders. Non-Executive Directors may have their
appointment terminated in accordance with the Articles
of Association of the Company (Articles), their letters of
appointment or statute at any time without compensation.
The Chief Executive is able to terminate her appointment
by giving twelve months’ notice. The Chairman has a six
month notice period. The Non-Executive Directors’ letters
of appointment, and the service agreement of the Executive
Director, are available for inspection by shareholders at the
Company’s registered office.
Corporate Governance Report
Virgin Money Group Annual Report 2016 I 85
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Election and re-election
All Directors appointed since the 2016 AGM will stand for
election at the 2017 AGM. All other Directors will retire and
those wishing to serve again will stand for re-election by
shareholders at the 2017 AGM. Marilyn Spearing has indicated
that she will not seek re-election.
The Virgin Group will be entitled to vote on the ordinary
resolutions at the AGM for the re-election of the Independent
Non-Executive Directors. However, for the purposes of the
Listing Rules, each such resolution will also require approval
by a majority of the votes cast by the Company’s independent
shareholders (being the shareholders excluding the Virgin
Group) in order to be valid. The outcome of both of these vote
counts will be announced following the 2017 AGM.
Directors’ and Officers’ liability insurance
Information on the Group’s insurance cover and indemnity
arrangements for Directors is provided on page 127 of the
Directors’ Report.
Diversity policy
Diversity and inclusion is a strategic priority for the Group.
The Board is clear that diversity helps to improve the quality
of decision making and is committed to continuing to increase
the diversity of the Board.
Information on the Group’s approach to diversity and
inclusion, including its consideration in Board appointments,
is set out in the Nomination Committee Report on pages 93 to
96, and the Strategic Report on pages 36 and 37.
Conflicts of interest
The Directors must avoid any situation which might give
rise to a conflict between their personal interests and those
of the Group. Prior to appointment, potential conflicts of
interest are disclosed and assessed to ensure that there are no
matters that would prevent the incoming Director from taking
the appointment.
Directors are responsible for notifying the Chairman and the
Company Secretary as soon as they become aware of any
actual or potential conflicts.
In addition, changes to the commitments of all Directors
are reported to the Board and a register of potential
conflicts is regularly reviewed by the Chairman to ensure the
authorisation remains appropriate.
If any potential conflict arises, the relevant Director will
excuse him/herself from any meeting or discussions where the
potential conflict is considered, and all relevant material will
be restricted. All potential conflicts authorised by the Board
are recorded in a register of Directors’ Conflicts of Interest.
There were no potential conflicts arising in 2016 which
required a relevant Director to excuse him/herself from any
meeting or discussion on such matter.
Time commitments
Each Non-Executive Director is required to devote such time
as is necessary for the effective discharge of their duties
to a minimum of 36 days per year and may be expected to
relinquish other appointments to ensure that they can meet
the time commitments of their role.
During 2016 the Chairman became an Independent Non-
Executive Director and Chair of the Audit Committee of Prisa
(Promotora de Informacional SA). The Chairman’s role with
the Group remains his primary role, and he limits his other
commitments to ensure he can spend as much time as the
role requires.
Executive Directors must seek authorisation from the Board
before accepting any additional responsibilities or external
appointments, and are restricted to holding no more than
two Non-Executive Director roles (excluding roles with bodies
not for commercial purposes). At 31 December 2016, the
Executive Director was compliant with this requirement and
continues to be at the date of this report.
86 I Virgin Money Group Annual Report 2016
Key matters considered by the Board
The following table provides an overview of the key matters considered by the Board in 2016:
Financial
Strategy and customer focus
Regulatory
– Approval of Budget for 2017
– Review of progress against the Group’s
– Approval of results and analyst
presentations
– Approval of dividends
– Approval of the Internal Capital Adequacy
Assessment Process
– Approval of funding and capital issuances
strategy
– Approval of three year strategic and
funding plans
– Consideration of potential acquisition
opportunities and strategic initiatives
– Monitoring of conduct, culture and values
– Overseeing digital transformation, including
approval of the partnership with 10x Future
Technologies
Overseeing the implementation of measures
to ensure compliance with:
– Ring-fencing
– Recovery and resolution
– Senior Managers & Certification Regime
– MREL and other regulatory changes
Risk management
Governance
Investors
– Approval of the Group’s risk appetite and risk
– Review of Board and Committee structure
– Receiving Investor Relations updates
management framework
and composition
– Oversight of debt and equity investor
– Review of the Group’s aggregate risk
– Review of the corporate governance
reporting
exposures, risk/return and emerging risks
framework
– Receiving AGM briefing and approval of
– Review of internal control systems
– Overseeing Board and Executive succession
AGM Notice
– Monitoring cyber resilience
– Approval of stress test results
planning and appointment
– Overseeing Board Effectiveness and
Chairman’s performance reviews
Training
Board induction
All Directors are expected to make an informed contribution
based on an understanding of the Group’s business model
and the key challenges it faces. The Chairman ensures that
all Directors receive a full induction on joining the Board,
facilitated by the Company Secretary and comprising:
> a corporate induction, including an introduction to the
Board and a detailed overview of the Group, its strategy,
the competitive environment, operational and governance
structures and main business activities and products;
> training on the roles and responsibilities of a Director,
including statutory duties and responsibilities as a Senior
Manager and/or an FCA approved person; and
> a detailed induction programme across Risk and Finance
focusing on: risk appetite and the Group’s risk profile,
culture and framework, compliance and conduct
risk, financial analysis and controls, capital, stress
testing, liquidity, recovery and resolution planning and
regulatory developments.
The induction is tailored to the individual needs of the Director
with regard to their specific role and experience to date. This
takes the form of reading materials, meetings with members
of the Board and the Executive and site visits.
Corporate Governance Report
Virgin Money Group Annual Report 2016 I 87
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Professional development and training
The Board receives regular training and information sessions
on current or emerging issues. The Company Secretary
maintains a training and development log for each Director.
The Chairman is responsible for the training and professional
development of Board members. The training programme
delivered throughout the year comprises both formal and
informal sessions, and tailored sessions on specific business
topics are a key component of the programme.
Site visits also play an important role by helping to connect
Directors with the business, our colleagues, and our
customers’ needs. Directors are also invited to attend courses,
management meetings and one-to-one meetings with
key Executives.
Board agenda and attendance
Attendance at meetings
In 2016, a total of eleven Board meetings were held (nine were scheduled and two were ad-hoc meetings). Where a Director is
unable to attend a meeting, he/she has the opportunity to review any papers and provide comments to the Chairman, who then
endeavours to represent the Director’s views at the meeting.
The attendance of Directors at Board and Committee meetings during the year is set out below. The number of meetings held
during the period that the Director held office is shown in brackets. The Chairman attends all Committee meetings, at the
invitation of the Committee Chairs.
Virgin Money Holdings (UK) plc
Current Directors who served during 2016
Glen Moreno
Norman McLuskie
Colin Keogh
Marilyn Spearing
Geeta Gopalan
Gordon McCallum
Patrick McCall
Jayne-Anne Gadhia CBE
Board
meetings1
Remuneration
Committee
Nomination
Committee
Board
Risk
Committee
Audit
Committee
11 (11)
11 (11)
11 (11)
11 (11)
11 (11)
10 (11)2
11 (11)
11 (11)
–
6 (6)
–
6 (6)
6 (6)
–
–
–
7 (7)
7 (7)
7 (7)
7 (7)
7 (7)
6 (7)2
–
–
–
7 (7)
7 (7)
7 (7)
7 (7)
–
–
–
–
7 (7)
7 (7)
7 (7)
7 (7)
–
–
–
1 The number of Board meetings includes two ad hoc meetings held in June. The first in relation to a potential strategic opportunity and the second in relation to the UK’s exit from the
European Union.
2 Conflict with external appointment.
88 I Virgin Money Group Annual Report 2016
Setting the Board agenda
The Chairman is responsible for setting the Board agenda.
Prior to each Board meeting, the Chairman reviews the agenda
and time allocation with the Company Secretary and discusses
key items of business with the Chief Executive. Board agendas
are structured to allow adequate time for discussion, in
particular of strategic matters.
The Chairman engages with the Independent Non-Executive
Directors and the Chief Executive before each scheduled
meeting to discuss any matters they wish to raise.
Effective use of the Board’s time
The Board agenda was re-designed in 2016 following a key
recommendation of the 2015 Board Effectiveness Evaluation.
The changes make more effective use of the Board’s time
by prioritising critical issues. In addition a variety of Board
forums, including Chief Executive/Chairman/Independent
Non-Executive Director only meetings and Non-Executive
Director only meetings, were held during 2016.
Board meetings and activity in 2016
The following timeline provides an overview of the Board meetings and activity in 2016:
(cid:35)(cid:35)
(cid:35)(cid:35)
(cid:35)
(cid:35)(cid:35)
(cid:35)
(cid:35)
(cid:35)
(cid:35)(cid:52)
(cid:35)(cid:52)
(cid:35)(cid:35)
(cid:35)(cid:52)
(cid:43)(cid:66)(cid:79)
(cid:39)(cid:70)(cid:67)
(cid:46)(cid:66)(cid:83)
(cid:34)(cid:81)(cid:83)(cid:74)(cid:77)
(cid:46)(cid:66)(cid:90)
(cid:43)(cid:86)(cid:79)(cid:70)
(cid:43)(cid:86)(cid:77)(cid:90)
(cid:34)(cid:86)(cid:72)
(cid:52)(cid:70)(cid:81)(cid:85)
(cid:48)(cid:68)(cid:85)
(cid:47)(cid:80)(cid:87)
(cid:37)(cid:70)(cid:68)
(cid:19)(cid:17)(cid:18)(cid:22)(cid:3)(cid:71)(cid:86)(cid:77)(cid:77)(cid:3)(cid:90)(cid:70)(cid:66)(cid:83)
(cid:83)(cid:70)(cid:84)(cid:86)(cid:77)(cid:85)(cid:84)(cid:3)(cid:66)(cid:79)(cid:69)(cid:3)(cid:258)(cid:79)(cid:66)(cid:77)
(cid:69)(cid:74)(cid:87)(cid:74)(cid:69)(cid:70)(cid:79)(cid:69)
(cid:50)(cid:18)(cid:3)(cid:83)(cid:70)(cid:84)(cid:86)(cid:77)(cid:85)(cid:84)(cid:3)
(cid:66)(cid:79)(cid:69)(cid:3)(cid:34)(cid:40)(cid:46)
(cid:41)(cid:66)(cid:77)(cid:71)(cid:3)(cid:90)(cid:70)(cid:66)(cid:83)(cid:3)(cid:83)(cid:70)(cid:84)(cid:86)(cid:77)(cid:85)(cid:84)
(cid:66)(cid:79)(cid:69)(cid:3)(cid:69)(cid:74)(cid:87)(cid:74)(cid:69)(cid:70)(cid:79)(cid:69)
(cid:50)(cid:20)(cid:3)(cid:83)(cid:70)(cid:84)(cid:86)(cid:77)(cid:85)(cid:84)
Key
Board meeting
Board meeting and tailored briefing
Board meeting and strategy discussion
Tailored briefings
> Credit cards business model
> Cyber resilience
B
BB
BS
> Internal Capital Adequacy Assessment Process (ICAAP)
> Recovery and resolution plans
> IFRS9
Site visits
> Mortgage Lab
> Mortgage Operations
> Contact Centre
> Security Operations
Board Strategy Review
During 2016 the Board spent considerable time discussing the
Group’s strategy. The strategic review included the four year
financial and funding plans, the 2017 budget and the external
environment (including the potential impact of the UK’s exit from
the EU).
The following matters were all discussed in detail: risk oversight
and appetite, with an increased focus on cyber resilience; the
impact of the macro and regulatory environment on base rates
and our capital; the need to continue managing costs tightly
whilst maintaining appropriate levels of investment; growing our
financial services business; the development of the Virgin Money
Digital Bank, and potential acquisition opportunities. The Board
also spent time considering the updates received from the Board
Committees on the Group’s strategy.
The Board’s key focus during these discussions was to ensure that
Virgin Money’s strategy supports its ambition to make ‘everyone
better off’.
Corporate Governance Report
Virgin Money Group Annual Report 2016 I 89
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Cyber resilience
It is Virgin Money’s determination to be consistently one of
the safest banks in the UK. The Board plays an important role
overseeing the Group’s cyber resilience approach and the
level of investment into cyber security, and has appointed
Geeta Gopalan as the accountable Non-Executive Director
responsible for leading on cyber security at Board level.
The Board provides robust challenge and scrutiny to ensure
that the Group is adequately mitigating the threats it faces,
and Virgin Money’s cyber resilience strategy is reviewed by the
Board on an annual basis with specific detailed reporting on
progress provided quarterly. The review takes into account the
latest cyber threat intelligence assessment. This ensures that
the strategy remains fit for purpose to combat the potential
cyber threats the Group may face, as well as remaining aligned
to the overall business objectives of the Group.
Board effectiveness
Skills and experience of the Board
As illustrated by the Board biographies on pages 75 and 76,
the Non-Executive Directors on our Board have a broad range
of skills and experience.
Annual Board Effectiveness Evaluation
In 2015 the Board engaged an external facilitator, Dr Tracy
Long CBE of Boardroom Review Limited, to undertake an
independent review of the Board’s current strengths and
future challenges. The key recommendations, and priorities
arising, were agreed by the Board in January 2016, and set out
in the 2015 Annual Report and Accounts. The next external
evaluation is not due until 2018, but in the intervening years
it is usual for the annual evaluation to be led by the Chairman,
with support from the Company Secretary.
A summary of the evaluation methodology and process
followed for the 2016 Board Effectiveness Evaluation and key
findings and recommendations are set out below.
Board Evaluation
The Chairman, with support from the Company Secretary,
undertook a review of Board governance, encompassing
the workings of the combined Company and Bank
Boards during 2016.
The scope of the review was predominantly focused on
assessing progress against the key recommendations and
priorities identified in the evaluation roadmap. The output
from the Board evaluation, as summarised below, was
considered by the Nomination Committee in February 2017,
and reflected in the updated roadmap for 2017.
Board Committee Evaluation
The review of Board Committee performance included an
assessment of whether each Committee had met its required
responsibilities; and a qualitative review seeking views on
the effective running of each Committee. Feedback and key
themes were discussed at the respective Committee meetings,
and the key recommendations for 2017 were agreed.
Director annual reviews
The Chairman met with each Non-Executive Director in
early 2017 to discuss their contributions and effectiveness,
and reported to the Nomination Committee on the output.
The Chairman also conducted the Chief Executive’s annual
performance appraisal. This activity supported the annual
review of Board composition and recommendations on
Director election/re-election to be put to the shareholders at
the 2017 AGM. In parallel, the SID assessed the Chairman’s
performance, seeking input from the other Directors and
updated the Nomination Committee in early 2017.
90 I Virgin Money Group Annual Report 2016
Key conclusions from 2016 Board Effectiveness Evaluation:
Progress against the 2016 Roadmap (priorities/
recommendations)
A need to balance strategic, operational and governance items and
prioritise critical areas:
– Better balance achieved in 2016 with appropriate and
proportionate Board focus on strategic, risk and control,
remuneration and governance matters.
– Significant Board interaction and engagement on strategy, threats
and opportunities and risk appetite.
– The forward agendas will continue to be developed collaboratively
with consultation between the Chairman, Chief Executive,
Committee Chairs and Company Secretary.
The importance of the Board as a team
– A well balanced Board in terms of skills, experience and
independence, strengthened further by the two new Board
appointments.
– Positive progress made in creating a strong Board culture with
mutual trust and respect, open communications, committed
contribution, challenge and support by all members. This will
remain an ongoing priority for the Chairman.
– The variety of Board forums, introduced in the 2016 Board
schedule, have worked well.
Greater clarity and visibility on Board succession and appointments
– Considerable focus and progress made in 2016 on Board
composition, with the medium-term succession plans aligned to
the current and future strategy.
– Senior Board Leadership and succession planning will remain a key
focus for 2017 and beyond, led by the Chairman in conjunction
with the SID.
Deeper focus on the external landscape (market environment,
competition, regulatory agenda)
– Significant progress made on increasing Board time and focus on
the external environment.
– Increased focus in the risk agenda on scenario planning, stress
testing and crisis management, supporting both strategic planning
process and ICAAP.
– Concluded a series of Board briefings on topics including cards
business model, resolution planning, cyber resilience and areas of
regulatory and accounting change.
– Increased ‘line one’ reporting and representation at Board and
Committees enhancing further the Board’s assessment of risk and
prioritisation of critical issues.
Continued focus on leadership and ensuring that talent development
and succession planning are aligned with the current and future
strategy
– Ongoing review of Executive talent, capability and succession
plans to ensure alignment to current and future strategy.
Further strengthening of the Executive in 2016; detail on key
appointments is set out on page 84.
– Greater visibility requested by the Board in 2017 on leadership and
talent development programmes to ensure the Group continues to
create opportunities for current and future leaders.
Board basics, agenda setting and quality of information
– Continued high quality of Board information, with transparent
information flow.
– Increased efficiency in Board processes and meetings.
– Comprehensive and formal written reporting to Board on
Committee business.
Further information regarding the 2016 Board Effectiveness
Evaluation is set out in the Committee reports on pages 93 to 104.
Shareholder engagement and relationships
The Board recognises the need for a programme of
engagement which offers all shareholders opportunities to
receive information directly and enable them to share their
views with the Board.
Please see page 272 for details of the breakdown of the
Company’s share register.
Controlling shareholder
During 2016 the Group’s ‘controlling shareholder’ was Virgin
Group Holdings Limited (Virgin Group). Virgin Money is party
to a Relationship Agreement with Virgin Group.
The principal purpose of the Relationship Agreement is to
ensure that the Group is capable of carrying on its business
independently of its controlling shareholder. The Relationship
Agreement provides for the appointment of a nominee
director by Virgin Group through whom the Chairman and
other Non-Executive Directors are kept up to date during the
year with the views of the Virgin Group.
The Chairman and Chief Executive have an ongoing dialogue
with the Virgin Group Nominee Director throughout the
course of the year.
So far as the Company is aware, the independence provisions
contained in the Relationship Agreement have been complied
with by the Virgin Group (and its associates), and the Company
has complied with the terms of the Relationship Agreement.
The Group was previously party to a Relationship
Agreement with WLR. All terms of this agreement ceased
to apply when WLR divested its remaining shareholding on
21 November 2016.
Corporate Governance Report
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Investor relations
The Investor Relations Director has primary responsibility
for co-ordinating day-to-day communications with existing
shareholders, potential investors and analysts. These
communications are effected through a combination of
briefings to analysts and institutional investors, individual
discussions with shareholders and potential investors,
regulatory announcements, press releases and updates on the
Group’s website.
The Investor Relations Director reports regularly to the Board
to ensure it is informed of significant market developments,
share price performance and changes in the shareholder base.
Investor contact
In 2016, the Group has engaged in active discussions
with corporate shareholders and potential investors on
an individual basis, through investor presentations and
attendance at investor conferences. The Group will maintain
an active dialogue with shareholders, potential investors and
analysts to discuss the performance of the Group, its strategy
and new developments in 2017.
Additionally, the Group engaged with institutional investors
or their representatives on governance and remuneration
matters in advance of the 2016 AGM and intends to do so in
advance of the 2017 AGM.
The Group has an Investor Relations section on its website
which contains information on all disclosures made to the
market, including results presentations, annual reports,
interim results and trading statements.
Shareholders, potential investors and analysts are able to ask
questions about the Group through the Investor Relations
function or the Group Secretariat.
The SID is also available to meet with shareholders, and may
be contacted through the Company Secretary at Jubilee
House, Gosforth, Newcastle upon Tyne, NE3 4PL.
Company Secretary and retail shareholders
The Company Secretary oversees communications with
individual retail investors.
The Group’s registrar, Equiniti Limited, provides a dedicated
shareholder online and telephone dealing service to assist
shareholders in managing their investments. Further detail
can be found on page 272.
During the year the Group has made specific contact with
shareholders in relation to the interim and final dividends,
and the 2016 AGM.
The Annual General Meeting
The AGM is the principal opportunity for shareholders to
engage directly with the Board. It is commonly used by
retail shareholders as an opportunity to share views and
raise questions during the meeting, but afterwards there
is an opportunity to meet the Directors and members of
the Executive.
The Company’s AGM was held in London in May 2016 and
in excess of 77% of total voting rights were exercised by
shareholders. All of the resolutions put to shareholders were
passed with votes in favour representing over 95% of the
votes cast, save for the resolution to approve the Directors’
Remuneration Policy in respect of which votes in favour
represented over 91% of the votes cast.
All Board members attended the 2016 AGM and those seeking
(re-)election plan to attend the 2017 AGM. All shareholders
will be invited to attend the 2017 AGM which will be held
on 3 May 2017 at the London offices of Allen & Overy LLP.
Information on the business to be considered at the AGM
will be set out in the Notice of Meeting which will be issued
to shareholders, together with any related documentation,
in due course.
Internal control
The Board is responsible for the Group’s system of internal
control. The system is designed to facilitate effective and
efficient operations and to ensure the quality of internal
and external reporting and compliance with applicable laws
and regulations.
The Group uses a “Three Lines of Defence” model. Further
detail can be found on page 133.
The Directors and Executive are committed to maintaining a
robust control framework as the foundation for the delivery
of effective risk management. The Directors acknowledge
their responsibilities in relation to the Group’s systems of
risk management and internal control and for reviewing their
effectiveness and conducted such a review during the year. In
addition, in 2015 Deloitte LLP (Deloitte) produced an External
Quality Assurance Review (EQAR) report in relation to the
Group’s Internal Audit function and significant progress has
been made during 2016 in respect of the report’s findings.
92 I Virgin Money Group Annual Report 2016
In establishing and reviewing the system of internal control,
the Directors consider the nature and extent of the risks
facing the Group, the likelihood of a risk event occurring and
the potential financial impact of failure. A system of internal
control is designed to manage, rather than eliminate, the
risk of failure to achieve business objectives. It therefore can
provide only reasonable but not absolute assurance against
the risk of material mis-statement or loss.
Statement of compliance
UK Corporate Governance Code
The 2014 Code applied to the Group’s 2016 financial year. The
Directors have considered the contents and recommendations
of the Code and confirm that throughout the year the Group
has applied the main principles and complied with the
provisions of the Code.
The policies supporting the Group’s risk management
framework define minimum standards for controls for all
material risk classes.
The Group intends to comply with the 2016 Code when it
comes into force, and will report on compliance in the Group’s
2017 Annual Report and Accounts.
Business areas and support functions assess on a quarterly
basis the internal controls in place to address all material risk
exposures across all risk classes. This review considers the
effectiveness of these material controls, including financial,
operational and compliance controls.
Further information on risk control and management is set out
in the Risk Management Report on pages 132 to 192.
The British Bankers’ Association Code for
Financial Reporting Disclosure
The Group has adopted the British Bankers’ Association
Code for Financial Reporting Disclosure and its 2016 Annual
Report and Accounts has been prepared in compliance with
its principles.
Committee reports
The following pages contain reports from each of the
Board’s Committees with information about the work of
the Remuneration Committee included in the Directors’
Remuneration Report.
Corporate Governance Report
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Nomination Committee Report
“We continue to work hard on the composition of the Board
to ensure the desired mix of skills and experience of Board
members both now and in the future”
Glen Moreno
Chair, Nomination Committee
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Membership and meetings
Meetings
attended
(held) in
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7 (7)
(7)(7)
(7)(7)
(7)(7)
(7)(7)
(6)(7)2
N/A3
Independent
Yes (on
appointment)
Yes
Yes
Yes
Yes
No
Yes
Committee Chair
Glen Moreno
Committee members
Norman McLuskie
Colin Keogh
Marilyn Spearing
Geeta Gopalan
Gordon McCallum
Eva Eisenschimmel
1 Number of meetings held during the period the member held office.
2 Conflict with an external appointment.
3 Eva Eisenschimmel joined the Committee on 25 January 2017.
Chairman’s overview
During 2016, succession planning and the composition of the Board and its Committees remained a key focus. Key highlights of the
Nomination Committee’s activities included:
– the appointment by the Board, on recommendation of the Committee, of Eva Eisenschimmel and Darren Pope as Independent
Non-Executive Directors;
– approval of Norman McLuskie as new Chair of the Remuneration Committee, effective in May 2017, upon the retirement from the Board
of Marilyn Spearing at the 2017 AGM;
– approval of Darren Pope as Chair of the Audit Committee, to take effect in 2017, following an orderly transition from Norman McLuskie;
– the appointment by the Bank Board in January 2017 of Peter Bole as an Executive Director; and
– consideration of Executive succession planning and overseeing the further strengthening of the Executive.
Further details on the new Board appointments and the Group’s approach to Board and Executive succession planning can be found on pages
94 and 95.
The Committee also considered progress against the recommendations and priorities from the 2015 Board Effectiveness Evaluation. I am
pleased to report that the changes introduced and actions arising from the review have led to improvements in a number of areas and other
Board members find the annual review process extremely valuable and insightful. Further detail can be found on pages 89 and 90.
Committee purpose and responsibilities
The purpose of the Committee is to keep the Board’s
composition, skills, experience, knowledge, independence
and succession arrangements under review, and to review
the succession plans for the Executive. The Committee
makes recommendations to the Board to ensure that the
Group’s arrangements are consistent with good corporate
governance standards. The Committee’s role also extends
to appointments to the Boards of the Group’s material
subsidiaries, including the Bank.
The key activities of the Committee during the year are set out
below. Full details of the Committee’s responsibilities are set
out in the Committee terms of reference and can be found on
the website at virginmoney.com/virgin/investor-relations.
During the year the Committee met its key objectives and
carried out its responsibilities effectively, as confirmed by the
annual effectiveness review.
94 I Virgin Money Group Annual Report 2016
Nomination Committee Report
Committee composition, skills
and experience
To ensure a broad representation of independent views,
including perspectives from each of the Committees,
membership of the Committee comprises the Chairman, all
Independent Non-Executive Directors and the Virgin Group
Nominee Director. The Chief Executive, the remaining non-
Independent Non-Executive Director (Virgin NED) and, if
required, the People Director attend meetings as appropriate.
How the Nomination Committee spent
its time in 2016
Board and Executive succession
Approach
The Committee recognises that good succession planning
contributes to the delivery of the Group’s strategy by ensuring
the desired mix of skills and experience of Board members
now and in the future. Just as importantly, internal talent
needs to be recognised and nurtured within Executive and
Management levels across the Group. The Group’s annual
talent and capability reviews and ‘Future Business Leaders’
Programme allows the Group to identify talent and have the
right succession plans and development programmes in place
to ensure the Group creates opportunities for current and
future leaders.
Process
The Committee supports the Chairman in keeping the
composition of the Board and its Committees under
regular review and in leading the appointment process for
nominations to the Board.
Following the 2015 Board Effectiveness Evaluation, the
Chairman undertook a review of Board tenure, succession
planning and an assessment of the collective technical and
governance skills required from the Non-Executive Directors
to support the future business strategy. Two additional
Independent Non-Executive Directors were appointed to
the Board as a result of this review. Further detail is set
out on page 95.
The Chairman is responsible for developing a succession plan
in relation to the Chief Executive, who is in turn primarily
responsible for developing and maintaining a succession plan
for key leadership positions in the Executive. The Committee
considers the adequacy of such succession arrangements.
Details of the appointments to the Board in 2017 are set
out on page 84.
To support the continued development of our business,
the Executive was further strengthened by the
following appointments:
> Hugh Chater joined the business as Chief Commercial
Officer in June 2016;
> Tim Arthur joined the business as Creative Director in
September 2016; and
> Peter Bole joined the business in November and became
CFO and an Executive Director of the Bank Board
in January 2017.
Details of their experience is set out on pages 77 and 78.
The Board is well placed to meet the challenges and
opportunities ahead, and the Committee and the Board are
satisfied that the Executive is staffed appropriately. The
Committee will continue to ensure that succession planning
remains under review.
Corporate Governance Report Virgin Money Group Annual Report 2016 I 95
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Board succession in practice
In late 2015, as a result of the Board succession planning process
referred to on page 94, the Chairman identified the need for two
additional Non-Executive Directors.
In early 2016 the search for a Non-Executive Director was
commenced. Ridgeway Partners (Ridgeway) (who have no other
connection with the Group) was appointed to support the search. The
specification for the role was agreed by the Chairman, in conjunction
with the Chief Executive and Committee members. Key attributes
for the position included extensive and recent banking or financial
services experience, marketing, technology and digital expertise.
Ridgeway analysed the market for possible candidates with a breath
of diversity, experience and background with candidates considered
from North America, Asia and other overseas locations as well
as the UK. During the second half of 2016 a short list of potential
candidates met with the Chairman and Chief Executive, following
which Eva Eisenschimmel was identified by the Committee as the
preferred candidate.
In parallel, a specification for the second Non-Executive Director
position was agreed with a focus on strong retail banking experience
and financial technical strength, preferably a former Chief Financial
Officer (CFO), to support Audit Committee Chair succession. Darren
Pope was identified by the Chairman and Chief Executive as a
potential candidate given his strong fit to the specification (as former
CFO of TSB Bank Group). Ridgeway was appointed to undertake
full due diligence, independent benchmarking and referencing on
Darren Pope.
Both individuals then met with Committee members and certain
members of the Executive. Following this comprehensive process
which was overseen by the Committee, Eva Eisenschimmel and
Darren Pope were appointed by the Board in December 2016 as Non-
Executive Directors. Details of their experience is set out on page 76.
Effectiveness
In January 2016, the Committee reviewed the findings of the
2015 Board Effectiveness Evaluation and agreed the roadmap
(recommendations and priorities) for 2016. Progress against
the roadmap was reviewed during the year and the Chairman
will meet with Dr Tracy Long CBE, the 2015 external facilitator,
in 2017 to discuss progress.
Independence and time commitments
The independence of the Non-Executive Directors, and the
election or re-election of Directors and their suitability to
continue in office, were reviewed. A rigorous independence
review was undertaken in respect of Norman McLuskie
and Colin Keogh, given both are now in the seventh year
of their tenure.
For the 2016 Board Effectiveness Evaluation, the
Committee made recommendations to the Board on the
process and timing of the review. The key conclusions of
the review reported to the Committee in February 2017
were that the Board and Committees continue to operate
effectively, although there are opportunities to further
improve effectiveness. Full details of the evaluation and
key recommendations are set out on pages 89 and 90. The
Committee will monitor the Board’s progress against the
agreed roadmap in 2017.
Corporate governance
The Committee oversaw the implementation of the
responsibilities map and individual Board statements of
responsibility, required under the Senior Managers and
Certification Regime (SMCR).
In assessing independence, the Committee did not rely
solely on the Code criteria but considered whether the Non-
Executive Director was demonstrably independent and free
of relationships and other circumstances that could affect
their judgment. It did this with reference to the individual
performance and conduct in reaching decisions. It also took
account of any relationships that had been disclosed to the
Board. Based on its assessment for 2016, the Committee is
satisfied that, throughout the year, Colin Keogh, Norman
McLuskie, Marilyn Spearing and Geeta Gopalan remained
independent as to both character and judgment.
The Virgin Group Nominee Director is not considered to
be independent due to his relationship with the Group’s
controlling shareholder, Virgin Group. The Virgin NED is also
not considered to be independent since he was appointed to
the Board as the representative director of Virgin Enterprises
Limited (VEL) pursuant to the Virgin Money Trade Mark
Licence Agreement.
96 I Virgin Money Group Annual Report 2016
Nomination Committee Report
The Committee reviewed the roles, including capabilities and
time commitments, of the Chairman, SID, Non-Executive
Directors and Chief Executive, considering amongst other
matters, the impact of limits placed by CRD IV on the number
of directorships that can be held by the Directors, and found
them to be appropriate.
The Committee is recommending the re-election of all
Directors who served during 2016 and who wish to continue
to serve, together with the election of Eva Eisenschimmel
and Darren Pope, to shareholders at the 2017 AGM. Marilyn
Spearing will retire from the Board at the 2017 AGM, having
completed her three-year term in January 2017.
Diversity
Diversity and inclusion is a strategic priority for the Group.
The Committee and Board recognise the importance of
diversity in enabling Board effectiveness and improving the
quality of decision making, and are committed to increasing
the diversity of the Board.
During the course of the year, the Board reviewed the Group’s
performance against the Board approved Diversity Policy
which sets out the approach to diversity for each of the main
Boards within the Group. Under the policy, the Committee
is responsible for reviewing the composition of the Group’s
Boards to ensure it is diverse, and reflects an appropriate
balance of skills, experience, knowledge and background.
Board appointments are always based on merit, with
candidates being considered against objective criteria.
During 2016, female representation on the Board at 37.5%
significantly exceeded the objective of 25% set out in the
Board Diversity Policy. In February 2017, the Committee
approved a revised Board Diversity Policy with an objective for
a balanced Board with representation of either gender making
up no less than 33% (one in three) of the Board. In addition,
the Group has a stated goal that by 2020 the Board’s gender
balance should be 50/50 with a 10% tolerance. Following
Darren Pope joining the Board in March 2017 and Marilyn
Spearing’s retirement from the Board in May 2017, female
representation will still meet the revised objective of 33%.
The Group supports the Parker Review ‘Beyond One by ‘21’
recommendation that FTSE 100 and 250 company boards
should have at least one ethnically diverse director by 2021
and 2024 respectively, and the Company is already compliant
with this requirement.
Please see pages 36 and 37 of the Strategic Report for details
of the Group’s approach to diversity, and inclusion and
diversity initiatives.
Glen Moreno
Chair, Nomination Committee
27 February 2017
Corporate Governance Report Virgin Money Group Annual Report 2016 I 97
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Audit Committee Report
“The transition of external auditors from KPMG to
PricewaterhouseCoopers was successfully
completed with a smooth handover process.”
Norman McLuskie
Chair, Audit Committee
Chairman’s overview
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Membership and meetings
Meetings
attended
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Independent
Yes
Yes
Yes
Yes
Yes
7 (7)
7 (7)
7 (7)
7 (7)
N/A2
Committee Chair
Norman McLuskie
Committee members
Colin Keogh
Marilyn Spearing
Geeta Gopalan
Eva Eisenschimmel
1 Number of meetings held during the period the member held office.
2 Eva Eisenschimmel joined the Committee on 25 January 2017.
We have continued to focus on the issues relevant to the Group’s financial reporting, considering emerging trends, and overseeing the Group’s
internal control framework to ensure it remains robust and fit for purpose. In particular, I would highlight the following activities:
– a successful and smooth auditor transition from KPMG LLP (KPMG) to PricewaterhouseCoopers LLP (PwC);
– review and challenge of the key estimates and judgements of Management relevant to the Financial Statements;
– oversight of the control framework with particular focus on cyber resilience, including review and discussion of internal audit reports and
Management’s response;
– oversight of the Internal Audit function, including the work to address the recommendations of the External Quality Assurance assessment
carried out by Deloitte;
– review of emerging guidance and regulation (including IFRS9 and the EU Audit Directive) and oversight of implementation plans.
During 2016, following the review by the Financial Reporting Council (FRC) of the Group’s 2015 Annual Report and Accounts (as part of its
normal cycle of reviews), the Group received confirmation from the FRC that it had no queries to raise. It should be noted that the FRC’s role in
this review was not to verify the information provided in our Report and Accounts but only to consider compliance with reporting requirements
and hence the review is not intended to provide assurance over the Annual Report and Accounts.
Finally, I would like to take this opportunity to welcome Peter Bole as Chief Financial Officer (CFO) from 1 January 2017 and I look forward to working with
him. I would also like to thank Dave Dyer, following his retirement, for his considerable contribution to the Group during his tenure as CFO.
Committee purpose and responsibilities
Committee composition, skills and experience
The purpose of the Committee is to monitor and review the
Group’s financial reporting arrangements, the effectiveness
of its internal controls and risk management framework, its
internal and external audit processes and its whistleblowing
procedures. The Committee reports to the Board on its
activities and makes recommendations, all of which have been
accepted during the year.
The key activities of the Committee are set out below and
full details of the Committee’s responsibilities are detailed
in the Committee terms of reference which can be found on
the website at virginmoney.com/virgin/investor-relations.
In 2016, the Committee met its objectives and carried out
its responsibilities effectively, as confirmed by the annual
effectiveness review.
The Committee acts independently of Management. This
ensures that the interests of shareholders are properly
protected in relation to financial reporting and internal
control. The Committee now comprises five Independent Non-
Executive Directors.
Each Committee member has extensive experience of
banking and financial services, therefore, as a whole, the
Committee has recent and relevant competence in the sector
in which the Group operates. In addition to the Chair, who is
a chartered accountant, individual Committee members also
bring specialist knowledge and proficiency which enhance
capability and effectiveness, particularly in relation to
the oversight of the internal control framework.
98 I Virgin Money Group Annual Report 2016
Audit Committee Report
Darren Pope will join the Committee on 1 March 2017 and,
following an orderly transition, will take over as Committee
Chair during 2017.
Full biographies of the Committee members can be found on
pages 75 and 76.
In addition to relevant members of the Executive, the Internal
Audit Director and external auditors attend all Committee
meetings. During the year, the Committee held a number
of private sessions with the external audit team (without
Executives present) and with each of the Chief Executive,
CFO and the Internal Audit Director.
How the Audit Committee spent its time in 2016
Financial reporting
During 2016, the Committee considered the following key financial issues and judgements in relation to the Group’s financial
statements and disclosures, with input from Management and the external auditors:
Key issues/judgements in financial reporting
Audit Committee review and conclusions
Going Concern and Viability
The Board is required to confirm whether it has a reasonable expectation
that the Company and the Group will be able to continue to operate and
meet their liabilities as they fall due for a specified period. The disclosure
must set out the basis for directors’ conclusions and explain why the
period chosen is appropriate.
Fair, balanced and understandable
The Group must ensure that the financial statements (including the
Annual Report) are fair, balanced and understandable.
Effective interest rate (EIR)
Interest earned on loans and receivables is recognised using the EIR
method.
The application of the EIR method of accounting is judgemental and
requires Management to make a number of assumptions.
The Committee reviewed and challenged the going concern and
viability assessment undertaken by Management, which was based on
the Group’s capital, funding and strategic plans. The assessment also
included consideration of the principal and emerging risks which could
impact the performance of the Group, and the liquidity and capital
projections over the period.
The Committee advised the Board that it was satisfied with the viability
statement and that three years was a suitable period of review. Further
details of the viability assessment can be found on pages 126 and 135.
The Committee spent time reviewing the Annual Report and Accounts
and challenged Management on the presentation of financial and
non-financial information. The Committee received an early draft of
the Annual Report to allow sufficient time for review and comment.
The Committee considered Management’s own assessment of
compliance with alternative performance measures guidelines and
the fair, balanced and understandable requirements. The Committee
concluded that, based on the information supplied to it and in its
judgement, the Annual Report and Accounts, when taken as a whole,
were fair, balanced and understandable.
The Committee spent considerable time understanding the
judgements taken and EIR methodology applied by Management,
including expected future customer behaviours.
Following review and challenge, the Committee agreed that
Management’s judgement, following review of the latest customer
trends, was appropriate and there have been no changes to the EIR
accounting policies applied for mortgages and credit cards during
2016. The disclosures relating to EIR are set out in note 1.10 to the
Financial Statements.
Corporate Governance Report Virgin Money Group Annual Report 2016 I 99
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Key issues/judgements in financial reporting
Audit Committee review and conclusions
Allowance for impairment losses on loans and receivables
Determining the appropriateness of impairment losses is judgemental
and requires the Group to make a number of assumptions.
Capitalisation and impairment of intangible assets
Determining the appropriateness of costs that qualify for recognition
as intangible assets requires Management judgement. Management is
also required to make ongoing assessments of whether any assets are
impaired. No assets were identified as impaired through reviews for
indicators of impairment.
Recoverability of the deferred tax asset
The Group continues to recognise deferred tax assets and liabilities in
respect of timing differences in the main trading subsidiaries.
Based on the Group’s forecast taxable profit, the losses are expected to
be fully utilised in the near to medium term.
Fair value of financial assets and liabilities
The Group uses estimates and judgements in the calculation of fair
values for assets and liabilities where not all inputs to calculations
are observable in the market, or where there are factors specific to an
individual instrument that impact fair values.
Internal control and risk management
Full details of the internal control and risk management
systems in relation to the financial reporting process are given
within the Corporate Governance Report on pages 91 and
92 and the Risk Management Report on pages 132 to 192.
Specific matters that the Committee considered during the
year included:
The Committee considered and challenged the provisioning
methodology applied by Management, including the results of
statistical loan loss models to support the impairment provisions for
both the secured and unsecured portfolios. The Committee considered
the calibration of model parameters in the light of economic indicators
including house price movements, and underlying book performance.
Consideration was also given to the appropriateness and use of post
model adjustments.
The Committee was satisfied that the impairment provisions, including
Management’s judgements, were appropriate. The disclosures relating
to impairment provisions are set out in note 1.10 to the Financial
Statements.
Over the course of 2016 a wide range of change projects were
delivered including a number with significant capital spend, in
particular in relation to digital development, fraud, cyber-crime and
investment in new office software for employee workstations.
As in prior years, the Committee has considered and is satisfied
with the appropriateness of the accounting recognition of these
investment costs, including that those costs qualify for recognition
as intangible assets in line with the criteria prescribed by accounting
standards. The Committee has also considered Management’s reviews
for indicators of impairment and is satisfied with the conclusion that
no assets require impairment adjustment.
The disclosures relating to the movement in intangible asset balances
during the year are set out in note 1.10 to the Financial Statements.
The Committee considered the recognition of deferred tax assets
and liabilities in respect of timing differences in the main trading
subsidiaries, in particular the forecast taxable profits based on the
Group’s strategic plan.
The Committee agreed with Management’s judgement that the
deferred tax assets were appropriately supported by forecast taxable
profits, taking into account the Group’s long-term financial and
strategic plans. There have been no changes in this approach during
the year, and the size of the deferred tax asset continues to reduce as
losses are utilised.
The disclosures relating to deferred tax assets are set out in note 1.10
to the Financial Statements.
The Committee spent time understanding and assessing judgements
applied and agreed with Management’s judgement regarding the
calculation of fair values, including the use of appropriate market rate
impacts to fair value conditions.
The disclosures relating to fair value are set out in note 1.10 to the
Financial Statements
> the effectiveness of systems for internal control, financial
reporting and risk management;
> the major findings of internal reviews into control
weaknesses, fraud or misconduct and Management’s
response alongside any control deficiencies identified;
100 I Virgin Money Group Annual Report 2016
Audit Committee Report
> in 2016, this included a focus on the IT control environment
in light of the increased threat from cyber-crime; and
> helpful preliminary observations from PwC on business
processes and controls.
The Committee is satisfied that internal controls over
financial reporting and risk management systems were
appropriately designed and operating effectively during the
period under review.
Internal audit
In monitoring the activity, role and effectiveness of the Internal
Audit function and its audit programme, the Committee:
> oversaw the progress against the action plan to address the
observations from the independent external assessment
on the effectiveness of the Internal Audit function carried
out in 2015 by Deloitte. The Committee is satisfied
that significant progress has been made against the
agreed action plan;
> approved the audit plan and budget and monitored progress
against it at regular intervals, confirming that appropriate
resources and capability were in place to execute the plan
effectively, and considered Internal Audit to have sufficient
standing in the Group;
> considered the regular Internal Audit reports, including
thematic and routine reviews on prudential and regulatory
compliance, customer conduct, credit risk, IT and financial
controls, discussing major findings and Management’s
responses; and
> approved the updated Internal Audit Charter.
Whistleblowing
The Committee received and considered reports from Internal
Audit on the Group’s whistleblowing arrangements including
summaries of reported cases. The Committee was satisfied
with the action taken with the reports having been considered
and approved by the Board’s Whistleblowing champion, the
Committee Chair.
The Committee also approved a revised Whistleblowing policy
which complies with the PRA and FCA policy statements on
whistleblowing published in October 2015 and which became
effective during 2016.
External audit
The Committee oversaw the relationship with the external
auditors and considered the terms of engagement (including
remuneration), its effectiveness, its continued independence
and objectivity. In particular, the Committee oversaw the
transition from KPMG to PwC. Further detail on the transition
process is set out below.
The Committee approved the interim and annual audit plan and
negotiated and agreed the auditors’ remuneration, reviewed the
findings of the external auditors and considered Management’s
responsiveness to such findings and recommendations.
The Committee also considered the continued effectiveness
of the audit process and the external auditors’ performance
during the 2016 interim results process, including
technical competence, strategic knowledge, quality
control, communication and reporting through an internal
effectiveness review.
PwC and KPMG both attended Committee
meetings in the first quarter of 2016 as part
of a shadowing programme, supported by
the Committee which aimed to ensure a robust
professional and collaborative handover process.
Shadowing
Detailed
planning
Good communication was the key to the
transition, with frequent meetings between the
Communication
Getting ahead
of the issues
auditors and key personnel to allow timely
discussion and knowledge transfer.
Internal planning sessions were held to help PwC
get up to speed as swiftly and efficiently
as possible.
Bringing the
auditors up
to speed
Involvement of
senior team
The Committee acknowledged the additional
work required during the transition and
supported the development of a detailed plan
which did not place undue strain on the business
during peak work load times, but still achieved
the objectives in a timely manner.
Informal discussion and detailed accounting
judgement sessions were held with Management
ahead of Committee meetings to ensure that PwC
understood the key accounting issues.
Members of the senior teams from the Group and
PwC were heavily involved in the transition process
which positioned the Group well and allowed PwC
to feed back key observations at an early stage of
the transition process.
Corporate Governance Report Virgin Money Group Annual Report 2016 I 101
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> determines that the overall fee level for non-audit services
will continue to be monitored by the Committee and should
not exceed 70% of the average audit fee over the prior three
year period; and
> includes restrictions on the employment of former external
auditors’ staff to further preserve the independence of the
external auditors.
In some cases, the external auditors may be selected over
another service provider for a particular engagement due to
its detailed knowledge and understanding of the business.
The total amount paid to the external auditors in 2016 was
£1.2 million. Details of the payments for audit and non-
audit services provided in 2016 is shown in note 6 to the
Financial Statements.
Regulatory change
The Committee also monitored emerging regulation and
legislation, assessed the impact on the business and oversaw
the development of policies and procedures to comply. For
example, this included work to progress compliance with
IFRS9; specifically in November 2016, the Committee had a
session with the Group finance team and the external auditors
to review and discuss the requirements of IFRS9 and the
implementation plan to meet the Group’s obligations under
the revised standard.
Norman McLuskie
Chair, Audit Committee
27 February 2017
The Committee concluded that it was satisfied with the auditors’
performance and recommends their re-appointment by
shareholders at the 2017 AGM.
External Auditors tenure
Following a formal audit tender process conducted in 2015,
shareholders approved the appointment of PwC as external
auditors at the AGM held on 4 May 2016 for the year ending
31 December 2016.
The Committee is satisfied that the Company has complied
with the provisions of the Statutory Audit Services for
Large Companies Market Investigation (Mandatory Use
of Competitor Tender Processes and Audit Committee
Responsibilities) Order 2014, during the financial year under
review and up to the date of this report.
External Audit transition
The appointment of new auditors provided an opportunity to
benefit from a new perspective. The Committee oversaw and
monitored the transition process, receiving regular updates
from Management and PwC during the transition period on
progress and key areas of auditor focus. Further detail on
the transition process is illustrated in the diagram on the
previous page.
The committee considered the findings from the FRC’s review
of KPMG’s audit of the 2015 financial statements.
Auditor independence and remuneration for
non-audit services
Both the Board and the external auditors have safeguards
in place to protect the independence and objectivity of the
external auditors. A policy (refreshed in November 2016 to
comply with the EU Audit Directive) is in place to regulate the
use of the auditors for non-audit services which:
> details the nature of work that the external auditors may
not undertake and sets a limit (£25,000) under which
permissible non-audit work may be undertaken without
prior permission from the Committee. All other non-audit
services are subject to prior approval by the Committee;
102 I Virgin Money Group Annual Report 2016
Board Risk Committee Report
“The Committee continues to focus on strong risk
management and culture as a fundamental part of achieving
our strategic objectives for all of our stakeholders.”
Colin Keogh
Chair, Board Risk Committee
Chairman’s overview
Membership and meetings
Committee Chair
Colin Keogh
Committee members
Norman McLuskie
Marilyn Spearing
Geeta Gopalan
Eva Eisenschimmel
Meetings
attended
(held) in
20161
Independent
Yes
Yes
Yes
Yes
Yes
7 (7)
7 (7)
7 (7)
7 (7)
N/A2
1 Number of meetings held during the period the member held office.
2 Eva Eisenschimmel joined the Committee on 25 January 2017.
During 2016, the Board Risk Committee assisted the Board in addressing all aspects of risk management across the Group, balancing its
agenda between existing and emerging risks. In particular, I would highlight the following activities:
– continued monitoring of the Group’s risk management and governance framework. This included an ongoing review of the Group’s key
authority documents, risk limits and policies;
– increased monitoring of the external economic environment in light of increased uncertainty and changes in the macroeconomic outlook;
– increased monitoring and oversight as part of contingency planning for the EU referendum and its outcome;
– continued oversight of the stress and scenario testing undertaken to provide comfort on the Group’s ability to mitigate potential risks,
including those considered in relation to the Internal Capital Adequacy Assessment Process (ICAAP);
– continued focus on the Group’s asset quality through monitoring performance against the Group’s risk appetite;
– reviewing and monitoring the funding and liquidity risks faced by the Group and ensuring the Group maintains a prudent mix of funding
sources including the use of TFS;
– continued monitoring of ongoing changes in the regulatory environment;
– reviewing risks relating to the resilience of IT systems and cyber security, which is a key priority of the Group; and
– continued focus on conduct risk, including the monitoring of outsourcing arrangements and oversight of key strategic programmes.
Committee purpose and responsibilities
The purpose of the Committee is to monitor and review the
Group’s compliance with the Board’s approved risk appetite,
risk management framework and risk culture.
This includes carrying out the annual review of risk appetite
alongside the strategic plan to reflect the Group’s latest
commercial, economic and regulatory views, and considering
the statements and risk appetite metrics under each
category of identified risk. The Committee considers the
Group’s approach to risk management alongside regulatory
developments and has a key role in setting risk management
tone and ensuring that the risk culture is embedded
throughout the Group.
The Committee monitors the Group’s risk management
framework, including policies, and methodologies, overseeing
proposed changes and any action arising from material
breaches. Details of the Group’s approach to risk management
can be found on pages 132 to 192. The Committee reports to
the Board on its activities and makes recommendations, all of
which have been accepted during the year.
Full details of the Committee’s responsibilities are set out in
the Committee terms of reference which can be found on our
website at virginmoney.com/virgin/investor-relations.
During the year, the Committee met its objectives and carried
out its responsibilities effectively, as confirmed by the annual
effectiveness review.
Corporate Governance Report Virgin Money Group Annual Report 2016 I 103
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Committee composition, skills and experience
The Committee now comprises five Independent Non-Executive
Directors who have a variety of industry backgrounds, with a
strong presence in banking and financial services experience.
The Chair is also a member of the Audit Committee. Darren
Pope will join the Committee on 1 March 2017. Full biographies
of Committee members can be found on pages 75 and 76.
In addition to relevant members of the Executive, the Internal
Audit Director attends the meetings to ensure that attendees
from all three lines of defence are represented. The external
auditors also attend most meetings. During the year, the
Committee held private sessions with the Chief Risk Officer
(without other Executives present).
How the Board Risk Committee spent its
time in 2016
Over the course of the year, the Committee considered a wide
range of risks facing the Group, both existing and emerging,
across all key areas of risk management. As part of the
review, certain risks were identified which required further
detailed consideration. A summary of these matters is set out
below and includes the key considerations and conclusions
of the Committee. In respect of the Group’s approach to risk
management, the Committee also reviewed the capability,
resources, remit and authority levels of the risk function. The
Committee concluded that the risk function was adequately
resourced and continued to be sufficiently independent with
appropriate authority and standing within the Group.
Significant risks considered by the
committee
Further details can be found in the Risk Overview on
pages 44 to 51.
Committee review and conclusions on significant risks
Retail Credit risk
The Committee monitored retail credit risk performance against the Group’s risk appetite metrics and policies. This included the introduction
of additional reports to monitor macroeconomic volatility and impact on customers’ behaviour pre and post the EU referendum, and in
response to the changing macroeconomic outlook. In response, credit scoring for some segments of new credit card lending was tightened
to protect credit quality. Additional scenario planning and stress testing was also undertaken to inform the Group’s strategic planning.
Market Risk
The Committee monitored, reviewed and challenged monthly interest rate risk positions against risk appetite metrics and policies. The
Committee oversaw the implementation of a revised suite of stresses for basis risk and monitors this on a regular basis.
Operational risks
The Committee received regular updates across all aspects of operational risk including financial crime, incident management, outsourcing
management and security infrastructure.
The Committee continued to oversee the delivery of the Group information security programme and cyber resilience strategy to mitigate the
threat of cyber attack. A variety of reviews and exercises were undertaken to test the resilience of IT and cyber security arrangements, with the
Committee reviewing Management’s recommendations to enhance systems and procedures and mitigate risks. This included sessions with
Management and risk colleagues to evaluate the current status of systems and processes and identify and prioritise improvement programmes
where required.
Work on financial crime prevention capability continued with the Committee providing insight and support to the approach and action plan.
The Committee monitors risks inherent with major outsource providers and received regular updates on their performance and resilience.
Where deficiencies in operation and/or performance were identified, the Committee increased the focus to ensure resolution was prioritised.
Conduct risk and compliance
The Committee spent a considerable amount of time focusing on conduct risk matters including the procedures and practices of major
outsourcing providers to ensure that the required standards are applied. This included consideration of complaints, regulatory reports and
remediation and product governance, supporting the Board in its wider consideration and decision making on conduct matters.
In respect of compliance matters, the Committee received regular detailed updates from Management on regulatory developments and upstream
risk, including structural reform, Minimum Requirement for Own Funds and Eligible Liabilities (MREL), and capital changes. The Committee
assessed the impact of those developments on the Group’s balance sheet, operational processes, systems and controls.
104 I Virgin Money Group Annual Report 2016
Board Risk Committee Report
Committee review and conclusions on significant risks
Funding and liquidity risk
The Committee reviewed and challenged the current and forecast funding and liquidity positions. The Committee considered reports on
funding sources to ensure a prudent mix was maintained within risk appetite and policy limits. Balance sheet growth has been supported by
RMBS, AT1 and FLS/TFS drawdown in 2016.
The Committee increased the monitoring of the external economic environment in light of increased uncertainty and changes in the
macroeconomic outlook.
Strategic and financial risk
Credit concentration risk is monitored against risk appetite metrics and challenged by the Committee. The quality of lending and detailed
reports on exposures to areas where there is concentration risk were reviewed regularly. These reviews led to the Committee approving
changes to Group policy or risk appetite to reduce exposures in these areas.
Capital
The Committee monitored, reviewed and challenged Management reports concerning the Group’s capital position. The Committee considered
the quality of the capital base, and the projected capital resources to ensure that the Group complies with current regulatory capital
requirements and is well positioned to meet future requirements. In November 2016, the Group raised a further £230 million of AT1 capital to
fund ongoing growth and support the Group’s leverage ratio.
The Committee also reviewed the results of the PRA UK Variant Stress Test scenarios published during the year. In addition, the Committee
focused on specific scenarios designed by Management. This work assisted the Committee in supporting the Board’s strategic planning cycle,
stress capital plan and risk appetite reviews.
The Committee reviewed and challenged Management’s development of scenario planning and stress testing as part of the regulatory capital
requirements and preparation of the Recovery and Resolution Plan (RRP) and ICAAP process. The Committee concluded that the Group’s
capital remained above minimum regulatory requirements and within the risk appetite set by the Board. The Committee noted the new
individual capital guidance from the PRA.
Emerging Risks
Emerging risks are those which have the potential to
increase in significance and affect the performance of the
Group. Further details can be found in the Risk Overview on
pages 44 to 51.
Risks arising from the implementation of banking sector
structural reform legislation have also been considered,
ensuring forward planning is undertaken to address
anticipated risks.
The Committee oversaw the Group’s detailed EU referendum
contingency planning to ensure that it was well positioned to
deal with the potential impacts of a vote to leave the EU.
The Committee concluded that the Group has a good
understanding and oversight of its emerging risk position
and is taking appropriate steps to mitigate where possible.
Colin Keogh
Chair, Board Risk Committee
27 February 2017
Corporate Governance Report Directors’
Remuneration Report
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Statement by the Chair of the Remuneration Committee
Dear Shareholder,
On behalf of the Board and as Chair of the Remuneration
Committee, I am pleased to present the Directors’
Remuneration Report for the year ended 31 December 2016.
The Committee continues to balance the views of
stakeholders with our duty to reward Directors fairly for
their performance and support the delivery of the Group’s
strategy, ensuring that we are able to attract and retain
talented people. This statement and the accompanying report
demonstrate the context in which decisions have been made,
the outcomes reached for the 2016 performance year and
how the Committee intends to approach the year ahead. The
Directors’ Remuneration Policy was approved by shareholders
in 2016 and no changes to the Policy are proposed for 2017.
2016 review
As outlined elsewhere in the annual report, 2016 was a very
successful year for Virgin Money and the Group continues to
deliver strongly against its objectives despite economic and
political uncertainty. The Group has delivered growth and
generated a significant increase in underlying profitability
whilst maintaining a high-quality balance sheet.
These strong results translate to a FY16 bonus award to the
Chief Executive of £1,000,000 (93% of fixed pay), which
equates to 93% of the maximum bonus opportunity, the
majority of which is delivered in shares. In March 2016 a share
award was made to the Chief Executive under the FY16 Long-
Term Incentive Plan (LTIP) subject to three-year performance
conditions to 31 December 2018.
Overall, 69% of the Chief Executive’s FY16 variable pay is
deferred from 2020 through to 2024 (via a combination of
deferred bonus awards and LTIP awards). Furthermore, 85% of
this variable pay is delivered in shares. This ensures continued
alignment with shareholders over a long-term horizon.
Looking forward to 2017
The Committee will operate within the existing approved
Directors’ Remuneration Policy in 2017.
Within that framework, the Committee has undertaken
a review of the performance measures for incentives to
ensure they are aligned to the Group’s business strategy and
incentivise the delivery of key strategic objectives.
The FY17 bonus metrics will be based on underlying profit
before tax (50% weighting), Corporate Scorecard (25%) and
Personal Strategic Objectives (25%). The FY17 LTIP measures
will focus on underlying basic earnings per share (EPS) (35%
weighting), return on tangible equity (RoTE) (35%) and non-
financial scorecard metrics (30%). Targets have been set
to provide a stretching incentive, which remain within the
Company’s risk appetite and are disclosed on page 116.
RoTE has been removed from the annual bonus award in
response to shareholder feedback regarding duplication of
bonus and LTIP measures. RoTE is retained as a measure in the
LTIP as it is a key long-term measure of returns generated for
shareholders. In addition, cost:income ratio has been removed
from the 2017 LTIP measures given the progress already made
to date and to enable continued investment in the Group’s
strategy of growth, quality and returns.
By reducing the number of incentive measures the Committee
are continuing to simplify variable pay, whilst ensuring
alignment with shareholder interests.
The salary for the Chief Executive will be £780,000 for 2017,
representing a 4% increase. The Committee determined this
was appropriate given the performance of the Chief Executive
and taking into account the average salary increase of 4% in
2016 across all colleagues (as outlined on page 119). The Chief
Executive had an outstanding year steering the Group through
a challenging external environment while making strong
progress against the Group’s strategic goals. The proposed
outcome is consistent with the pay approach for all colleagues
in the forthcoming pay round, where the highest performers
will receive up to a 6% increase.
Finally, changes are required to the vesting terms of share
awards in order to comply with the European Banking
Authority regulations applicable to FY17 remuneration
arrangements for all Material Risk Takers including Executive
Directors. To address these changes, the Committee will:
> extend the holding period for vested share awards
(post-tax) for Executive Directors from six months to
twelve months; and
> continue the existing approach of not paying dividend
equivalents on unvested share awards.
The full details are outlined in the Implementation
Report on page 113.
Remuneration Committee changes
Eva Eisenschimmel joined the Committee following her
appointment to the Board in January 2017. In addition,
Darren Pope will join the Committee upon his appointment
in March 2017.
106 I Virgin Money Group Annual Report 2016
Directors’ Remuneration Report
I do not intend to seek re-election at the 2017 AGM and will
therefore retire from the Board in May having completed my
initial three-year term in January. Norman McLuskie, who has
been a member of the Board and Remuneration Committee
since January 2010, will take on the role of Remuneration
Committee Chair. Mr McLuskie’s appointment along with
the ongoing membership of Geeta Gopalan, will ensure the
Committee retains continuity.
Consideration of shareholders’ views
Shareholders have a vital role in developing responsible pay
practices. The Committee received feedback from major
shareholders ahead of the 2016 AGM which was reflected in
the strong levels of shareholder support for remuneration
related resolutions.
I am pleased to recommend this statement and the 2016
Remuneration Implementation Report on page 113 to
shareholders, ahead of the 2017 AGM.
Marilyn Spearing
Chair, Remuneration Committee
27 February 2017
Virgin Money Group Annual Report 2016 I 107
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> to ensure the approach to senior remuneration is fair,
competitive and supportive of the Group’s strategy, Virgin
Money undertakes annual reviews of its remuneration
approach. This also ensures that the Group’s position
remains appropriate relative to competitors.
Virgin Money aims to support colleagues and their families
whilst enabling them to plan for the future through a
competitive benefits package. The benefits package helps
ensure low staff turnover, higher engagement and supports
the Group’s overall operational and financial efficiency.
Directors’ Remuneration Policy and Principles
The current Directors’ Remuneration Policy was formally
approved by shareholders at the AGM on 4 May 2016. It is
intended that approval of the Remuneration Policy will be
sought at three yearly intervals, unless amendments to the
policy are required in the interim, in which case appropriate
shareholder approval will be sought.
The full policy is set out on pages 112 to 121 of the 2015
Annual Report and Accounts which is available at: http://
uk.virginmoney.com/virgin/investor-relations/results-and-
presentations/. For ease of reference, the remuneration policy
tables for Executives and Non-Executive Directors from the
policy are included in the following pages.
Information on how the policy will be applied in 2017 is
included on pages 115 and 116 of the Implementation Report.
As set out in the previous Directors’ Remuneration Report, the
Group seeks to reward colleagues fairly for their contribution,
whilst ensuring they are always motivated to deliver the best
outcomes for stakeholders. To achieve this, colleagues are
rewarded in line with UK listed financial services sector best
practice, with no reward for inappropriate risk taking.
The Group’s approach to remuneration for all colleagues,
including Executive Directors, is designed to promote the
long term success of Virgin Money for customers, corporate
partners, shareholders and wider society. This reflects the
culture and supports the delivery of the business strategy:
> to maintain capacity for growth, Virgin Money ensures
it remains competitive in the financial services market
through regular market reviews. The Group’s remuneration
strategy aims to motivate individual out-performance
against transparent and challenging objectives that are
rigorously applied;
> to ensure an appropriate approach to remuneration, and
in particular variable pay, clear risk principles are applied
which aim to drive sustainable growth. Risk considerations
are a material factor in the determination of pay. Malus
adjustments and clawback apply to all variable pay;
> the Group aims to treat its colleagues in the same way that it
serves customers – with honesty, transparency and fairness.
Virgin Money believes in creating a culture where customer
service is the priority. To achieve this, all colleagues receive
an annual bonus opportunity, with no product-focused sales
incentives in place. Balanced objectives are used to assess
annual performance; and
108 I Virgin Money Group Annual Report 2016
Directors’ Remuneration Report
Summary of Remuneration Policy for Executive Directors
Base salary
Purpose and link to strategy
Base salary reflects the role of the individual taking account of responsibilities and experience.
Operation
Base salaries are normally reviewed annually. When determining and reviewing base salaries, the
Committee considers:
Maximum potential
– corporate and individual performance;
– the skills, experience and responsibilities of the Executive Director and their market value;
– the scope and size of the role;
– base salary increases for colleagues throughout the Group; and
– external market factors.
Whilst there is no maximum base salary, any salary increases in percentage terms will normally be
in line with increases awarded to other colleagues, but may be higher in certain circumstances. The
circumstances may include but are not limited to:
– where a new Executive Director has been appointed at a lower salary, higher increases may be
awarded over an initial period as the Executive Director gains experience in the role;
– where there has been an increase in the scope or responsibility of an Executive Director’s role; or
– where a salary has fallen significantly below market positioning given current size and scale of the
Group.
Base salary levels may be amended to take into account any regulatory changes.
Performance measures
N/A
Fixed Allowance
Purpose and link to strategy
To ensure that total fixed remuneration is commensurate with the role and to provide a competitive
reward package for Executive Directors with an appropriate balance of fixed and variable
remuneration. Also to facilitate recruitment of an Executive Director if required.
Operation
The Fixed Allowance will be delivered in cash and /or shares normally on a monthly basis.
The Fixed Allowance is not pensionable.
Maximum potential
The maximum allowance is 100% of base salary.
Performance measures
N/A
Pension
Purpose and link to strategy
Operation
To support the Executive Directors in building long-term retirement savings in a manner which does
not expose the Group to any unacceptable financial risk.
Executive Directors are eligible to participate in the Group’s defined contribution pension scheme.
Alternatively, Virgin Money may make contributions to an Executive Director’s personal pension
arrangement.
Only base salary is pensionable. An individual may elect, with the Group’s consent, to receive some or
all of their pension contribution as a cash allowance.
Maximum potential
The maximum allowance for Executive Directors is 30% of base salary.
Performance measures
N/A
Virgin Money Group Annual Report 2016 I 109
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Benefits
Purpose and link to strategy
Operation
To provide a competitive and cost effective flexible package delivered in a way which does not expose
the Group to any unacceptable financial risk.
Virgin Money provides a range of benefits which may include private medical insurance, permanent
health insurance and life assurance.
The Committee retains the discretion to provide additional benefits as may be reasonably required.
These may include national and international relocation benefits such as (but not limited to)
accommodation, family relocation support and travel.
The Executive Directors are entitled to a maximum of 30 days’ holiday and any unused holiday may be
bought back at the standard daily salary rate.
Maximum potential
The maximum value of benefits is based on the cost to the Group of providing each of the benefits in
the ‘Operation’ section immediately above.
Performance measures
N/A
Annual Bonus and Deferred Bonus Share Plan
Purpose and link to strategy
The annual bonus is designed to reward performance, scored against annual weighted financial and
non-financial measures.
Operation
Maximum potential
Annual bonuses are discretionary and are based on Group and individual performance within the year.
The determination of measures and their weighting are set annually and awards are determined by the
Remuneration Committee at the end of the financial year.
The Committee has discretion, in exceptional circumstances, to amend targets, measures, or number
of shares under award if an event happens (for example a major transaction or capital raising) that in
the opinion of the Committee, causes the annual targets or measures to no longer be appropriate or
such adjustment to be reasonable. The Committee also has the discretion to reduce the vesting level
of any award if it deems that the outcome is not consistent with performance delivered.
The annual bonus may be delivered partly in cash and partly deferred into cash, shares or other
instruments. The mechanism for making the bonus deferral is the Deferred Bonus Share Plan (DBSP).
Deferral levels are set at the time of award and in line with regulatory requirements. At present this
means that at least 60% of total variable pay is deferred, at least 50% of variable pay is paid in shares
or other instruments, and vested shares (post taxation) are subject to a retention period.
The deferral and holding periods may be amended to take into account any regulatory changes over
the life of the policy. The Remuneration Committee may adjust awards or amend the terms of the
awards in accordance with the DBSP rules.
At the time of the shares being released and as long as this remains permissible under the regulatory
rules, Executive Directors may receive an amount (in cash or in shares) equal to the dividends paid or
payable between the date of grant and the vesting of the award on the number of shares which have
vested.
All awards will be subject to malus and clawback provisions
The normal maximum bonus for Executive Directors is 100% of fixed pay. Under the DBSP rules, there is
scope to award a bonus up to 300% of total fixed remuneration in exceptional circumstances, normally
linked with recruitment. Any such Award would however remain subject to the overall regulatory rules.
Performance measures
Performance measures are determined by the Remuneration Committee each year.
At least 50% of the annual bonus opportunity is based on performance against key financial measures
determined at the beginning of each financial year. The remainder of the annual bonus is based
on performance against non-financial measures, which will normally include a scorecard of brand,
culture, control measures and personal strategic objectives.
110 I Virgin Money Group Annual Report 2016
Long Term Incentive Plan (LTIP)
Purpose and link to strategy
Operation
Maximum potential
The plan is designed to reward delivery of the Group’s strategy and growth in shareholder value over a
multi-year period and aligns senior colleagues’ interests with those of shareholders.
Awards are granted in the form of nil cost options or conditional shares, subject to performance
conditions aligned to long term strategy.
The Committee has discretion, in exceptional circumstances, to amend targets, measures, or number
of shares under award if an event happens (for example a major transaction or capital raising) that
in the opinion of the Committee, causes the targets or measures to no longer be appropriate or such
adjustment to be reasonable. The Committee also has the discretion to reduce the vesting level of any
award if it deems that the outcome is not consistent with performance delivered.
Performance conditions will normally be tested over a period of three financial years. Deferral terms
are set at the time of award and in line with regulatory requirements. Vested shares (post taxation) will
be subject to a holding period. The performance, vesting and holding periods may be amended to take
into account any regulatory changes over the life of the policy.
At the time of the shares being released and as long as this remains permissible under regulatory
rules, Executive Directors may receive an amount (in cash or in shares) equal to the dividends paid or
payable between the date of grant and the vesting of the award on the number of shares which have
vested.
All awards will be subject to malus and clawback provisions.
The normal maximum award for Executive Directors is 100% of fixed pay. There is scope to increase
Awards up to 300% of total fixed remuneration in exceptional circumstances, normally linked with
recruitment. Any such award would remain subject to the overall regulatory rules.
Performance measures
Performance measures are determined by the Remuneration Committee each year.
All-colleague plans
Purpose and link to strategy
Operation
If operated in the future, Executive Directors will be eligible to participate in HMRC approved
all-colleague schemes which encourage share ownership, as approved by shareholders.
Executive Directors may participate in these plans if operated in the future in line with the prevailing
HMRC guidelines (where relevant), on the same basis as other eligible employees.
Maximum potential
Participation levels will be in line with HMRC limits as amended from time to time.
Performance measures
N/A
Directors’ Remuneration Report Virgin Money Group Annual Report 2016 I 111
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Legacy awards and restrictions on
payments
The Remuneration Committee reserves the right to honour
any remuneration payments or awards and any payments or
awards for loss of office, notwithstanding that they are not
in line with the policy set out above where the terms of the
payment or award were agreed before the policy came into
effect (as set out in the 2014 Directors’ Remuneration Policy
or the Listing Prospectus where relevant). Such payments
or awards are set out in the Implementation Report for the
relevant year. This includes payments in relation to legacy
deferred bonus awards and long-term incentive awards
and share options (including exceptional awards vesting
on the listing of the Company) granted prior to listing
of the Company.
Service Agreements
The notice period and date of the current Executive Director’s
service agreement is shown below:
Notice period
Date of service
agreement
Colleague remuneration and engagement
When reviewing and setting Executive Director remuneration,
the Remuneration Committee takes into account the pay
and employment conditions of all colleagues. Specifically,
the level of any Group-wide pay review is a key determinant
when setting the level of any increase to Executive Directors’
salaries. Discussion on the Group’s approach to remuneration
and relevant colleague reward matters takes place with union
representatives during the annual pay review cycle.
There is no colleague representative on the Remuneration
Committee. Instead, time is taken to meet and listen to the
views of many colleagues. One of the duties of the People
Director is to brief the Board on colleague views and, as a
regular invitee to Remuneration Committee meetings, he
ensures that decisions are made with appropriate insight to
colleagues’ views.
Colleague engagement is a measure within the scorecards
for both the annual bonus and the LTIP. The structure of the
Executive Director’s remuneration packages cascades down
to other colleagues. Particular points to note are:
> LTIP awards are granted to the wider Virgin Money
Jayne-Anne Gadhia
12 months
18 November 2014
Executive Team;
The Company policy is that the Chairman will normally have a
six month notice period, to be served by either party.
> all colleagues are eligible to participate in an annual bonus
arrangement, with no product-focused sales incentives.
Instead, all bonuses are subject to a balanced scorecard
of measures with particular emphasis on customer
experience; and
> colleagues in certain roles may receive a fixed allowance
where this is considered appropriate taking into account
pre-determined criteria.
112 I Virgin Money Group Annual Report 2016
Chairman and Non-Executive Director Fees
Purpose and link to strategy
To ensure the Group is able to engage and retain highly skilled and experienced individuals who can provide a
valuable contribution, having a significant range and depth of expertise.
Operation
Fees payable to the Chairman are determined by the Remuneration Committee, whilst the fees paid to the
Non-Executive Directors are set by the Board.
The Board undertakes periodic reviews, at least annually, of Non-Executive Director fees and this may lead to
fee increases.
The fees are set at a rate that reflects the individuals’ experience, value to the Group and the expected time
commitment of them. The regulatory regime and the practical aspects of running a complex financial services
company are important inputs to remuneration decisions.
For the Non-Executive Directors, there is a base fee which is then supplemented by additional fees in respect of
chairing and being a member of Board committees. Incremental fees will be paid for additional duties and time
commitment, such as those of the Senior Independent Director. The current fees are set out on page 116.
From time to time, new Board Committees may be established and/or responsibilities distributed between
Committees, at which point fees for Committee membership and Chairmanship may be reviewed.
The Chairman and Non-Executive Directors are reimbursed for expenses (grossed-up where taxable) incurred
in performing their duties. For individuals based outside of the UK this will include travel to and from the UK.
The Chairman has access to a vehicle for personal use, which is a taxable benefit, and may be offered access to
private medical insurance.
Maximum limit
The maximum aggregate value of fees payable to the Chairman and the Non-Executive Directors is capped at
£2 million under the Articles of Association.
Performance metrics
No remuneration payable to the Chairman and the Non-Executive Directors has performance conditions.
Directors’ Remuneration Report Virgin Money Group Annual Report 2016 I 113
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Implementation Report
Purpose and membership of the Remuneration Committee
The role of the Remuneration Committee is to determine and recommend to the Board a fair and responsive remuneration
framework to ensure that the Group’s most senior Executives are appropriately rewarded and incentivised for their contribution
to the Group’s performance. The Remuneration Committee’s primary purpose is to formulate policies that ensure a clear link
between reward and performance and are compliant with regulatory requirements.
The Committee reports to the Board on its activities and makes recommendations, where required, all of which have been
accepted during the year.
Full details of the Committee’s responsibilities are set out in the Committee terms of reference which can be found on our
website at virginmoney.com/virgin/investor-relations.
During the year, the Committee met its objectives and carried out its responsibilities effectively, as confirmed by the annual
effectiveness review.
Remuneration Committee membership in 2016
Marilyn Spearing
Norman McLuskie
Geeta Gopalan
Independent member
Joined 29 January 2014 (and Chair from 1 January 2016)
Independent member
Joined 27 January 2010
Independent member
Joined 25 June 2015
Other attendees (by invitation from time to time) included: the Chairman, the Virgin NED, the Chief Executive, the People
Director, and the Reward Director. To manage potential conflicts of interest, those five individuals did not attend at times when
their own remuneration outcome was discussed and approved. Deloitte (the Committee’s independent consultants in relation to
Directors’ remuneration following the 2016 AGM) and PwC (consultants prior to the 2016 AGM) also attended meetings where
invited. The Company Secretary attended meetings to record minutes.
The Company manages the link between risk and remuneration carefully and members of the Remuneration Committee are
also members of the Board Risk Committee. In addition, representatives from Risk may attend meetings where appropriate. In
advance of a share award vesting or a bonus being awarded, the Chief Risk Officer provides the Remuneration Committee with
a detailed risk assessment. This is also considered separately by the Board Risk Committee.
Remuneration Committee activity in 2016
There were 6 meetings of the Remuneration Committee during 2016. The key matters were as follows:
Date
Q1
Q2
Q3
Q4
Pay / bonus
Policy / Governance
– FY15 pay and bonus outcomes
– Directors’ Remuneration Policy for FY16
– Performance conditions for the FY16 Annual Bonus and LTIP
– FY15 Directors’ Remuneration Report and Pillar 3
– Release of deferred bonus awards
– FY15 PRA Remuneration Policy Statement
– Terms for the incoming Chief Financial Officer
– Terms for the retirement of the Chief Banking Officer
– Material Risk Taker population for 2016
– Release of shares vesting under Buy-out Awards
– Release of Executive awards vesting under the IPO Share
– Review of performance measures for the FY17 Annual Bonus
Award and IPO Incentive scheme
and LTIP
– Review of EBA consultation on sound remuneration practices
– Review of PRA’s application of the EBA’s guidelines on sound
remuneration practices
114 I Virgin Money Group Annual Report 2016
Advisors to the Remuneration Committee
From the 2016 AGM, the Remuneration Committee took external advice from Deloitte, the Committee’s independent consultants
in relation to Directors’ remuneration. PwC, the Committee’s previous advisers, also provided advice to the Committee until
the 2016 AGM, at which point they were approved as the Group Auditor. After this event PwC provided no further advice to the
Remuneration Committee.
Deloitte and PwC’s respective appointments as consultants were made by the Remuneration Committee. Both Deloitte and PwC
are members of the Remuneration Consultants Group and comply with the professional body’s code of conduct. This supports
the Remuneration Committee’s view that the advice received was objective and independent.
Deloitte’s fees since they were appointed Remuneration Committee advisors at the AGM amounted to £71,250. During the year,
Deloitte also provided co-sourced internal audit services and advisory services in relation to data analytics, regulatory advice,
quantitative risk measurement and security systems.
PwC fees for work carried out prior to the 2016 AGM were £20,450. During 2016, in addition to their work as the Group’s Auditor
following the AGM, they also provided assurance services in relation to Treasury and IFRS 9.
Statement of voting at Annual General Meeting
The proposals in relation to the Group’s remuneration policy and the remuneration offered to the Executive Directors in 2016
were detailed within the Directors’ Remuneration Report for 2015 and were voted on at the 2016 AGM. The shareholder votes
submitted at the meeting, either directly, by mail or by proxy, were as follows:
Votes in favour
Votes against
Votes withheld
Number of
shares
Percentage of
votes cast
Number of
shares
Percentage of
votes cast
Remuneration Policy
349,102,101
Remuneration Implementation Report
373,747,604
91.79%
98.77%
31,219,817
4,636,406
8.21%
1.23%
Number of
shares
83,374
2,021,282
Directors’ Remuneration Report Virgin Money Group Annual Report 2016 I 115
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Implementation of the policy in 2017
The following sets out how the Directors’ Remuneration Policy will be applied in 2017:
Fixed Pay
Base salary
Fixed Allowance
Jayne-Anne Gadhia (Chief Executive): £780,000
Jayne-Anne Gadhia (Chief Executive): £100,000
Pension and other benefits
No change from the stated policy.
Annual Bonus
Opportunity
Deferral terms
Maximum annual bonus opportunity is 100% of fixed pay.
For 2017:
– up to 32% of any bonus will be paid in cash following the publication of the financial statements for
the previous year;
– up to 32% of any annual bonus will be converted into an award of equivalent value under the
Deferred Bonus Share Plan, vesting immediately on award and the resultant number of shares (post
taxation) will be subject to a twelve month retention period;
– up to 36% of any bonus will be converted to an award of equivalent value under the Deferred Bonus
Share Plan, vesting equally from the third anniversary to the seventh anniversary and the resultant
number of shares (post taxation) will be subject to a twelve month retention period;
Dividend equivalents will not be paid on the number of shares which vest.
Performance measures and targets
The Remuneration Committee has determined that for 2017 the annual bonus will be based on:
Long Term Incentive Plan
Opportunity
Vesting terms
Performance measures and targets
– financial measures (underlying profit before tax) – 50% weighting
– non-financial measures (personal strategic objectives and a series of risk, brand, culture and control
measures) – 50% weighting
The Board considers the targets that apply to these measures to be commercially sensitive at this time
but will provide information on the targets alongside the level of payout relative to the performance
achieved in next year’s Implementation Report.
The Remuneration Committee has determined that 60% vesting is justified for target performance and
0% is justified for threshold performance.
All awards will be subject to malus and clawback provisions.
LTIP awards in 2017 will be granted over shares worth 100% of fixed pay.
The performance period will be the three years commencing on 1 January 2017. An assessment of
performance in the financial year preceding the date of grant will be taken into account before awards
are made. The intended date of grant is March 2017.
To the extent that the performance measures are satisfied, awards will vest equally from the fourth
anniversary of the date of grant to the eighth such anniversary. At each vesting date the resultant
number of shares (post taxation) will be subject to a twelve month retention period.
Dividend equivalents will not be paid on the number of shares which vest.
The Remuneration Committee has chosen performance measures that are based on delivering the
Company’s strategic objectives, and the continued creation of shareholder value. This choice and
the calibration of the targets is consistent with the strategic plan. The Remuneration Committee has
determined that 80% vesting is justified for target performance and 20% is justified for threshold
performance. Performance against the targets will be subject to a risk assessment review.
The following table outlines the weightings and measures for the 2017 awards.
All awards will be subject to malus and clawback provisions.
116 I Virgin Money Group Annual Report 2016
FY17 LTIP Performance Measures
Measure
Underlying basic earnings per share
Return on tangible equity
Scorecard of measures relative to external
comparators and internal scores
Target
Threshold: 5% p.a.
Maximum: 10% p.a.
Threshold: 11%
Maximum: 14%
a) Customers (Advocacy)
b) Customers (Complaints)
c) Colleagues (Engagement)
Weighting
35%
35%
30%
Outcomes will be disclosed on a retrospective basis after the end of the three year performance period.
Chairman and Non-Executive Director fees in 2017
The annual fees for the Chairman and Non-Executive Directors are unchanged to that specified in the 2015 Annual Report. A
review of the Chairman fee was carried out in 2016 and a review of the Non-Executive Director fees was carried out in early 2017.
2017 fee policy
Chairman fee1
Non-Executive Director basic fee
Senior Independent Directorship
Audit Committee Chairmanship
Remuneration Committee Chairmanship
Board Risk Committee Chairmanship
Nomination Committee Chairmanship
Audit Committee Membership
Remuneration Committee Membership
Board Risk Committee Membership
Nomination Committee Membership
2017
2016
£350,000
£350,000
£80,000
£20,000
£25,000
£25,000
£25,000
£–
£10,000
£10,000
£10,000
£–
£80,000
£20,000
£25,000
£25,000
£25,000
£–
£10,000
£10,000
£10,000
£–
1 The Chairman has access to a vehicle for personal use, which is a taxable benefit and is offered access to the Group’s private medical insurance scheme which he has accepted and chosen
to personally fund.
Non-Executive Directors may receive more than one of the above fees.
Directors’ Remuneration Report Virgin Money Group Annual Report 2016 I 117
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Remuneration outcome for 2016
Executive Directors (audited)
The following table summarises the total remuneration awarded in relation to Executive Director’s services during 2016.
Salary
Fixed Allowance1
Taxable benefits2
Pension allowance
Total fixed
Bonus
Total remuneration
1 The Chief Executive received a fixed allowance in 2016. There is no year on year comparison for this allowance.
2 Taxable benefits comprise of a car allowance (2015 only) and private medical insurance.
Jayne-Anne Gadhia
2016
£’000
750
100
1
225
1,076
1,000
2,076
2015
£’000
725
–
8
218
951
666
1,617
118 I Virgin Money Group Annual Report 2016
Variable Awards
Annual Bonus
For 2016 the Chief Executive had a maximum annual bonus opportunity of 100% of fixed pay.
The Chief Executive’s 2016 annual bonus determination was based on performance against:
> financial measures (60% of overall award): underlying profit before tax, cost of risk, return on tangible equity;
> brand, culture, control objectives (20% of overall award): based on performance against objectives from the Group’s corporate
scorecard; and
> personal strategic objectives (20% of overall award): based on performance against pre-determined personal
strategic objectives.
Actual performance against the 2016 bonus targets was as follows (audited):
Performance measure
Threshold
(0%)
Target
(60%)
Maximum
(100%)
Actual
performance
Weighting at
maximum
Chief Executive
Underlying profit before tax
£180.7m
£190.7m
£220.8m
£213.3m
Cost of risk
Return on tangible equity
Brand, culture, control scorecard
Personal strategic objectives
Total bonus
20bps
10.6%
19bps
11.2%
16bps
13.0%
13bps
12.4%
as explained below
as explained below
20%
20%
20%
20%
20%
100%
Bonus
score
18.0%
20.0%
17.3%
17.5%
20.0%
93%
Brand, Culture, Control Scorecard (20% weighting)
Personal strategic objectives (20% weighting)
> Delivered superior customer satisfaction and advocacy,
with an increase in overall Net Promoter Score to +29.
> Long-term strategic planning was completed and approved
by the Board for implementation.
> Colleague engagement exceeded target at 81%,
benchmarking strongly against competitors.
> Increased the number of women in senior leadership roles
across the company, supporting progress to achieving the
aim of 50%/50% gender balance by 2020.
> Virgin Money Giving continues to grow with £92m of
donations made to charities demonstrating continued
support to the communities we serve.
> A continued focus and drive to ensure our customers have
been treated fairly.
2016 Final outcome: 17.5% out of a maximum 20%
> Development of the Virgin Money Digital Bank proposition
and a partnership with 10X has been agreed and
has commenced.
> Progress has been made towards an improved gender
balance within the Company through enhancing leadership
capability to identify and counter unconscious bias,
encouraging a flexible working culture and utilising
technology to enable this.
> Progress in relation to company succession planning,
including the successful induction and transitional
handovers for Peter Bole (Chief Financial Officer) and Hugh
Chater (Chief Commercial Officer), has been achieved.
> Enhancing the company reputation and brand, for example
through delivery of the HM Treasury sponsored ‘Women in
Finance’ Review.
2016 Final outcome: 20% out of a maximum 20%
Directors’ Remuneration Report
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FY16 Variable Pay
Overall 69% of the Chief Executive’s FY16 variable pay is
deferred from 2020 through 2024 (via a combination of
deferred bonus and LTIP awards).
Annual Bonus
2021, one-fifth after six years in March 2022, one-fifth after
seven years in March 2023, and the final one-fifth after
eight years in March 2024 (each with a six month holding
period). Once vested, the awards remain subject to clawback
provisions, in line with the Group policy.
The bonus awarded to the Chief Executive is summarised in
the table below:
Chief Executive remuneration compared with
the wider employee population
Name
Jayne-Anne Gadhia
Maximum opportunity (% of fixed pay)
% of fixed pay awarded for 2016
Bonus awarded for 2016
100%
93%
£1,000,000
The table below compares the percentage change in
remuneration of the Chief Executive with all colleagues.
Figures for ‘All Colleagues’ are calculated using salary figures
excluding the Chief Executive, which is considered to be the
most appropriate approach for these purposes.
For the 2016 annual bonus, 32% of the annual bonus will be
paid in cash in March 2017, 32% will be paid in shares with a
six-month holding period. The remaining 36% will be deferred
with one-fifth vesting in March 2020, one-fifth vesting in
March 2021, one-fifth vesting in March 2022, one-fifth
vesting in March 2023 and the final one-fifth vesting in March
2024 (each with a six month holding period). Once vested, the
awards remain subject to clawback provisions, in line with
the Group policy.
LTIP
The Chief Executive received an FY16 LTIP award in March
2016 (100% of fixed pay). The award will be assessed
against performance at 31 December 2018 based on the
performance conditions set out in detail in the 2015 Directors’
Remuneration Report. One-fifth of the award will vest after
four years in March 2020, one-fifth after five years in March
% change in
base salary
(2015-2016)1
% change in
annual bonus
% change
in taxable
benefits
(2015-2016)2
(2015-2016)3
Chief Executive
All Colleagues
3%
4%
50%
43%
(87.5%)
0%
Note the percentages for “All Colleagues” included in the table above represent the
year-end position as at 31 December 2016 compared with the year-end position as at
31 December 2015. The percentages are adjusted for movements in colleague numbers and
other impacts to ensure a like for like comparison.
1 The percentage change for the Chief Executive’s salary represents the difference
between the 2016 salary included in the single figure table on page 117 (£750,000) with
the corresponding figure in 2015 (£725,000).
2 This figure represents the percentage change in the FY16 Annual Bonus when compared
with the FY15 Annual Bonus.
3 In 2016 the CEO’s car allowance benefit of £7,000 ceased.
120 I Virgin Money Group Annual Report 2016
Relative spend on pay
A year on year comparison of the relative spend on pay is shown below. Underlying profit before tax has been used for comparison
on the basis that it reflects performance, excluding one-off events. Total spend on salaries and performance based compensation
in 2016 increased by 7% against an increase in underlying profit before tax of 33%. Dividend distributions in 2016 were £14.6m
higher compared with 2015.
£m
250
200
150
100
50
0
213.3
160.7
158.9
169.6
2015
2016
Underlying profit
before Tax
6.2
2015
20.8
2016
Dividends to shareholders
2015
2016
Salaries and performance
based compensation
To note, the distribution in 2015 constituted payment of the interim dividend for the financial year 2015; the distribution in 2016 constituted the final dividend for financial year 2015 in
addition to the interim dividend for financial year 2016.
Total Pension Entitlements
The Chief Executive does not have a prospective right to a
defined benefit pension in respect of qualifying service.
External Appointments
The Chief Executive undertakes a number of external
appointments (as set out on page 76). The Chief
Executive does not receive any earnings in respect of
these appointments.
Payments within the reporting year to past
Directors (audited)
As part of arrangements on leaving the Company:
> an FY12 deferred bonus was released to Finlay
Williamson of £278,611;
> the final tranches of (i) an IPO Incentive Award of £134,556
and (ii) a Recruitment Award of £405,352 were released
to Lee Rochford.
Loss of office payments (audited)
There were no payments for the loss of office made to former
Directors during 2016.
Chairman and Non-Executive Directors’ fees
(audited)
Glen Moreno1
Colin Keogh
Norman McLuskie
Marilyn Spearing
Patrick McCall
Gordon McCallum
Geeta Gopalan (from 25/6/15)
Fees paid in
2016 (£000s)
Fees paid in
2015 (£000s)
350
114
142
124
80
80
109
253
111
125
106
80
80
53
1 Glen Moreno has access to a vehicle for personal use, which is a taxable benefit (£5,618).
A similar benefit was provided in 2015.
Breakdown of Non-Executive Directors’ fees
Non-Executive Directors receive specific committee fees, as
set out in the table on page 116. There were no changes to
fees during 2016.
Directors’ Remuneration Report Virgin Money Group Annual Report 2016 I 121
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Historical TSR performance and Chief
Executive pay
The graph opposite shows the total shareholder return (TSR)
of the Company for the period from the date when shares were
listed on the London Stock Exchange (18 November 2014) to
the end of the 2016 financial year, and the performance of
the FTSE 350 Index over the same time period. As a recently
listed company, a five year TSR graph cannot be included. The
FTSE 350 Index has been chosen as the comparative broad
equity index because the Company is a member of that index.
For further context and comparison to some competitors, the
graph also shows the Company’s TSR performance against the
FTSE 350 Banks Index over the same period.
Virgin Money TSR v FTSE 350
(cid:57)(cid:76)(cid:85)(cid:74)(cid:76)(cid:81)(cid:3)(cid:48)(cid:82)(cid:81)(cid:72)(cid:92)(cid:3)(cid:55)(cid:54)(cid:53)(cid:3)(cid:89)(cid:3)(cid:41)(cid:55)(cid:54)(cid:40)(cid:3)(cid:22)(cid:24)(cid:19)
160
140
120
100
80
60
40
20
0
(cid:81)(cid:3) (cid:55)(cid:74)(cid:83)(cid:72)(cid:74)(cid:79)(cid:3)(cid:46)(cid:80)(cid:79)(cid:70)(cid:90)
(cid:81)(cid:3) (cid:39)(cid:53)(cid:52)(cid:38)(cid:3)(cid:20)(cid:22)(cid:17)
(cid:81)(cid:3) (cid:39)(cid:53)(cid:52)(cid:38)(cid:3)(cid:20)(cid:22)(cid:17)(cid:3)(cid:35)(cid:66)(cid:79)(cid:76)(cid:84)(cid:3)
18/11/2014
31/12/2014
31/12/2015
31/12/2016
Chief Executive remuneration outcome – historic (since Initial Public Offering)
Financial year ending
Chief Executive
Total remuneration single figure (£000)
Annual bonus awarded (% of maximum opportunity)
Long term Incentive Award vesting
31/12/2016
31/12/2015
31/12/2014
Jayne-Anne Gadhia
Jayne-Anne Gadhia
Jayne-Anne Gadhia
2,076
93%
–
1,617
88%
–
3,647
95%
–
122 I Virgin Money Group Annual Report 2016
Outstanding share awards (audited)
Directors’ interests
The table below summarises shareholdings and share interests as at 31 December 2016.
Jayne-Anne Gadhia
Ordinary shares
Breakdown of unvested shares:
(A) Phantom Share Awards (pre-IPO)
(B) Deferred Bonus Share Plan Awards
(C) Long Term Incentive Plan Awards
1 The Chief Executive does not hold any vested or unvested options.
2 All unvested awards above will be subject to tax upon vesting.
Owned
outright
Number of shares1,2
Total
Unvested (not
subject to
performance
conditions)
Unvested
(subject to
performance
conditions)
2,438,275
446,000
274,535
563,643
3,722,453
Breakdown of share interests
Further details in respect of the unvested shares included in the Directors’ interest table above are provided in the following
tables. The details are in relation to the current Executive Director and no other Directors have rights to shares. The share
numbers referred to in this section are adjusted for the effect of the re-organisation of the Company share capital on
listing in 2014.
(A) FY12 and FY13 Phantom Share Awards
Awards were granted prior to IPO under a deferred bonus plan known as the ‘Phantom Incentive Plan’. No further phantom share
awards have been granted since listing. No further performance conditions apply, although the awards remain subject to malus
and clawback. Holding periods of six months apply to each deferred tranche.
At 1 Jan 2016
Jayne-Anne Gadhia
FY12 deferred bonus
485,160
Jayne-Anne Gadhia
FY13 deferred bonus
203,420
Total
Awarded
during the
year
Vested
during the
year
Lapsed
during the
year
Unvested
as at
31 Dec
20162
Date of grant
–
–
242,580
–
242,580
18 July 2013
–
27 February
2015
203,420
446,000
Market
value at
grant1
n/a
n/a
Notes
Vests March
2017
Vests March
2017 and
2018
1 The Company was in private ownership at the date of grant and therefore no market value was available at that time.
2 All unvested awards above will be subject to tax upon vesting.
Directors’ Remuneration Report Virgin Money Group Annual Report 2016 I 123
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(B) Annual Bonus – Deferred Bonus Share Plan (DBSP)
A Conditional Share Award was granted under the Deferred Bonus Share Plan in March 2016 in respect of FY15. The portion of
the annual bonus converted into shares had a face value of £433,225. No further performance conditions apply, although awards
remain subject to malus and clawback provisions. Holding periods of six months apply to each deferred tranche. Details of this
award are included in the table below alongside the award made in respect of FY14.
At 1 Jan 2016
Awarded
during the
year
Vested
during the
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Lapsed
during the
year
Unvested
as at
31 Dec
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Date of grant
Jayne-Anne Gadhia
FY14 deferred bonus
221,570
–
–
Jayne-Anne Gadhia
FY15 deferred bonus
Total
–
114,759
61,794
–
–
221,570
26 March 2015
52,965
15 March 2016
377.5p per
share
274,535
1 Awards are made based on the market value of ordinary shares determined on the dealing day preceding the date of grant.
2 All unvested awards above will be subject to tax upon vesting.
(C) Long Term Incentive Plan
A Conditional Share Award was granted under the FY16 Long Term Incentive Plan on 15 March 2016. The Award is subject
to performance conditions (as described in last year’s report) that will apply from 1 January 2016 to 31 December 2018, with
threshold performance resulting in 20% of the award vesting.
The face value of the award was £1,075,000. This value was converted into the number of shares shown using the share price on
the day immediately preceding grant. One-fifth of the award will vest after four years in March 2020, one-fifth after five years in
March 2021, one-fifth after six years in March 2022, one-fifth after seven years in March 2023, and the final one-fifth after eight
years in March 2024 (each with a six month holding period). All awards are subject to malus and clawback provisions. Details of
this award are included in the table below alongside the award made in respect of FY15.
At 1 Jan 2016
Awarded
during the
year
Vested
during the
year
Lapsed
during the
year
Unvested
as at
31 Dec
20162
Date of grant
Market
value at
grant1
409p per
share
Notes
Vests
26 March
2018 and
2019
Vests
15 March
2017, 2018
and 2019
Jayne-Anne Gadhia
FY15 LTIP
278,875
–
Jayne-Anne Gadhia
FY16 LTIP
Total
–
284,768
–
–
–
278,875
26 March 2015
–
284,768
15 March 2016
377.5p per
share
563,643
1 Awards are made based on the market value of ordinary shares determined on the dealing day preceding the date of grant.
2 All unvested awards above will be subject to tax upon vesting.
Market
value at
grant1
409p per
share
Notes
Vests
26 March
2018, 2019
and 2020
Vests
15 March
2020, 2021,
2022, 2023
and 2024
124 I Virgin Money Group Annual Report 2016
Additional disclosures
IPO Incentive Scheme
The IPO Incentive Scheme is not included in the unvested shares reported in the Directors’ interests table above since all shares
awarded under this scheme have now vested. Awards were granted under the IPO Incentive Scheme on 19 December 2013.
These were included in the Chief Executives total remuneration for 2014 when the performance conditions were assessed. The
final 20% of the award vested in December 2016 with a holding period of six months applied. Awards are subject to malus and
clawback provisions.
At 1 Jan 2016
Awarded
during the
year
Vested
during the
year
Lapsed
during the
year
Unvested
as at
31 Dec
20162
Jayne-Anne Gadhia
66,643
–
66,643
–
–
1 The Company was in private ownership at the date of grant and therefore no market value was available at that time.
2 The vested shares from the above awards are included in the owned outright total (page 122).
Date of grant
19 December
2013
Market
value at
grant1
Notes
n/a
–
Shareholding guidelines
Executive Directors are expected to hold 200% of salary in shares of Virgin Money built up over five years from listing or
recruitment, whichever is the later.
As a result of the shareholdings in the table on page 125, the position for the Executive Director in 2016 is as follows:
Executive Directors
Jayne-Anne Gadhia
Shareholding requirement
Current shareholding
Base salary
% of base
salary
Number of
shares
(at 31.12.16
closing price
of £3.03)
% of base
salary
(at 31.12.16
closing price
of £3.03)
Value of
shares held
(at 31.12.16
closing price
of £3.03)
Requirement
met
Yes/No
£750,000
200%
495,540
984%
£7,380,658
Yes
Directors’ Remuneration Report Virgin Money Group Annual Report 2016 I 125
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Directors’ interest – summary of awards vested and purchases and sales made by directors
in 2016 (audited)
Holding at
1 January 2016
(or appointment date)
Transactions
during year
Number of
shares
Notes
Jayne-Anne Gadhia
2,242,251
15 March 2016
160,814
19 December 2016
35,210
Number of shares from vesting of deferred bonus
shares (FY12 Phantom Incentive and FY15 DBSP)
after tax
Number of shares from vesting of fourth tranche
of IPO Incentive after tax
Glen Moreno
Geeta Gopalan
Colin Keogh
Patrick McCall
Gordon McCallum
Norman McLuskie
Marilyn Spearing
25,000
28 June 2016
46,164
Purchase of shares
–
–
–
–
137,260
27 June 2016
20,000
Purchase of shares
–
18,983
90,080
–
–
–
–
–
–
–
–
–
–
–
–
–
Holding at
31 December
2016
2,438,275
71,164
–
157,260
–
18,983
90,080
–
On 10 January 2017 Gordon McCallum disposed of 18,983 shares for nil consideration, by way of donation to charity.
There have been no other changes to the above interests between 31 December 2016 and 28 February 2017.
Marilyn Spearing
Chair, Remuneration Committee
27 February 2017
126 I Virgin Money Group Annual Report 2016
Directors’ Report
Corporate governance report
The Corporate Governance Report found on pages 79
to 104, together with this report of which it forms part,
fulfils the requirements of the Corporate Governance
Statement for the purpose of the Disclosure Guidance and
Transparency Rules (DTR).
Results
The consolidated income statement shows a profit before tax
for the year ended 31 December 2016 of £194.4m.
Dividends
Following the approval of the 2015 final dividend by
shareholders at the 2016 Annual General Meeting (AGM),
a final dividend of 3.1 pence per ordinary share was paid on
25 May 2016 to those shareholders registered at the close of
business on 15 April 2016.
On 26 July 2016, the Board announced that it had declared and
approved an interim dividend of 1.6 pence per ordinary share
which was paid on 23 September 2016 to those shareholders
registered at the close of business on 12 August 2016.
On 27 February 2017, the Board recommended a final dividend
of 3.5 pence per ordinary share in respect of the financial
year ended 31 December 2016 which will, subject to approval
by shareholders at the 2017 AGM, be payable on 10 May
2017. Further information on dividends is shown in note 11
of the Financial Statements and is incorporated into this
report by reference.
Post balance sheet events
There have been no material post balance sheet events.
Going concern
resources to continue to operate for a period of at least
twelve months from the date of approval of this report, the
Directors have considered a number of key dependencies
which are set out in the Risk Overview and Risk Management
Report sections under Principal Risks on pages 48 to 51 and
138, Funding and Liquidity on page 50 and pages 177 to 187
and Capital Position on pages 187 to 192, and additionally
have considered projections for the Company and the Group’s
capital and funding position.
Having considered these and made appropriate enquiries,
the Directors consider that the Company and Group have
adequate resources to continue in business for a period of at
least twelve months from the date of approval of this report.
As a result, it is appropriate to continue to adopt the going
concern basis in preparing the accounts.
Viability statement
In accordance with the 2014 UK Corporate Governance Code
requirement, the Directors have assessed the viability of the
Group, taking into account its current position, the Board’s
assessment of the Group’s prospects and the potential impact
of the principal risks and uncertainties the Group faces, which
are set out on pages 48 to 51. The Directors have determined
that a three year period to 31 December 2019 constitutes an
appropriate period over which to perform this assessment in
line with the Board’s strategic planning horizon. We believe this
presents a reasonable degree of confidence, while providing a
longer term perspective.
In making this statement, the Board has considered the principal
and emerging risks facing the Group, including those that could
threaten the Group’s business model, future performance,
solvency or liquidity, such as changes in the macro-economic
environment and the macro-structural landscape. The Group’s
capital and liquidity ratios, including the CET1, total capital
and leverage ratios, have been assessed in comparison to risk
appetite, early warning indicators and regulatory minima.
The going concern basis of the Company and the Group is
dependent on successfully funding the balance sheet and
maintaining adequate levels of capital. In order to satisfy
themselves that the Company and the Group have adequate
As described in the Corporate Governance Report on pages
79 to 104 and the Risk Management Report on pages 132 to
192, the Board monitored the effectiveness of the Group’s
risk management and internal control systems over the
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course of the year. The monitoring and review covered
all material controls, including financial, operational and
compliance controls.
The Board considers at least annually, and monitors on an
ongoing basis its strategic plan. This plan is stress tested and
includes a review of the sensitivity of the Group to business as
usual risks and other, severe but plausible events. The Board
also considers the ability of the Group to raise finance and
deploy capital. These results take account of the availability
and likely effectiveness of the mitigating actions that could
be taken to avoid or reduce the impact or occurrence of the
underlying risk.
As part of the Group’s stress testing work, which includes the
Internal Capital Adequacy Assessment (ICAAP) and Internal
Liquidity Adequacy Assessment (ILAAP), the Group performs
a wide range of severe macro-economic, idiosyncratic and
income stress tests, the most material of which relate to rising
unemployment, increased base rate and a reduction in HPI.
The results of this stress testing show that sufficient capital
is held to cover the stress scenarios and liquidity, both in
amount and quality. Supporting capital and funding plans are
developed to survive the impact of the stress scenarios over the
planning horizon.
Information relevant to the Board’s assessment of viability can
be found on the following pages:
> the Group’s principal activities, business model and strategy
are described in the Strategic Report on pages 32 and 33;
> the Group’s emerging risks are disclosed on
pages 136 and 137;
> the Group’s principal risks, including mitigating actions, key
risk indicators and areas of future focus, are described on
pages 48 to 51; and
> the Group’s approach to stress testing and reverse stress
testing, including both regulatory and internal stresses, is
described on page 135.
On the basis of this assessment, the Directors confirm they have
reasonable expectation that the Group will be able to continue
in operation and meet its liabilities as they fall due in the period
to 31 December 2019.
Directors
The names and biographical details of the current Directors,
who, other than Eva Eisenschimmel, all served throughout
the year, are shown on pages 75 and 76. Particulars of their
emoluments and interests in shares in the Company are given
on pages 108 to 125 of the Directors’ Remuneration Report.
Changes to the composition of the Board since 1 January 2016, and up to the date of this report, are shown in the table below.
Further details of Board changes can be found on page 84 of the Corporate Governance Report.
Name
Role
Date of appointment
Eva Eisenschimmel
Independent Non-Executive Director
25 January 2017
Appointment and retirement of Directors
Directors’ indemnities
The appointment, retirement and/or replacement of Directors
is governed by the Articles of Association of the Company
(Articles), the 2014 Edition of the UK Corporate Governance
Code (Code) and the Companies Act 2006 (Act). The
Articles may be amended only by a special resolution of the
shareholders in a general meeting.
All Directors appointed to the Board since the 2016 AGM
will stand for election by shareholders at the 2017 AGM. In
the interests of good governance, all of the other Directors
will also retire and those wishing to serve again will submit
themselves for re-election at the 2017 AGM.
The Directors have entered into individual deeds of indemnity
with the Group which constitute ‘qualifying third party
indemnity provisions’ for the purposes of the Act. The deeds
indemnify the Directors to the maximum extent permitted
by law and remain in force for the duration of a Director’s
period of office and for a six-year period thereafter. The
deeds were in force during the whole of the financial year.
Deeds for existing Directors are available for inspection at
the Company’s registered office. In addition, the Group had
appropriate Directors’ and Officers’ liability insurance cover in
place throughout 2016.
128 I Virgin Money Group Annual Report 2016
Share capital, control and Directors’ powers
Information about share capital, restrictions on the transfer
of shares or voting rights, and special rights with regard to
control of the Company is shown in note 28 to the Financial
Statements and is incorporated into this report by reference.
The Company operates an employee benefit trust (EBT), which
holds ordinary shares on trust for the benefit of employees
and former employees of the Group, and their dependents,
and which is used in conjunction with the Group’s employee
share schemes. Whilst ordinary shares are held in the EBT, the
voting rights in respect of these ordinary shares are exercised
by the trustees of the EBT.
The powers of the Directors, including in relation to the issue
or buy back of the Company’s shares, are set out in the Act and
in the Articles. The Directors were granted authorities to issue
and allot shares and to buy back shares at the 2016 AGM.
Shareholders will be asked to renew these authorities taking
into account the latest institutional shareholder guidelines
at the 2017 AGM.
The Company did not repurchase any of the issued ordinary
shares during 2016 and up to the date of this report or in 2015.
Substantial shareholders
Information provided to the Company by substantial
shareholders pursuant to the DTR is published via a
Regulatory Information Service. As at 31 December 2016,
the Company has been notified under DTR Rule 5 of the
interests in its issued share capital as set out below. All such
share capital has the right to vote in all circumstances at
general meetings.
Internal control and financial risk
management
Information about internal controls and financial risk
management systems in relation to financial reporting, as well
as the Board’s review of these, can be found on pages 98 to
100 of the Audit Committee Report.
Information about financial risk management objectives and
policies in relation to the use of financial instruments can be
found in the Risk Management Report beginning on page 132.
Both of these sections of the Annual Report and Accounts are
incorporated into this report by reference.
Information included in the Strategic Report
The following information that would otherwise be required to
be disclosed in this report, and which is incorporated into this
report by reference, can be found on the following pages of
the Strategic Report:
Subject matter
Future developments
Page reference
32 to 43
Employment of disabled persons
36
Colleague engagement
Emissions reporting
36 and 37
42 and 43
Disclosure of information under Listing Rule
(LR) 9.8.4R
Additional information required to be disclosed by LR 9.8.4R,
where applicable to the Group, can be found on the following
pages of this report:
Subject matter
Page reference
Relationship agreement
Publication of unaudited financial
information
90
139
Dividend waivers
Note 11 and Pg 232
Allotment of equity securities
Note 28 and Pg 244
Allotment of other equity securities
(ATI issuance)
Note 29 and Pg 245
Significant contracts
Note 36 and Pg 253
Directors’ Report Virgin Money Group Annual Report 2016 I 129
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Directors’ Remuneration Report
Directors’ Report
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As at 31 December 2016
Shareholder
Virgin Group Holdings Limited
Kames Capital LLC
York Capital Management Global Advisors, LLC
Standard Life Investments (Holdings) Limited
Prudential plc
2
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Ordinary
shares held
% of voting
rights
155,120,454
34.86%
Direct/
indirect
interest
Direct
22,404,747
5.04% Direct/Indirect
18,482,971
28,777,913
14,003,154
4.15%
6.47%
3.15%
Indirect
Indirect
Indirect
In the period from 31 December 2016 to the date of this
report, the Company has received notifications from Standard
Life Investments (Holdings) Limited and the Prudential plc
group of companies. As at the date of this report, those
notifications indicate that Standard Life Investments
(Holdings) Limited shareholding is 44,666,748 Ordinary
Shares representing 10.04% of the total voting rights
attached to issued share capital and the Prudential plc group
of companies shareholding is 16,018,229 representing 3.60%
of the total voting rights attached to issued share capital.
There are no agreements between Virgin Money and its
Directors or employees which provide compensation for
loss of office or loss of employment that occurs because of
a takeover bid.
In the event of a takeover or other change of control
(excluding an internal reorganisation), outstanding awards
under the Group’s share plans vest to the extent any
applicable performance conditions have been met, and
subject to applicable time pro-rating, in accordance with the
rules of the plans.
Research and development activities
Virgin Money does not undertake formal research and
development activities although it does invest in the
development of platforms and products.
Change of control
The Company is not a party to any significant contracts
that are subject to change of control provisions in the event
of a takeover bid, other than the Virgin Money Trademark
Licence Agreement. This is the agreement under which
Virgin Enterprises Limited (VEL) grants a perpetual licence
to Virgin Money providing the right to use the ‘Virgin’ and
‘Virgin Money’ trademarks. VEL has the right to terminate the
agreement in the event of a change of control, other than a
change of control pre-approved by VEL. VEL shall be entitled
to withhold consent only in the event of a takeover by a third
party who, in VEL’s reasonable opinion, is a direct competitor
of VEL or any Virgin entity in the UK, or whose reputation or
financial standing is reasonably likely to damage materially
the value or reputation of the Virgin brand.
130 I Virgin Money Group Annual Report 2016
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
company’s transactions and disclose with reasonable accuracy, at
any time, the financial position of the parent company and enable
them to ensure that its financial statements comply with the
Act. They have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Group and
to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors’ Report,
Directors’ Remuneration Report and Corporate Governance
Statement that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Group’s
website, virginmoney.com. Legislation in the UK governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report
and the Group and parent company financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and
parent company financial statements for each financial year.
Under that law, they are required to prepare the Group financial
statements in accordance with International Financial Reporting
Standards (IFRS) as adopted by the EU and applicable law and
have elected to prepare the parent company financial statements
on the same basis.
Under company law, the Directors must not approve the financial
statements unless they are satisfied that they give a true and
fair view of the state of affairs of the Group and parent company,
and of the profit or loss for that period. In preparing each of the
Group and parent company financial statements, the Directors
are required to:
> select suitable accounting policies and then apply
them consistently;
> make judgements and estimates that are
reasonable and prudent;
> state whether they have been prepared in accordance with IFRS
as adopted by the EU; and
> prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the
parent company will continue in business.
Directors’ Report Virgin Money Group Annual Report 2016 I 131
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Directors’ Remuneration Report
Directors’ Report
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Responsibility statement of the Directors in
respect of the Annual Financial Report
Each of the current Directors, who is in office at the date of this
report and whose name is listed on pages 75 and 76, confirms that
to the best of his or her knowledge:
> the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Company and the undertakings included in the
consolidation taken as a whole; and
> the Strategic Report and Directors’ Report include a fair review
of the development and performance of the business and the
position of the Company and Group together with a description
of the principal risks and uncertainties that they face.
The Directors consider that the Annual Report and Accounts,
taken as a whole, are fair, balanced and understandable and
provide the information necessary for shareholders to assess the
Group’s position and performance, business model and strategy.
Independent auditors and audit information
Each of the current Directors, who is in office at the date of
this report and whose name is listed on pages 75 and 76,
confirms that, so far as the Director is aware, there is no
relevant audit information of which the Company’s auditors,
PricewaterhouseCoopers LLP, is unaware and that they have
taken all the steps that they ought to have taken as a Director
to make themselves aware of any relevant audit information
and to establish that the Company’s auditors are aware of that
information. This confirmation is given and should be interpreted
in accordance with the provisions of the Act.
Resolutions concerning the re-appointment of
PricewaterhouseCoopers LLP as auditors and authorising the
Audit Committee to set the auditors’ remuneration will be
proposed at the 2017 AGM.
On behalf of the Board:
Katie Marshall
Company Secretary
27 February 2017
Virgin Money Holdings (UK) plc
Registered No. 03087587
132 I Virgin Money Group Annual Report 2016
Risk Management Report
133 The Group’s approach to risk management
135 Risk management framework
136 Emerging risks
139 Risk classes
140 Full analysis of risk classes
Virgin Money Lounge, Edinburgh
Virgin Money Group Annual Report 2016 I 133
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Risk management framework
Emerging risks
Risk classes
Full analysis of risk classes
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The Group’s approach to risk management
Risk management is at the heart of the Group’s strategy to deliver sustainable growth,
quality and returns. This is achieved through a prudent risk appetite and informed risk
decision-making, supported by a consistent risk-focused culture across the Group.
Risk culture and values
The Group has a customer-focused business model built
on a prudent risk culture. The risk culture is aligned to the
Group’s EBO philosophy and reinforces accountability. The
Group’s risk values, outlined below, describe how it expects all
colleagues, suppliers and partners to operate.
(cid:37)(cid:80)(cid:3)(cid:85)(cid:73)(cid:70)(cid:3)
(cid:83)(cid:74)(cid:72)(cid:73)(cid:85)(cid:3)(cid:85)(cid:73)(cid:74)(cid:79)(cid:72)
(cid:36)(cid:73)(cid:66)(cid:77)(cid:77)(cid:70)(cid:79)(cid:72)(cid:70)
(cid:85)(cid:73)(cid:70)(cid:3)(cid:84)(cid:85)(cid:66)(cid:85)(cid:86)(cid:84)(cid:3)(cid:82)(cid:86)(cid:80)
(cid:54)(cid:79)(cid:69)(cid:70)(cid:83)(cid:84)(cid:85)(cid:66)(cid:79)(cid:69)
(cid:90)(cid:80)(cid:86)(cid:83)
(cid:83)(cid:70)(cid:84)(cid:81)(cid:80)(cid:79)(cid:84)(cid:74)(cid:67)(cid:74)(cid:77)(cid:74)(cid:85)(cid:74)(cid:70)(cid:84)
Risk appetite
Risk appetite is the amount and type of risk that the Group
is prepared to seek, accept or tolerate. It is reflected
in frameworks and policies that either limit or, where
appropriate, prohibit activities that could be detrimental to
the Group. The Group’s strategy is developed in conjunction
with risk appetite. A Risk Appetite Statement is approved by
the Board with each strategic planning cycle.
Governance and control
Delegation of authority from the Board to Executive
Committees and management establishes governance and
control. Issues are escalated promptly and remediation plans
are initiated where required.
The key responsibilities of the Board and senior management
include setting risk appetite, agreeing the risk management
framework, and approving policies and practices.
Accountability
The Group uses a ‘Three Lines of Defence’ model which
defines clear responsibilities and accountabilities ensuring
effective independent assurance activities over key
business activities.
> line management (first line) have primary responsibility for
risk decisions; measuring, monitoring and controlling risks
within their areas of accountability. They are required to
establish effective controls in line with policy, to maintain
appropriate risk management skills, practices and tools, and
to act within Board-approved risk appetite parameters. All
Executives certify a monthly control effectiveness review
and a quarterly risk and control attestation;
> the Risk function (second line) provides proactive advice and
constructive challenge on the effectiveness of risk decisions
taken by management. It is responsible for the design and
development of the risk management framework and for
promoting the implementation of a strategic approach
to risk management. It provides a view of the Group’s
risk profile while proposing and reporting against risk
appetite to the Board. It also oversees the Group’s internal
stress testing framework and maintains a good working
relationship with regulators; and
> Internal Audit (third line) provides independent, objective
assurance to improve operations. It helps the Group
achieve its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk
management, control and governance processes.
134 I Virgin Money Group Annual Report 2016
The Group’s approach to risk management
Board
Chairman: Glen Moreno
Board Committees1
Risk Committee
Chairman: Colin Keogh
(Non-Executive Director)
Audit Committee
Chairman: Norman McLuskie
(Non-Executive Director)
Remuneration Committee
Chairman: Marilyn Spearing
(Non-Executive Director)
Executive Committees
Risk Management Committee
Chairman: Chief Risk Officer
Identifies and recommends risk appetite, manages risk within
agreed limits, monitors key risk exposures in relation to risk strategy
and recommends the approach to managing all types of risk.
Asset and Liability Committee
Chairman: Chief Financial Officer
Responsible for management and monitoring of liquidity, funding,
capital and asset and liability management within agreed risk
appetite and policy.
Management Committees
Operational Risk, Conduct Risk
and Compliance Committee
Credit Risk
Committee
Treasury Risk
Committee
1 In addition, there is a Board Nomination Committee.
Risk Management Report Virgin Money Group Annual Report 2016 I 135
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Stress testing
Stress testing is an essential risk management tool which
examines the sensitivities of the strategic plan and business
model and supports the development of management
actions and contingency plans. It is overseen by the Board
Risk Committee.
Sensitivity analysis and scenario stress testing is used to:
> ensure the Group operates within a prudent risk appetite
and can meet any unexpected demands on financial
resources without threatening the viability of the business;
> inform decision-making, ranging from underwriting
decisions to ensuring the sufficiency of capital and liquidity
over the planning horizon. This involves the use of a variety
of macro-economic, operational, liquidity and financial
market disruption scenarios;
> support the Internal Capital Adequacy Assessment
Process (ICAAP), the Individual Liquidity Adequacy
Assessment Process (ILAAP) and inform the setting of
regulatory guidance; and
> develop the Recovery Plan for the business including the
identification of material recovery options.
Reverse stress testing is used to explore the vulnerabilities of
the Group’s strategies and plans to extreme adverse events
with the aim of improving contingency planning.
The Senior Managers and Certification Regime outlines
stress testing as a prescribed responsibility, with clear
accountabilities and responsibilities assigned to senior
management and the Risk and Finance functions. The Chief
Risk Officer is the Executive accountable for stress testing with
collective engagement from the wider Executive and Board.
Risk management framework
The Group’s risk management framework is the foundation for
the delivery of effective risk management and is structured
around the components below:
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External Forces*
* External forces
Legal
Regulatory
Economic
Customer
Competitor
Supplier/Partner
Political
Technological
Risk identification and control assessment
The process to identify, measure and control risk is integrated
into the overall risk governance framework. Risk identification
processes are forward-looking to ensure emerging risks are
identified. Risks are captured in comprehensive risk logs and
measured using consistent methodologies. Risk measurement
includes the application of sound stress testing and scenario
analysis, and considers whether relevant controls are in place.
Risk decision-making and reporting
A current and forecast view of the Group’s overall risk profile,
key exposures, management actions, and performance is
reported to the Risk Management Committee, the Board
Risk Committee and the Board. Rigorous stress testing
exercises are carried out to assess the impact of a range of
adverse scenarios and enable the Group to make appropriate
contingency plans. The Chief Risk Officer has direct access to
the Chairman of the Board Risk Committee.
136 I Virgin Money Group Annual Report 2016
Emerging risks
The Group considers the following to be risks that have
the potential to increase in significance and affect the
performance of the Group.
Regulatory and competition authorities continue to review
key banking markets. Market inefficiencies and consolidation
within the banking sector could change the competitive
landscape and possibly impact market structures and margins.
Macro-economic environment
The UK’s decision to leave the EU has introduced a significant
degree of uncertainty for the economy. While there has been
no evidence of material changes in customer behaviour
to date, adverse developments in the macro-economic
environment may affect the Group’s earnings and profitability
as they are exposed to risks relating to credit conditions and
the housing and savings markets.
The Bank of England (BoE) reduced the Bank Base Rate in
August 2016. Lower for longer interest rates will put pressure
on banking sector net interest margins and may impact the
financial performance of the Group.
Key mitigating actions
> the Group regularly reviews earnings in light of economic
forecasts and tests its readiness to respond to future
changes in the economy;
> the BoE’s Term Funding Scheme (TFS) is designed to
mitigate the impact of the reduction in interest rates;
> the Group ensures there is an appropriate balance between
profitability and customer outcomes; and
> the Group monitors its credit and liquidity positions
operational capability and risk of disruption to payment and
other systems.
Macro-structural landscape
There is a wide range of incoming regulatory changes which
will impact the Group.
Changes to capital requirements include an increase to the
countercyclical buffer, implementation of the ring-fencing
regime and the introduction of Minimum Requirements for
Own Funds and Eligible Liabilities (MREL). Further information
regarding these changes can be found on page 188.
The outcome of the EU referendum brings uncertainty
in relation to regulation derived from EU legislation.
Material items of regulatory change deriving from EU
legislation include the EU Market Abuse Directive, Payment
Services Directive 2 (PSD2) and General Data Protection
Regulation (GDPR).
Key mitigating actions
> the Board is focused on responding effectively and
efficiently to changes in the regulatory environment;
> the business planning process incorporates the Group’s
view of emerging capital requirements;
> stress and scenario testing forms an integral part of the
Group’s strategic and capital planning; and
> the Group actively participates in a range of regulatory
developments, engaging with HM Treasury, the PRA, the
FCA and the BoE on the evolving UK regulatory framework
and the impact of EU directives.
Balance sheet risk
Credit
The UK has been experiencing strong credit conditions and
historically low arrears emergence. However, should there
be a rise in interest rates, unemployment, or an economic
slow-down, there is the risk that retail consumers’ disposable
income will come under pressure. This could lead to further
increases in defaults and impairments. Additionally, the
implementation of IFRS 9 in 2018 will change the basis
of provisioning to a view of expected loss. More details
relating to IFRS 9 can be found in note 38 to the financial
statements, on page 255.
Key mitigating actions
> the Group remains resilient to this risk as a result of its
strong asset quality;
> the Group has tightened credit scores for new card
applications following the EU referendum to protect the
credit quality of new card lending; and
> the Group has a fully mobilised IFRS 9 programme and has
adjusted plans for the estimated impact.
Risk Management Report Virgin Money Group Annual Report 2016 I 137
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Risk management framework
Emerging risks
Risk classes
Full analysis of risk classes
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136
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Key mitigating actions
> the Group develops its supplier partnership and oversight
capability to minimise the risk of service disruption caused
by the failure of a third party;
> the Group engages specialist third parties to undertake
targeted reviews of supplier performance as required; and
> the Group outsources the administration of its unit
trust and pension business to IFDS. During 2016, IFDS
initiated a significant programme of remediation relating
to compliance with client asset regulations which will
continue into 2017. The Group continues to strengthen its
oversight of IFDS.
Cyber-crime
The external threat of cyber attack continues with reports
of data and security breaches increasing in frequency and
severity across all industries. Cyber-crime continues to be
cited as a material risk by the FPC.
Key mitigating actions
> the Group has a Cyber Security Strategy to enhance IT
resilience and information security capability, taking
account of both the external threat environment and the
changing risk profile of the business;
> the Group monitors the changing external threat landscape,
invests to enhance its control environment and improve
resilience; and
> increased focus on digital capability and IT resilience.
Supplier partnerships
The Group manages outsourced relationships with third
parties who support the credit card, investment and insurance
business lines. The Group has strategic suppliers for key
components of its infrastructure. Reliance on key corporate
partners and strategic suppliers gives rise to the potential risk
of disruption.
138 I Virgin Money Group Annual Report 2016
Exposure to risk by business activity
The table below provides a high-level illustration of how the Group’s business activities are reflected in risk-weighted assets.
(cid:55)(cid:74)(cid:83)(cid:72)(cid:74)(cid:79)(cid:3)(cid:46)(cid:80)(cid:79)(cid:70)(cid:90)(cid:3)(cid:40)(cid:83)(cid:80)(cid:86)(cid:81)
(cid:53)(cid:80)(cid:85)(cid:66)(cid:77)(cid:3)(cid:83)(cid:74)(cid:84)(cid:76)(cid:14)(cid:88)(cid:70)(cid:74)(cid:72)(cid:73)(cid:85)(cid:70)(cid:69)(cid:3)(cid:66)(cid:84)(cid:84)(cid:70)(cid:85)(cid:84)(cid:3)(cid:98)(cid:24)(cid:13)(cid:23)(cid:26)(cid:22)(cid:78)
(cid:46)(cid:80)(cid:83)(cid:85)(cid:72)(cid:66)(cid:72)(cid:70)(cid:84)(cid:3)
(cid:66)(cid:79)(cid:69)(cid:3)(cid:84)(cid:66)(cid:87)(cid:74)(cid:79)(cid:72)(cid:84)
(cid:36)(cid:86)(cid:83)(cid:83)(cid:70)(cid:79)(cid:85)(cid:3)(cid:66)(cid:68)(cid:68)(cid:80)(cid:86)(cid:79)(cid:85)(cid:84)
(cid:51)(cid:70)(cid:84)(cid:74)(cid:69)(cid:70)(cid:79)(cid:85)(cid:74)(cid:66)(cid:77)(cid:3)(cid:78)(cid:80)(cid:83)(cid:85)(cid:72)(cid:66)(cid:72)(cid:70)(cid:84)
(cid:35)(cid:86)(cid:90)(cid:14)(cid:85)(cid:80)(cid:14)(cid:77)(cid:70)(cid:85)(cid:3)(cid:78)(cid:80)(cid:83)(cid:85)(cid:72)(cid:66)(cid:72)(cid:70)(cid:84)
(cid:36)(cid:86)(cid:84)(cid:85)(cid:80)(cid:78)(cid:70)(cid:83)(cid:3)(cid:69)(cid:70)(cid:81)(cid:80)(cid:84)(cid:74)(cid:85)(cid:84)
(cid:36)(cid:83)(cid:70)(cid:69)(cid:74)(cid:85)(cid:3)(cid:68)(cid:66)(cid:83)(cid:69)(cid:84)
(cid:36)(cid:83)(cid:70)(cid:69)(cid:74)(cid:85)(cid:3)(cid:68)(cid:66)(cid:83)(cid:69)(cid:84)
(cid:3)
(cid:39)(cid:74)(cid:79)(cid:66)(cid:79)(cid:68)(cid:74)(cid:66)(cid:77)
(cid:84)(cid:70)(cid:83)(cid:87)(cid:74)(cid:68)(cid:70)(cid:84)
(cid:49)(cid:70)(cid:79)(cid:84)(cid:74)(cid:80)(cid:79)(cid:84)
(cid:42)(cid:79)(cid:84)(cid:86)(cid:83)(cid:66)(cid:79)(cid:68)(cid:70)(cid:3)
(cid:42)(cid:79)(cid:87)(cid:70)(cid:84)(cid:85)(cid:78)(cid:70)(cid:79)(cid:85)(cid:84)(cid:3)
(cid:51)(cid:74)(cid:84)(cid:76)(cid:14)(cid:88)(cid:70)(cid:74)(cid:72)(cid:73)(cid:85)(cid:70)(cid:69)(cid:3)(cid:66)(cid:84)(cid:84)(cid:70)(cid:85)(cid:84)
(cid:51)(cid:74)(cid:84)(cid:76)(cid:14)(cid:88)(cid:70)(cid:74)(cid:72)(cid:73)(cid:85)(cid:70)(cid:69)(cid:3)(cid:66)(cid:84)(cid:84)(cid:70)(cid:85)(cid:84)
(cid:51)(cid:74)(cid:84)(cid:76)(cid:14)(cid:88)(cid:70)(cid:74)(cid:72)(cid:73)(cid:85)(cid:70)(cid:69)(cid:3)(cid:66)(cid:84)(cid:84)(cid:70)(cid:85)(cid:84)
(cid:3)
(cid:36)(cid:83)(cid:70)(cid:69)(cid:74)(cid:85)(cid:3)(cid:83)(cid:74)(cid:84)(cid:76)(cid:3)
(cid:48)(cid:81)(cid:70)(cid:83)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:66)(cid:77)(cid:3)(cid:83)(cid:74)(cid:84)(cid:76)
(cid:3)
(cid:98)(cid:78)
(cid:21)(cid:13)(cid:24)(cid:23)(cid:22)
(cid:21)(cid:21)(cid:17)
(cid:3)
(cid:36)(cid:83)(cid:70)(cid:69)(cid:74)(cid:85)(cid:3)(cid:83)(cid:74)(cid:84)(cid:76)(cid:3)
(cid:48)(cid:81)(cid:70)(cid:83)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:66)(cid:77)(cid:3)(cid:83)(cid:74)(cid:84)(cid:76)
(cid:3)
(cid:3)
(cid:98)(cid:78)
(cid:18)(cid:13)(cid:25)(cid:21)(cid:24)
(cid:18)(cid:23)(cid:22)
(cid:3)
(cid:48)(cid:81)(cid:70)(cid:83)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:66)(cid:77)(cid:3)(cid:83)(cid:74)(cid:84)(cid:76)(cid:3)
(cid:3)
(cid:98)(cid:78)
(cid:22)(cid:17)
(cid:3)
(cid:36)(cid:70)(cid:79)(cid:85)(cid:83)(cid:66)(cid:77)(cid:3)(cid:71)(cid:86)(cid:79)(cid:68)(cid:85)(cid:74)(cid:80)(cid:79)(cid:84)
(cid:52)(cid:73)(cid:66)(cid:83)(cid:70)(cid:69)(cid:3)(cid:84)(cid:86)(cid:81)(cid:81)(cid:80)(cid:83)(cid:85)(cid:3)(cid:71)(cid:86)(cid:79)(cid:68)(cid:85)(cid:74)(cid:80)(cid:79)(cid:84)
(cid:42)(cid:79)(cid:85)(cid:70)(cid:83)(cid:70)(cid:84)(cid:85)(cid:3)(cid:51)(cid:66)(cid:85)(cid:70)(cid:3)(cid:51)(cid:74)(cid:84)(cid:76)(cid:3)(cid:74)(cid:79)(cid:3)(cid:85)(cid:73)(cid:70)(cid:3)(cid:35)(cid:66)(cid:79)(cid:76)(cid:74)(cid:79)(cid:72)(cid:3)(cid:35)(cid:80)(cid:80)(cid:76)(cid:3)(cid:9)(cid:42)(cid:51)(cid:51)(cid:35)(cid:35)(cid:10)(cid:18)
(cid:51)(cid:74)(cid:84)(cid:76)(cid:14)(cid:88)(cid:70)(cid:74)(cid:72)(cid:73)(cid:85)(cid:70)(cid:69)(cid:3)(cid:66)(cid:84)(cid:84)(cid:70)(cid:85)(cid:84)
(cid:36)(cid:83)(cid:70)(cid:69)(cid:74)(cid:85)(cid:3)(cid:83)(cid:74)(cid:84)(cid:76)(cid:3)
(cid:36)(cid:83)(cid:70)(cid:69)(cid:74)(cid:85)(cid:3)(cid:87)(cid:66)(cid:77)(cid:86)(cid:70)(cid:3)
(cid:3)
(cid:66)(cid:69)(cid:75)(cid:86)(cid:84)(cid:85)(cid:78)(cid:70)(cid:79)(cid:85)(cid:84)
(cid:3)
(cid:98)(cid:78)
(cid:21)(cid:17)(cid:22)
(cid:19)(cid:20)
1 Virgin Money does not have a trading book and, as such, does not have material exposure to market risk. Interest Rate Risk in the Banking Book is captured as part of Pillar 2 capital and
therefore does not give rise to risk-weighted assets.
Principal risks
The Board have carried out a robust assessment of the principal risks facing the Group, including those that would threaten
its business model, future performance, solvency or liquidity. The Group’s principal risks are shown in the Risk overview on
pages 48 to 51.
The Group’s emerging risks are shown on pages 136 and 137. Full analysis of the group’s risk classes is shown on
pages 140 to 192.
Risk Management Report Virgin Money Group Annual Report 2016 I 139
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Risk classes
The Group’s risk framework covers all types of risk which affect the Group and could impact on the achievement of strategic
objectives. A detailed description of each category is provided on pages 140 to 192.
All disclosures in the Risk Management Report are unaudited, unless otherwise stated. Additional information can be found in
the Pillar 3 disclosures on the Group’s website.
Credit Risk
Page 140
Market Risk
Page 164
Operational
Risk
Page 169
Other Operational Risk
Page 169
Conduct Risk and Compliance
Page 170
Strategic and
Business Risk
Page 44
Financial Risk
Page 171
Liquidity
Page 177
Capital
Page 187
Retail
Wholesale
Conduct
Compliance
Mortgage
Wholesale
Credit Risk
Foreign
Exchange
Risk
Operational
Risk
Framework
Fund
Management
People
Product
Design and
Governance
Upstream
Regulation
Macro-
economic
Risk
Interest Rate
Risk in the
Banking Book
Retail
Funding Risk
Capital
Sufficiency
Personal
Current
Accounts
Large
Exposures
Corporate
Risks
Legal Risk
Process
Regulatory
Reporting
Transformation
Risk
Retail
Concentration
Risk
Off -Balance
Sheet
Liquidity Risk
Capital
Efficiency
Credit Cards
Collections
& Recoveries
Responsible
Lending
Unfair
Contract
Terms
Sales
Practices,
Advice &
Culture
Operational
Risk Losses
Business
Disruption
Systems
Critical and
Important
Outsourcing
Change Risk
Management
Secured
Wholesale
Debt
Marketable
Asset Risk
Non-
Marketable
Asset Risk
Information
Security
Payment &
Settlement
Risk
Sales
Incentives
and Reward
Senior
Persons
Regime
Reputation
Risk
Management
Pricing
Information
Management
Physical
Security
& Safe
Environment
Quality and
Competence
Privacy
and Data
Protection
Competitive
Environment
Model Risk
Franchise
Viability Risk
Financial
Crime
Non-financial
Counterparty
Risk
Post sale
Administration
& Transaction
Handling
Partner
Conduct
Vulnerable
Customers
& Treating
Customers
Fairly
Sourcebooks
CASS
COLL
MCOB
BCOB
BIPRU
COB
CCA
REMCODE
Markets
Compliance
Wholesale
Credit
Concentration
Risk
Wholesale
Funding Risk
Under-
estimation of
Credit Risk
Funding
Concentration
Risk
Intra-Day
Liquidity Risk
140 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
Credit risk
Definition
Credit risk is defined as the risk that a borrower or
counterparty fails to pay the interest or the capital due
on a loan or other financial instrument (both on and off-
balance sheet).
Risk appetite
The Group has appetite for high-quality credit
exposures including affordable retail lending and liquid
wholesale investments.
Exposures
The principal credit risks arise from loans and advances to
customers, debt securities and derivatives. The credit risk
exposures of the Group are set out on page 143. Credit risk
exposures are categorised as retail (secured and unsecured)
and wholesale.
In terms of loans and advances, credit risk arises
both from amounts lent and commitments to extend
credit to a customer. This applies to the secured and
unsecured portfolios.
Loans and advances expose the Group to customer re-
mortgage risk, for example, in the interest only retail
mortgage portfolio. Re-mortgage risk is the possibility that
an outstanding exposure cannot be repaid at its contractual
maturity date. Interest only mortgage management strategies
are detailed on page 159.
Growth in buy-to-let lending has been undertaken in a
controlled manner, with Board oversight against risk appetite.
The buy-to-let lending policy is targeted towards retail
customers rather than professional landlords, with specific
restrictions in place on total exposures by loan amount and
number of properties.
The Group’s unsecured portfolio has grown in line with
expectation and within strict underwriting criteria.
Credit risk in the wholesale portfolio arises from
debt securities, derivatives and foreign exchange
activities. The Group’s wholesale credit risk exposure is
reflected on page 161.
Measurement
The Group uses statistical models, supported by both internal
and external data, to measure retail credit risk exposures.
The models reflect three components: (i) the ‘probability of
default’ (PD) by the borrowers on their contractual obligations,
(ii) current exposures to the borrowers and their likely future
development, from which the Group derives the ‘exposure
at default’, and (iii) the likely loss ratio on the defaulted
obligations (the ‘loss given default’). These parameters are
used in order to derive an expected loss.
Portfolios are assessed by using segmentation for
measurement and reporting purposes. Details of
the classifications used for asset quality can be
found on page 144.
The Group uses Advanced Internal Ratings Based (AIRB)
models in measuring the credit risk of secured loans and
advances to customers. All retail unsecured and wholesale
exposures are measured under the Standardised Approach for
regulatory capital.
The Group’s credit portfolios are subject to regular stress
testing, with stress scenario assessments run at various levels
of the organisation from Group-led to individual portfolio
exercises. Further information on the stress testing process,
methodology and governance can be found on page 135.
Page 147 provides details of the Group’s approach to
the impairment of financial assets. Refer to note 1 to the
financial statements.
Mitigation
The Group uses a range of approaches to mitigate credit risk.
Credit policy
The Risk function uses risk appetite to set the credit policy
for each type of credit risk. These policies are supported
by lending manuals which define the responsibilities of
underwriters and provide a rule set for credit decisions. The
risk appetite, target market and risk acceptance criteria are
reviewed at least annually. Risk oversight teams monitor
early warning indicators, credit performance trends, and
key risk indicators, and review and challenge exceptions
to planned outcomes. They test the adequacy of the credit
risk infrastructure and governance processes throughout
the Group. Counterparty exposures are regularly reviewed
and appropriate interventions are made where necessary.
Risk Assurance perform independent risk-based reviews,
Risk Management Report Virgin Money Group Annual Report 2016 I 141
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and provide an assessment of the effectiveness of internal
controls and risk management practices. Oversight and
review is also undertaken by Internal Audit.
Buy-to-let is limited to a maximum of 75% LTV and
residential interest only is limited to a maximum of 70% LTV,
regardless of loan size.
Controls over AIRB rating systems
The Group has an established Independent Model Validation
team that sets common minimum standards. The standards
are designed to ensure risk models and associated AIRB rating
systems are developed consistently, and are of sufficient
quality to support business decisions and meet regulatory
requirements1.
Credit underwriting
The Group uses a variety of lending criteria when assessing
applications for secured and unsecured lending. The general
approval process uses credit acceptance scorecards and
involves a review of an applicant’s previous credit history
using information held by credit reference agencies.
The Group assesses the affordability of the borrower
under stressed scenarios including increased interest
rates. In addition, the Group has in place limits on
permitted indebtedness.
The Group rejects any application for a product where a
customer is registered as bankrupt or insolvent, or has a
County Court Judgement registered at a credit reference
agency used by the Group. In addition, the Group’s approach
to underwriting applications takes into account the total
unsecured debt held by a customer and their affordability.
For residential mortgages, the Group’s policy is to accept
only standard applications with a loan-to-value (LTV) of less
than 95%. All originations in the year to 31 December 2016
which were between 90% and 95% LTV were only permitted
under the Help to Buy loan guarantee scheme. The Group
has maximum % LTV limits which depend upon the loan size.
Residential mortgage limits are:
Loan size from
To
£1
£500,000
Maximum LTV
95% (purchase)
90% (re-mortgage)
£500,001
£1,000,000
80%
1 The Risk function reviews model effectiveness, while new models and model changes are
referred to the appropriate model governance committee for approval.
The Group’s approach to underwriting applications for
unsecured products takes into account the total unsecured
debt held by a customer and their affordability.
The Group uses statistically based decisioning techniques
(primarily credit scoring models) for its retail portfolios.
Collateral for secured retail and wholesale exposures
The sole collateral type for secured loans and advances to
customers is residential real estate. Property offered as
collateral must be of acceptable construction and located
in England, Wales, Scotland or Northern Ireland. Title to the
property must be good, marketable and free from onerous
restrictions and conditions. The Group requires first legal
charge over the property offered as collateral and does not
accept charges over part of the collateral. The Group does not
lend where the collateral is land only.
Collateral held as security for financial assets other than loans
and advances is determined by the nature of the instrument.
Debt securities, treasury and other bills are generally
unsecured, with the exception of asset-backed securities and
similar instruments such as covered bonds, which are secured
by portfolios of financial assets. Collateral is generally not
held against loans and advances to financial institutions,
except where a collateral agreement has been entered into
under a master netting agreement.
In addition, derivative transactions with wholesale
counterparties are collateralised under a Credit Support
Annex in conjunction with the ISDA Master Agreement to
further mitigate credit risk. The Group will receive additional
collateral from certain counterparties in the event their
external credit rating falls below contractually set triggers as
agreed in the Credit Support Annex.
It is the Group’s policy that, at the time of borrowing, collateral
should always be realistically valued by an appropriately
qualified source, independent of both the credit decision
process and the customer. Collateral valuation is reviewed on
a regular basis.
Monitoring
The Group produces regular portfolio monitoring reports
for review by senior management. The Risk function in
turn produces a review of credit risk throughout the Group,
including reports on significant credit exposures, which are
142 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
presented to the Risk Management Committee and the Board
Risk Committee.
The performance of all rating models is monitored on a
regular basis to ensure that:
> appropriate risk differentiation capability is provided;
> generated ratings remain as accurate and robust as
practical; and
> appropriate risk estimates are assigned to grades and
pools of accounts.
In the event that the monitoring identifies material exceptions
or deviations from expected outcomes, these are escalated
for resolution.
Debt management for customers in financial difficulty
The Group’s aim in offering forbearance and other assistance
to retail customers in financial distress is to benefit both
the customer and the Group by discharging the Group’s
regulatory and social responsibilities to support customers
and act in their best long-term interests. This allows customer
facilities to be brought back into a sustainable position
which, for residential mortgages, may also mean keeping
customers in their homes. The Group offers a range of tools
and assistance to support customers who are encountering
financial difficulties. Cases are managed on an individual
basis, with the circumstances of each customer considered
separately and the action taken judged as being affordable
and sustainable for the customer.
Customers are assisted through the Debt Management
Function where tailored repayment programmes can be
agreed. Customers are actively supported and referred to
free money advice agencies where they have multiple credit
facilities, including those at other lenders, which require
restructuring.
One component of the management approach is to contact
customers showing signs of financial difficulty to discuss their
circumstances and offer solutions to prevent their accounts
falling into arrears.
Specific tools are available to assist customers which vary
by product and the customer’s status. Further details can be
found on page 159.
Income and expenditure assessments are undertaken for all
customers entering into a long-term repayment plan. This
ensures that customers are provided with a sustainable and
affordable solution that allows them a realistic opportunity
to repay their debt in the short to medium term. In addition,
the Group will advise customers to contact debt management
companies such as Citizens Advice Bureau, Stepchange and
Payplan. These companies do not charge any fees and will
offer advice to customers as well as work with creditors to
agree affordable repayment plans. Understanding what has
changed and establishing the customers’ current and future
financial situation is imperative to ensuring that the right
level of support is offered and that customers receive the
appropriate solution to help them manage their debt when in
financial difficulty.
Forbearance and provisioning
The Group’s approach is to ensure that provisioning models,
supported by management judgement, appropriately
reflect the incurred loss risk of exposures. The Group uses
behavioural scoring to assess customers’ credit risk and
the models take a range of potential indicators of customer
financial distress into account.
The performance of provision models is monitored and
challenged on an ongoing basis in line with the Retail Credit
Provisioning Policy. Regular detailed analysis of modelled
provision outputs is undertaken to demonstrate that the risk
of forbearance or other similar activities is recognised, that
the outcome period adequately captures the risk and that the
underlying risk is appropriately reflected.
Further details on forbearance can be found on page 159.
Risk Management Report Virgin Money Group Annual Report 2016 I 143
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Full analysis of risk classes
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Credit risk portfolio as at 31 December 2016
Overview
The tables below show the total credit risk exposures for the Group’s retail and wholesale portfolios.
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Secured
Unsecured
Wholesale
Residential
mortgage
loans
£m
Residential
buy-to-let
mortgage
loans
£m
Credit cards
£m
Overdrafts
£m
Treasury
assets
£m
Derivative
exposures
£m
24,283.0
5,468.4
2,486.5
0.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
635.6
786.3
0.7
858.8
Total
£m
32,238.0
635.6
786.3
0.7
858.8
–
–
–
–
–
–
104.2
104.2
2016 (audited)
Total gross loans and
advances to customers
Loans and advances to banks
Cash and balances at
central banks
Debt securities classified
as loans and receivables
Available-for-sale financial
assets
Gross positive fair value of
derivative assets
Total
24,283.0
5,468.4
2,486.5
0.1
2,281.4
104.2
34,623.6
Secured
Unsecured
Wholesale
Residential
mortgage
loans
£m
Residential
buy-to-let
mortgage
loans
£m
Credit cards
£m
Overdrafts
£m
21,060.3
4,401.9
1,609.8
0.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Treasury
assets
£m
–
614.5
888.6
1.1
1,296.9
Derivative
exposures
£m
–
–
–
–
Total
£m
27,072.2
614.5
888.6
1.1
1,296.9
–
82.3
82.3
2015 (audited)
Total gross loans and
advances to customers
Loans and advances to banks
Cash and balances at
central banks
Debt securities classified
as loans and receivables
Available-for-sale financial
assets
Gross positive fair value
of derivative assets
Total
21,060.3
4,401.9
1,609.8
0.2
2,801.1
82.3
29,955.6
144 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
Credit quality of assets
Loans and receivables
Unsecured exposures are categorised as:
> higher risk where assets are past due;
The Group defines three classifications of credit quality (low
risk, medium risk and higher risk) for all credit exposures.
These are based on the following criteria.
Secured credit exposures are segmented according to the
credit quality classification and a point-in-time PD. The point-
in-time PD is an internal parameter used within the Group’s
AIRB capital models which aims to estimate the probability
of default over the next 12 months based on account
characteristics and customer behavioural data. Default occurs
where the borrower has missed six months of mortgage
repayments or the borrower is deemed to be unlikely to repay
their loan. Exposures are categorised as:
> higher risk where assets are past due or have a point in time
PD greater than 2%;
> medium risk where assets are not past due and have a PD
greater than 0.8% and less than or equal to 2%; and
> low risk where assets are not past due and have a PD less
than or equal to 0.8%.
> 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. The Group’s wholesale exposures are investment
grade and therefore classified as low risk.
No wholesale credit exposures were past due or impaired as at
31 December 2016 and 31 December 2015.
Further asset quality categorisation is disclosed on page 147,
which reflects the impairment status of assets.
Risk Management Report Virgin Money Group Annual Report 2016 I 145
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Full analysis of risk classes
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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. These commitments represent agreements to lend in the future
and may be decreased or removed by the Group, subject to product notice requirements.
Low risk
£m
Medium risk
£m
Higher risk
£m
Total
exposures
£m
Low risk
%
Medium risk
%
Higher risk
%
2016 (audited)
On-balance sheet
Wholesale
Cash and balances at central
banks
Debt securities classified as
loans and receivables
Available-for-sale financial
assets
Loan and advances to banks
Derivative financial instruments
Retail
Gross loans and advances to
customers – secured
Gross loans and advances to
customers – unsecured
786.3
0.7
858.8
635.6
104.2
–
–
–
–
–
–
–
–
–
–
786.3
100.0
0.7
100.0
858.8
100.0
635.6
104.2
100.0
100.0
26,822.3
1,871.6
1,057.5
29,751.4
90.1
2,451.3
2.9
32.4
2,486.6
98.6
91.5
Total on-balance sheet
31,659.2
1,874.5
1,089.9
34,623.6
Off-balance sheet
Loan commitments (pipeline
and undrawn commitments)
5,289.1
–
–
5,289.1
100.0
–
–
–
–
–
6.3
0.1
5.4
–
–
–
–
–
–
3.6
1.3
3.1
–
146 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
Low risk
£m
Medium risk
£m
Higher risk
£m
Total
exposures
£m
Low risk
%
Medium risk
%
Higher risk
%
2015 (audited)
On-balance sheet
Wholesale
Cash and balances at central
banks
Debt securities classified as
loans and receivables
Available-for-sale financial
assets
Loan and advances to banks
Derivative financial instruments
Retail
Gross loans and advances to
customers – secured
Gross loans and advances to
customers – unsecured
888.6
1.1
1,296.9
614.5
82.3
–
–
–
–
–
–
–
–
–
–
888.6
100.0
1.1
100.0
1,296.9
100.0
614.5
82.3
22,916.7
1,652.7
892.8
25,462.2
1,579.7
2.9
27.4
1,610.0
100.0
100.0
90.0
98.1
91.4
Total on-balance sheet
27,379.8
1,655.6
920.2
29,955.6
Off-balance sheet
Loan commitments (pipeline
and undrawn commitments)
4,479.8
–
–
4,479.8
100.0
–
–
–
–
–
6.5
0.2
5.5
–
–
–
–
–
–
3.5
1.7
3.1
–
Risk Management Report
Virgin Money Group Annual Report 2016 I 147
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Loans and advances to customers comprise:
(audited)
Advances secured on residential property not subject to securitisation
Advances secured on residential property subject to securitisation
Total advances secured on residential property
Residential buy-to-let loans not subject to securitisation
Total loans and advances to customers secured on residential property
Impairment allowance-secured
Loans and advances-secured
Credit cards
Overdrafts
Unsecured receivables not subject to securitisation
Impairment allowance – unsecured
Loans and advances – unsecured
Total loans and advances to customers excluding portfolio hedging
2016
£m
2015
£m
19,375.2
17,389.9
4,907.8
3,670.4
24,283.0
21,060.3
5,468.4
4,401.9
29,751.4
25,462.2
(10.6)
(8.7)
29,740.8
25,453.5
2,486.5
1,609.8
0.1
0.2
2,486.6
1,610.0
(39.5)
(31.2)
2,447.1
1,578.8
32,187.9
27,032.3
The mortgage portfolio has grown by 16.8% (£4.3 billion) during 2016. Buy-to-let loans grew by 24.2% (£1.1 billion) to
£5.5 billion, accounting for 18.4% of total secured loans (2015: 17.3%). This increase is in line with growth in the private rental
sector, with the proportion of buy-to-let mortgage lending in line with the market. In particular, the market experienced an
increase in buy-to-let lending during the first three months of 2016, ahead of the stamp duty changes which came into effect
on 1 April 2016. Growth in buy-to-let lending has been undertaken in a controlled manner, with the intention of keeping the
portfolio mix broadly in line with the market average position.
The credit card portfolio has grown by 54.5% (£876.7 million) during 2016, in line with the target of £3 billion of receivables
by the end of 2017. This growth has not been at the expense of credit quality, as shown by the reduction in the proportion of
impaired balances to total book of 0.4% in the year.
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
and in forbearance
Loans that are categorised as neither past due nor impaired, and 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 impaired assets, as the expected recoverable amount exceeds the carrying amount. This category
is not applicable for unsecured lending.
Arrears
Impaired assets
For secured lending, 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.
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.
148 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
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
2016 (audited)
£m
%
£m
%
£m
Neither past due nor
impaired
24,047.8
99.1
5,441.8
99.5
2,454.1
%
98.7
£m
0.1
%
£m
100.0
31,943.8
%
99.1
– of which in receipt
231.5
1.0
25.7
0.5
2.9
0.1
151.3
83.9
0.6
0.3
17.6
9.0
0.3
0.2
–
32.4
–
1.3
–
–
–
–
–
–
260.1
0.8
168.9
125.3
0.5
0.4
24,283.0
100.0
5,468.4
100.0
2,486.5
100.0
0.1
100.0
32,238.0
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. Full forbearance disclosures can be found on page 160.
Secured
Unsecured
Total
Residential mortgage
loans
Residential buy-to-
let mortgage loans
Credit cards
Overdrafts
2015 (audited)
£m
%
£m
%
£m
20,837.5
98.9
4,379.9
99.5
1,582.4
%
98.3
£m
0.2
%
£m
100.0
26,800.0
%
99.0
238.6
1.1
8.8
0.2
2.9
0.2
145.2
77.6
0.7
0.4
15.0
7.0
0.3
0.2
-
27.4
-
1.7
-
-
-
-
-
-
250.3
0.9
160.2
112.0
0.6
0.4
21,060.3
100.0
4,401.9
100.0
1,609.8
100.0
0.2
100.0
27,072.2
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. Full forbearance disclosures can be found on page 160.
The criteria the Group uses to determine that there is objective evidence of impairment are disclosed on page 147. 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.
of forbearance1
Past due and not
impaired
Impaired
Total
Neither past due nor
impaired
– of which in receipt
of forbearance1
Past due and not
impaired
Impaired
Total
Risk Management Report Virgin Money Group Annual Report 2016 I 149
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Full analysis of risk classes
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Loans and advances which are neither past due nor impaired
Loans which are neither past due nor impaired have improved marginally by 0.1% in the year to 31 December 2016. This has been
driven primarily by a reduction in secured and unsecured arrears rates. Additionally, new lending during the period, although
having a diluting effect, has shown strong arrears performance.
The segmentation for ‘low’, ‘medium’ and ‘higher’ risk categories for the unsecured portfolio can be found on page 145.
The tables below show the details of the credit quality for neither past due nor impaired loans.
2016 (audited)
PD by internal ratings
Low risk
Medium risk
Higher risk
Residential mortgage loans
Residential buy-to-let
mortgage loans
£m
%
£m
%
Total
£m
21,565.5
1,699.5
782.8
89.7
7.1
3.2
5,256.8
172.1
12.9
96.6
3.2
0.2
26,822.3
1,871.6
795.7
%
90.9
6.3
2.8
Total neither past due nor impaired
24,047.8
100.0
5,441.8
100.0
29,489.6
100.0
2015 (audited)
PD by internal ratings
Low risk
Medium risk
Higher risk
Residential mortgage loans
Residential buy-to-let
mortgage loans
£m
%
£m
%
Total
£m
18,681.1
1,519.0
637.4
89.6
7.3
3.1
4,235.6
133.7
10.6
96.7
3.1
0.2
22,916.7
1,652.7
648.0
%
90.8
6.6
2.6
Total neither past due nor impaired
20,837.5
100.0
4,379.9
100.0
25,217.4
100.0
150 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
Loans and advances which are past due and not impaired
The balance of mortgages which are past due and not impaired totalled £168.9 million at 31 December 2016, representing
a 5.4% (£8.7 million) increase from 31 December 2015. Past due and not impaired balances as a proportion of the overall
book have remained stable, constituting 0.6% of secured loans (2015: 0.6%). All unsecured assets which are past due are
treated as impaired.
Residential mortgage loans
Residential buy-to-let
mortgage loans
2016 (audited)
Up to one month
One to three months
Three to six months
Over six months
£m
57.1
63.9
21.4
8.9
%
37.8
42.2
14.1
5.9
Total past due and not impaired
151.3
100.0
£m
4.3
10.8
2.1
0.4
17.6
%
24.4
61.4
11.9
2.3
Total
£m
61.4
74.7
23.5
9.3
%
36.4
44.2
13.9
5.5
100.0
168.9
100.0
2015 (audited)
Up to one month
One to three months
Three to six months
Over six months
Residential mortgage loans
Residential buy-to-let
mortgage loans
£m
44.4
63.5
24.1
13.2
%
30.6
43.7
16.6
9.1
£m
4.3
8.3
1.3
1.1
%
28.7
55.3
8.7
7.3
Total
£m
48.7
71.8
25.4
14.3
%
30.4
44.8
15.9
8.9
Total past due and not impaired
145.2
100.0
15.0
100.0
160.2
100.0
Risk Management Report Virgin Money Group Annual Report 2016 I 151
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Impaired assets
The tables below show the movement of impaired loan balances during 2016 and 2015.
Secured
Unsecured
Wholesale
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Credit cards
£m
Overdrafts
£m
Treasury
assets
£m
Derivative
exposures
£m
Residential
mortgage
loans
£m
77.6
132.3
Residential
buy-to-let
mortgage
loans
£m
7.0
20.4
27.4
85.0
27.4
81.9
(112.9)
(17.7)
(38.3)
(0.6)
(12.5)
83.9
(0.2)
(0.5)
9.0
(32.3)
(9.4)
32.4
Residential
mortgage
loans
£m
68.9
174.9
Residential
buy-to-let
mortgage
loans
£m
7.6
22.2
(151.2)
(21.6)
(42.7)
(1.7)
(13.3)
77.6
(0.2)
(1.0)
7.0
(26.0)
(13.2)
27.4
2016 (audited)
As at 1 January 2016
Classified as impaired during
the year
Transferred from impaired
to unimpaired
Amounts written off
Repayments
As at 31 December 2016
2015 (audited)
As at 1 January 2015
Classified as impaired during
the year
Transferred from impaired
to unimpaired
Amounts written off
Repayments
As at 31 December 2015
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£m
112.0
237.7
(168.9)
(33.1)
(22.4)
125.3
Total
£m
103.9
279.0
(215.5)
(27.9)
(27.5)
112.0
Secured
Unsecured
Wholesale
Credit cards
£m
Overdrafts
£m
Treasury
assets
£m
Derivative
exposures
£m
Total impaired assets increased by £13.3 million in the year to 31 December 2016. This increase reflects growth in the book,
despite improved arrears performance. Further details can be found on page 154.
152 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
An analysis of impaired assets by overdue term and assets where the borrower’s property is in possession is provided in the
tables below.
Residential mortgage
loans
Residential buy-to-let
mortgage loans
Credit cards
Overdrafts
Total
£m
55.7
19.9
4.1
3.9
0.3
%
66.4
23.7
4.9
4.6
0.4
83.9
100.0
£m
6.2
2.2
0.3
0.2
0.1
9.0
%
69.0
24.4
3.3
2.2
1.1
£m
13.1
9.3
9.7
0.3
–
%
40.5
28.7
29.9
0.9
–
100.0
32.4
100.0
£m
%
–
–
–
–
–
–
–
–
–
–
–
–
£m
75.0
31.4
%
59.8
25.1
14.1
11.3
4.4
0.4
3.5
0.3
125.3
100.0
Residential mortgage
loans
Residential buy-to-let
mortgage loans
Credit cards
Overdrafts
Total
£m
50.6
13.7
5.2
7.2
0.9
%
65.1
17.7
6.7
9.3
1.2
£m
4.5
1.4
0.3
0.7
0.1
%
64.3
20.0
4.3
10.0
1.4
£m
11.8
7.6
7.7
0.3
–
%
43.1
27.7
28.1
1.1
–
77.6
100.0
7.0
100.0
27.4
100.0
£m
%
–
–
–
–
–
–
–
–
–
–
–
–
£m
66.9
22.7
%
59.7
20.3
13.2
11.8
8.2
1.0
7.3
0.9
112.0
100.0
2016 (audited)
Up to one month
One to three
months
Three to six
months
Over six months
Possession
Total impaired
assets
2015 (audited)
Up to one month
One to three
months
Three to six
months
Over six months
Possession
Total impaired
assets
Risk Management Report Virgin Money Group Annual Report 2016 I 153
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The tables below show impaired assets and impairment provisions.
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2016 (audited)
Residential mortgage loans
Residential buy-to-let mortgage loans
Total secured
Credit cards
Overdrafts
Total unsecured
Wholesale treasury assets
Wholesale derivative exposures
Total wholesale
Total
2015 (audited)
Residential mortgage loans
Residential buy-to-let mortgage loans
Total secured
Credit cards
Overdrafts
Total unsecured
Wholesale treasury assets
Wholesale derivative exposures
Total wholesale
Total
Impaired
balances as
a % of gross
balances
%
Impaired
balances
£m
Impairment
provisions
£m
Impairment
provisions
as a % of
impaired
balances
%
83.9
9.0
92.9
32.4
–
32.4
–
–
–
0.3
0.2
0.3
1.3
–
1.3
–
–
–
9.4
1.2
10.6
39.4
0.1
39.5
–
–
–
11.2
13.3
11.4
121.6
–
121.9
–
–
–
Gross
balances
£m
24,283.0
5,468.4
29,751.4
2,486.5
0.1
2,486.6
2,281.4
104.2
2,385.6
34,623.6
125.3
0.4
50.1
40.0
Impaired
balances as
a % of gross
balances
%
Impaired
balances
£m
Impairment
provisions
£m
Impairment
provisions
as a % of
impaired
balances
%
77.6
7.0
84.6
27.4
–
27.4
–
–
–
0.4
0.2
0.3
1.7
–
1.7
–
–
–
7.7
1.0
8.7
31.1
0.1
31.2
–
–
–
9.9
14.3
10.3
113.5
–
113.9
–
–
–
112.0
0.4
39.9
35.6
Gross
balances
£m
21,060.3
4,401.9
25,462.2
1,609.8
0.2
1,610.0
2,801.1
82.3
2,883.4
29,955.6
154 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
Secured impaired balances increased by 9.8% during the year to 31 December 2016 and remained stable as a proportion of
gross balances. Impairment provisions on the secured book have increased by £1.9 million; representing 0.04% and 0.03% as a
proportion of gross balances as at 31 December 2016 and 31 December 2015 respectively. This increase reflects book growth
and the use of management judgement to maintain appropriate coverage in the current uncertain economic environment.
Unsecured impaired assets have increased by £5.0 million during the year, reducing as a proportion of gross balances from 1.7%
to 1.3% at 31 December 2015 and 31 December 2016 respectively. This reflects improved arrears performance and the diluting
effect of new lending which is yet to mature. Impairment provisions have increased by £8.3 million during the period and have
reduced as a percentage of gross balances from 1.9% at 31 December 2015 to 1.6% at 31 December 2016. The impairment
provisions as a proportion of impaired balances have increased however, from 113.9% to 121.9% at 31 December 2015 and
31 December 2016 respectively. Impairment provisions have remained consistent on older tranches of debt while increasing on
newer tranches to take into account the maturing of the book.
The table below shows the movement of impairment provisions during the year.
Secured
Unsecured
Wholesale
On advances
secured on
residential
property
£m
On advances
secured on
residential
buy-to-let
property
£m
Credit cards
£m
Overdrafts
£m
Treasury
assets
£m
Derivative
exposures
£m
6.2
(1.7)
3.2
7.7
(0.6)
2.3
9.4
1.4
(0.2)
(0.2)
1.0
(0.2)
0.4
1.2
22.9
(26.0)
34.2
31.1
(32.3)
40.6
39.4
0.1
–
–
0.1
–
–
0.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£m
30.6
(27.9)
37.2
39.9
(33.1)
43.3
50.1
(audited)
As at 1 January 2015
Advances written off
Gross charge to the income
statements
As at 1 January 2016
Advances written off
Gross charge to the income
statement
As at 31 December 2016
The net impairment charge to the income statement in 2016 was £37.6 million (2015: £30.3 million) with the gross charge of
£43.3 million (2015: £37.2 million), and advances written off of £33.1 million (2015: £27.9 million), representing the movement
between opening and closing provision balances as shown above. The difference between the gross and net charge represents
sales of credit card receivables which had previously been written off resulting in net recoveries of £5.7 million (2015:
£6.9 million). Refer to note 8 in the financial statements for more details.
Collateral held as security for loans and receivables to customers
A general description of collateral held as security in respect of financial instruments is provided on page 141. The Group holds
collateral against loans and receivables in the mortgage portfolio. Quantitative and, where appropriate, qualitative information
is provided in respect of this collateral on page 156.
The Group holds collateral in respect of loans and advances to customers as set out on page 141. 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.
Risk Management Report Virgin Money Group Annual Report 2016 I 155
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The tables below show retail secured loan-to-value (LTV) %.
Residential mortgage loans
Residential buy-to-let
mortgage loans
2016 (audited)
<50%
50%-<60%
60%-<70%
70%-<80%
80%-<90%
90%-<100%
>100%
Total
Average LTV1 of stock – indexed
Average LTV of new business
1 The average LTV of stock and new business is balance weighted.
£m
9,476.6
4,958.1
3,918.9
3,162.8
2,307.7
445.1
13.8
24,283.0
%
39.1
20.4
16.1
13.0
9.5
1.8
0.1
100.0
55.6%
69.8%
£m
1,922.8
1,454.8
1,271.8
796.4
19.0
2.2
1.4
5,468.4
%
35.2
26.6
23.3
14.6
0.3
–
–
100.0
54.8%
60.5%
Total
£m
11,399.4
6,412.9
5,190.7
3,959.2
2,326.7
447.3
15.2
29,751.4
Residential mortgage loans
Residential buy-to-let
mortgage loans
Total
2015 (audited)
<50%
50%-<60%
60%-<70%
70%-<80%
80%-<90%
90%-<100%
>100%
Total
Average LTV1 of stock – indexed
Average LTV of new business
1 The average LTV of stock and new business is balance weighted.
£m
8,125.8
4,680.7
4,026.2
2,247.7
1,720.1
250.4
9.4
21,060.3
%
38.6
22.2
19.1
10.7
8.2
1.2
–
100.0
54.9%
69.8%
£m
1,443.5
1,202.9
1,069.7
680.5
3.4
1.4
0.5
4,401.9
£m
9,569.3
5,883.6
5,095.9
2,928.2
1,723.5
251.8
9.9
25,462.2
%
32.8
27.3
24.3
15.5
0.1
–
–
100.0
55.4%
62.7%
%
38.3
21.6
17.4
13.3
7.8
1.5
0.1
100.0
55.4%
68.0%
%
37.6
23.1
20.0
11.5
6.8
1.0
–
100.0
55.0%
68.0%
The average indexed LTVs of the overall mortgage portfolio have increased by 0.4% as at 31 December 2016. This reflects the
overall book growth, with an increased proportion of residential new lending. The value of loans with a LTV greater than 100%
increased from £9.9 million as at 31 December 2015 to £15.2 million as at 31 December 2016. This increase is due to a small
number of cases in Northern Ireland which experienced a 7.1% decrease in the indexed value for properties during the period.
The average LTV for new business has remained at 68.0% as at 31 December 2016, despite a reduction in the proportion of buy-
to-let new business. Buy-to-let mortgages have lower LTV’s due to the 75% cap enforced at origination, therefore, this reduction
is not sufficiently material to change the overall new business LTV.
156 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
Collateral held in relation to secured loans is capped at the amount outstanding on an individual loan basis. The percentages in
the tables below represent the value of collateral, capped at loan amount, divided by the total loan amount in each category.
20161 (audited)
Neither past due nor impaired
– of which in receipt of forbearance
Past due and not impaired
Impaired
– of which in possession
Total
Residential mortgage loans
Residential buy-to-let
mortgage loans
£m
24,046.6
231.5
151.3
83.7
0.3
24,281.6
%
100.0
100.0
100.0
99.8
100.0
100.0
£m
5,441.7
25.7
17.6
9.0
0.1
5,468.3
%
100.0
100.0
100.0
100.0
100.0
100.0
Total
£m
29,488.3
257.2
168.9
92.7
0.4
29,749.9
1 Some segments may appear fully collateralised due to immaterial balances in negative equity. Due to rounding these do not change the overall collateralised percentage shown.
20151 (audited)
Neither past due nor impaired
– of which in receipt of forbearance
Past due and not impaired
Impaired
– of which in possession
Total
Residential mortgage loans
Residential buy-to-let
mortgage loans
£m
20,836.9
238.6
145.2
77.3
0.9
21,059.4
%
100.0
100.0
100.0
99.6
100.0
100.0
£m
4,379.8
8.8
15.0
7.0
0.1
4,401.8
%
100.0
100.0
100.0
100.0
100.0
100.0
Total
£m
25,216.7
247.4
160.2
84.3
1.0
25,461.2
1 Some segments may appear fully collateralised due to immaterial balances in negative equity. Due to rounding these do not change the overall collateralised percentage shown.
%
100.0
100.0
100.0
99.8
100.0
100.0
%
100.0
100.0
100.0
99.6
100.0
100.0
Risk Management Report Virgin Money Group Annual Report 2016 I 157
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The tables below show the excess between the mortgage balance and collateral held, on secured balances with a LTV of
greater than 100%.
For these loans, the exposure was £1.5 million greater than the collateral held as at 31 December 2016. This has increased from
£1.0 million as at 31 December 2015 reflecting a small number of cases in Northern Ireland where negative house price movements
were observed during the year. The recoverable amount used for impairment provision purposes reflects this level of collateral.
2016 (audited)
Neither past due nor impaired
– of which in receipt of forbearance
Past due and not impaired
Impaired
– of which in possession
Total
2015 (audited)
Neither past due nor impaired
– of which in receipt of forbearance
Past due and not impaired
Impaired
– of which in possession
Total
Residential
mortgage
loans
£m
Residential
buy-to-let
mortgage
loans
£m
1.2
–
–
0.2
0.1
1.4
0.1
–
–
–
–
0.1
Residential
mortgage
loans
£m
Residential
buy-to-let
mortgage
loans
£m
0.6
–
–
0.3
–
0.9
0.1
–
–
–
–
0.1
Total
£m
1.3
–
–
0.2
0.1
1.5
Total
£m
0.7
–
–
0.3
–
1.0
Repossessions
The Group 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.
The Group had six repossessed properties as at 31 December 2016, compared to twelve as at 31 December 2015.
158 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
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’s interest only exposure for customers on both interest only and part-and-part for the year to 31 December 2016 has
reduced, accounting for 29.9% of total secured balances, compared to 33.1% at 31 December 2015.
The tables below provide 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.
2016 (audited)
Term expired (still open)
Due within 2 years
Due after 2 years and before 5 years
Due after 5 years and before 10 years
Due after more than 10 years
Total
– of which are impaired
% of total secured loans and advances to customers
Average LTV (%)
2015 (audited)
Term expired (still open)
Due within 2 years
Due after 2 years and before 5 years
Due after 5 years and before 10 years
Due after more than 10 years
Total
– of which are impaired
% of total secured loans and advances to customers
Average LTV (%)
Residential
mortgage
loans
£m
Residential
buy-to-let
mortgage
loans
£m
30.1
167.5
405.2
1,012.9
2,726.0
4,341.7
8.6
17.9
42.1
1.9
16.4
77.8
591.8
3,852.6
4,540.5
47.8
83.0
55.8
Residential
mortgage
loans
£m
Residential
buy-to-let
mortgage
loans
£m
19.1
172.4
411.6
1,017.7
3,173.2
4,794.0
6.7
22.8
44.9
0.7
15.7
57.6
488.1
3,068.6
3,630.7
41.6
82.5
56.4
Total
£m
32.0
183.9
483.0
1,604.7
6,578.6
8,882.2
56.4
29.9
49.6
Total
£m
19.8
188.1
469.2
1,505.8
6,241.8
8,424.7
48.3
33.1
50.3
Risk Management Report Virgin Money Group Annual Report 2016 I 159
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Forbearance
The Group operates a number of treatments to assist
borrowers who are experiencing financial distress. In defining
these treatments, the Group distinguishes between the
following categories for secured assets:
> payment arrangements: a temporary arrangement for
customers in financial distress where arrears accrue
at the contractual payment, for example, short-term
arrangements to pay less than the contractual payment;
> transfers to interest only: an account change to assist
customers through periods of financial difficulty where
arrears do not accrue at the original contractual payment.
Any arrears existing at the commencement of the
arrangement are retained;
> term extensions: a permanent account change for
customers in financial distress where the overall term of
the mortgage is extended, resulting in a lower contractual
monthly payment; and
> discretionary payment holidays: a temporary account
change to assist customers through periods of financial
difficulty where arrears do not accrue at the original
contractual payment.
The value of forbearance stock totalled £278.8 million
at 31 December 2016, representing a 3.2% (£8.6 million)
increase since 31 December 2015. This increase is reflective
of book growth, as forbearance as a percentage of total
loans and advance has reduced for both secured and
unsecured lending.
The Group has been following a process whereby contact is
made with customers who have an interest only mortgage
scheduled to mature within the next ten years. These
customers are contacted throughout their mortgage term to
confirm if their strategy to repay the mortgage loan in full at
the end of the agreed term remains on track. If not, the Group
will discuss a range of options with them which may include a
review of the product to ensure it remains the best product for
their needs, or a forbearance treatment if required.
Interest only balances due to mature in the next two years
represent 2.1% of total interest only balances, totalling
£183.9 million at 31 December 2016. 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, £32.0 million remain at
31 December 2016 (2015: £19.8 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. Approximately 0.1% of the
secured portfolio relates to expired term loan balances. The
average balance of expired term loans which are more than
six months past their maturity date is around £60,000 with an
average LTV of 24%.
The Group offers interest only loans to applicants who have
credible means to repay the mortgage loan at maturity
other than sale of main residence. The flow of new interest
only residential business has remained low during 2016,
representing 2.5% of residential completions. As a result, the
proportion of residential interest only mortgages (excluding
part-and-part) in the portfolio continues to reduce, moving
from 19.1% to 15.0% during 2016.
The Group regularly reviews the effectiveness of the interest
only policy and contact strategies to ensure the delivery of fair
customer outcomes.
160 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
Neither past due
nor impaired
£m
%
0.1
20.9
177.0
59.2
257.2
–
8.1
68.9
23.0
100.0
2.9
100.0
Past due not impaired
Impaired
Total
£m
0.6
1.8
2.3
1.5
6.2
–
%
9.7
29.0
37.1
24.2
100.0
£m
–
0.6
1.4
0.7
2.7
%
–
22.2
51.9
25.9
100.0
£m
%
0.7
23.3
180.7
61.4
266.1
0.3
8.8
67.8
23.1
100.0
–
9.8
100.0
12.7
100.0
2016 (audited)
Secured
Payment arrangement
Transfer to interest only
Term extension
Payment holiday
Total secured forbearance
Unsecured
Accounts where the customer
has been approved on a
repayment plan
Total forbearance
260.1
100.0
6.2
100.0
12.5
100.0
278.8
100.0
Neither past due nor
impaired
£m
%
3.0
17.5
171.9
55.0
247.4
1.2
7.1
69.5
22.2
100.0
2.9
100.0
Past due not impaired
Impaired
Total
£m
0.3
3.3
5.3
0.8
9.7
–
%
3.2
34.0
54.6
8.2
100.0
£m
0.3
0.8
0.7
0.6
2.4
%
£m
%
12.5
33.3
29.2
25.0
100.0
3.6
21.6
177.9
56.4
259.5
1.4
8.3
68.6
21.7
100.0
–
7.8
100.0
10.7
100.0
2015 (audited)
Secured
Payment arrangement
Transfer to interest only
Term extension
Payment holiday
Total secured forbearance
Unsecured
Accounts where the customer
has been approved on a
repayment plan
Total forbearance
250.3
100.0
9.7
100.0
10.2
100.0
270.2
100.0
£266.1 million of retail secured loans and advances were subject to forbearance as at 31 December 2016 (31 December 2015:
£259.5 million). Loans which are forborne are grouped with other assets portraying similar risk characteristics and assessed
collectively for impairment, for example, all customers with a payment arrangement are grouped together and assessed on a
collective basis. The loans are not considered to be impaired unless they meet the Group’s definition of an impaired asset.
Retail unsecured loans and advances subject to forbearance totalled £12.7 million (31 December 2015: £10.7 million). Credit risk
provisioning for the retail unsecured portfolio is undertaken on a collective basis, except for fraud cases, which are provided
for in full, on an individual basis. The approach used is based on PD’s for various behavioural and arrears status segments,
measuring the likelihood of default and the probability of charge-off given default.
Risk Management Report
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Wholesale credit risk
(audited)
Loans and advances to banks excluding Bank of England
Bank of England
Debt securities classified as loans and receivables
Debt securities classified as available-for-sale financial assets
Gross positive fair value of derivative contracts
Total
2016
£m
635.6
786.3
0.7
850.9
104.2
2015
£m
614.5
888.6
1.1
1,292.3
82.3
2,377.7
2,878.8
The Group’s wholesale credit risk exposures reduced by £501.1 million during 2016 due to a reduction of debt securities held and
cash deposited at the BoE. Full disclosure of the Group’s liquid asset portfolio can be found on page 183.
At 31 December 2016 the single largest exposure to any single counterparty, which is not a sovereign or a supranational, was
£115.9 million (2015: £130.8 million). This exposure was to a large UK bank. The table below shows the credit ratings of loans and
advances to banks excluding the BoE.
(audited)
AA+
AA-
A+
A
A-
BBB+
Total
2016
£m
56.8
115.9
208.4
187.4
35.2
31.9
635.6
2015
£m
16.8
130.8
205.5
174.3
42.1
45.0
614.5
162 I Virgin Money Group Annual Report 2016
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The table below shows debt securities classified as loans and receivables and debt securities classified as available-for-sale
financial assets.
(audited)
UK sovereign exposures
Non-domestic sovereign exposures
Supranational
Residential mortgage-backed securities
Covered bonds
Debt securities issued by banks
Total
2016
2015
Debt
securities
classified as
available-
for-sale
financial
assets
£m
Debt
securities
classified as
loans and
receivables
£m
Debt
securities
classified as
loans and
receivables
£m
–
–
–
0.7
–
–
0.7
317.3
–
129.3
52.2
327.1
25.0
850.9
–
–
–
1.1
–
–
1.1
Debt
securities
classified as
available-
for-sale
financial
assets
£m
409.5
–
203.7
59.4
535.3
84.4
1,292.3
The table below shows the credit rating of debt securities classified as loans and receivables and debt securities classified as
available-for-sale financial assets.
(audited)
AAA
AA+
AA
AA-
A+
A
Total
2016
£m
508.6
–
317.3
25.0
–
0.7
2015
£m
798.4
434.9
–
30.0
29.0
1.1
851.6
1,293.4
The credit rating of the debt securities remains high, with 97% rated AA or higher compared to 95% at 31 December 2015.
The movement of exposures from AA+ to AA is due to the downgrading of the UK’s credit rating, following the outcome of the
EU referendum.
Derivative financial instruments
The Group reduces exposure to credit risk through central clearing for eligible derivatives and daily posting of cash collateral
on such transactions, as detailed in note 34 to the financial statements. For over-the-counter (OTC) transactions, exposure is
reduced by the use of 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 £104.2 million (2015: £82.3 million), collateral of
£86.4 million (2015: £10.6 million) was held.
The Group measures exposure in 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.
Risk Management Report Virgin Money Group Annual Report 2016 I 163
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While exposures are managed on a net basis, they are represented on the balance sheet on a gross basis unless the IAS 32
offsettings rules are met. 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.
Cash collateral received is shown as deposits from banks, with cash 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.
(audited)
Gross positive fair value of derivative contracts
Netting with gross negative fair value of derivative contracts1
Potential future incremental exposure
Collateral received
Net OTC derivative exposures
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.
(audited)
Gross negative fair value of derivative contracts
Netting with gross positive fair value of derivative contracts1
Collateral pledged (loans and advances to banks)2
Net OTC derivative liability
2016
£m
104.2
(25.4)
61.2
(86.4)
53.6
2015
£m
82.3
(70.4)
49.9
(10.6)
51.2
2016
£m
2015
£m
(222.3)
(151.0)
25.4
168.1
(28.8)
70.4
72.5
(8.1)
1 The use of netting allows positions on all bilateral transactions with any given counterparty to be offset.
2 The December 2015 collateral pledged has been restated to exclude the impact of over-collateralisation.
The only netting agreements in place are in relation to derivative financial instruments and repurchase transactions. In respect
of repurchase transactions, only the haircut between the asset pledged and deposit received is classed as an exposure given the
balance sheet maintains the exposure to the underlying obligor.
The table below provides credit quality analysis of the gross OTC derivative exposures by credit rating of the counterparties.
(audited)
AA-
A+
A
A-
BBB+
Total
31 December 2016
31 December 2015
£m
5.6
0.6
84.5
12.7
0.8
%
5.4
0.6
81.1
12.2
0.7
104.2
100.0
£m
22.1
6.8
42.0
6.4
5.0
82.3
%
26.9
8.3
51.0
7.7
6.1
100.0
164 I Virgin Money Group Annual Report 2016
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Market risk
Definition
Market risk is defined as the risk that the value of, or net
income arising from, assets and liabilities changes as a result
of interest rate or exchange rate movements. Market risk for
the Group arises only as a natural consequence of carrying out
and supporting core business activities. The Group does not
trade or make markets. As a result, interest rate risk is the only
material market risk for the Group.
Risk appetite
The Group has limited risk appetite for exposures to IRRBB,
in terms of both potential changes to economic value, and
changes to expected net interest income or earnings.
Exposures
The Group’s banking activities expose it to the risk of adverse
movements in interest rates and exchange rates.
Interest rate mismatch risk in the Group’s portfolio and in
the Group’s capital and funding activities arises from the
different re-pricing characteristics of the Group’s assets,
liabilities and off-balance sheet positions. Interest rate risk
arises predominantly from the mismatch between interest
rate sensitive assets and liabilities, the variation in volume
of business written in response to changes in interest rate,
optionality in customers’ ability to complete or redeem
their products, the investment term of capital and reserves,
and the need to stabilise earnings in order to minimise
income volatility.
Basis risk arises from possible changes in spreads, between
different reference rates, for example, where assets and
liabilities reprice at the same time and the scale of rate
movement differs. The primary rates that the Group is exposed
to are the Bank Base Rate and LIBOR. If the spread between
these rates moves adversely, the Group may experience a
reduction in income on unhedged exposures.
Pipeline risk arises where new business volumes are higher
or lower than forecast, requiring the business to unwind
or execute additional hedging at rates which may differ to
what was expected.
Product option/optionality risk arises as customer balances
amortise more quickly or slowly than anticipated due to
economic conditions or customers’ response to changes
in economic conditions.
Foreign currency risk arises as a result of having assets,
liabilities and derivative items denominated in currencies other
than Sterling as a result of banking activities. This includes
maintaining liquid assets and wholesale funding. The Group
has minimal appetite for foreign currency risk.
Measurement
The Group uses stress scenarios to quantify the impact to
economic value and earnings arising from a shift to interest
rates. These include interest rate re-pricing gaps, earnings
sensitivity analysis and open foreign exchange positions.
During April 2016, the Basel Committee on Banking
Supervision (BCBS) published standards relating to the
management of IRRBB. The Group maintains IRRBB
management practices in line with regulatory expectations.
Interest rate risk exposure is measured as follows:
> Capital at Risk (CaR) is considered for assets and liabilities in
all interest rate risk re-pricing periods. This is expressed as
the present value of the negative impact of a sensitivity test
on the Group’s capital position.
> Earnings at Risk (EaR) is considered for assets and liabilities
on the forecast balance sheet over a 12 month period,
measuring the adverse change to net interest income from a
movement in interest rates.
IRRBB is measured considering both positive and negative
instantaneous shocks to interest rates. The measurement is
enhanced with non-parallel stress scenarios (basis risk) and
behavioural volume stresses (pipeline and optionality risk).
Both EaR and CaR are controlled by a defined risk appetite
limit and supporting metrics.
The disclosures on the following page show CaR and EaR
measurements based on a 2% parallel stress for interest rate
mismatch risk, subject to a contractual rate floor at 0%, with
complementary stress scenarios in other risk categories. The
use of this standardised parallel stress is intended to provide
comparability in reporting, consistent with the objectives of
the regulatory bodies. The magnitude of stress used within the
Group’s internal risk appetite differs from the standardised
regulatory stress, based on observed rate movements and
internally defined exposure holding periods.
The Group has an integrated Asset and Liability Management
system which allows it to measure and manage interest rate
re-pricing profiles (including behavioural assumptions),
perform stress testing and produce forecasts.
Risk Management Report Virgin Money Group Annual Report 2016 I 165
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Mitigation
As defined within the scope of the Group’s IRRBB Policy, the
Interest Rate Risk Transfer Pricing framework is used for all
hedgeable interest rate risk arising from commercial product
lines. Treasury is responsible for managing risk and does this
through natural offsets of matching assets and liabilities
where possible.
Appropriate hedging activity of residual exposures is
undertaken, subject to the authorisation and mandate of the
Asset and Liability Committee, within the Board-approved
risk appetite. Certain residual interest rate risks may remain
due to differences in basis and profile mismatches arising
from customer behaviour. The impact of this is detailed in the
table on page 167.
The TFS could increase the Group’s basis mismatch exposure
as funding is linked to the BBR. In the absence of the TFS, the
Group would use more retail and market-based wholesale
funding. While the TFS offers cost-effective funding, it brings
additional concentration in relation to basis risk. The Group
mitigates basis risk through product strategy; creating
natural offsets where possible. When required, the Group uses
basis derivatives to maintain the residual exposure within
risk appetite.
Monitoring
The Board Risk Committee regularly reviews market risk
exposure as part of the wider risk management framework.
Capital at Risk
The forecast interest rate environment reduced during
2016, following the UK’s vote to leave the EU and the BoE’s
25 basis point reduction to Bank Base Rate. The lower rate
environment reduced the severity of the negative rate
shock assuming contractual rates do not go below 0%. CaR
as at 31 December 2016, decreased to £14.1 million from
£20.1 million at 31 December 2015 in a negative rate shock
scenario. CaR at December 2016 under a positive rate shock
scenario is comparable with December 2015 across all sources
of IRRBB risk.
Interest rate mismatch risk
Pipeline risk
Optionality risk
Total interest rate risk – Capital at Risk
1 Market rate (BBR, LIBOR and swaps) stresses are subject to a contractual rate floor of 0%.
2016
2015
Positive
rate shock
£m
(1.6)
5.7
30.1
34.2
Negative
rate shock1
£m
(0.7)
7.1
7.7
14.1
Positive
rate shock
£m
Negative
rate shock1
£m
(3.8)
8.9
27.1
32.2
3.1
4.7
12.3
20.1
166 I Virgin Money Group Annual Report 2016
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Earnings at Risk
EaR has increased year-on-year by £7.8 million in a positive rate shock scenario and by £16.1 million in a negative rate shock
scenario due to changes made in the way the Group measures the exposure to basis risk. The scenarios used have been updated
to better capture basis risk in the current low rate environment. The Group’s underlying IRRBB risk exposure, after removing the
impact of changes to basis risk stress scenarios, is materially unchanged.
(unaudited)
Interest rate mismatch risk
Basis risk
Pipeline risk
Optionality risk
Total interest rate risk – Earnings at Risk
1 Market rate (BBR, LIBOR and swaps) stresses are subject to a contractual rate floor of 0%.
2016
2015
Positive
rate shock
£m
1.7
10.4
3.0
8.6
23.7
Negative
rate shock1
£m
1.4
17.6
2.3
0.3
21.6
Positive
rate shock
£m
Negative
rate shock1
£m
4.0
(0.2)
3.8
8.3
15.9
2.9
0.1
1.7
0.8
5.5
The volume of balance sheet items denominated in foreign currencies has increased since 31 December 2015 due to the issuance
of debt securities in US Dollars and Euros as part of the Gosforth Residential Mortgage Backed Securities (RMBS) programmes.
The Group raised £803.0 million during January 2016 and a further issuance in May 2016 raised £474.2 million. Exposures to
adverse changes in exchange rates have been reduced by using cross-currency swaps, resulting in a minimal net exposure. The
table below shows assets and liabilities in foreign currency at sterling carrying values.
(audited)
Assets
Loans and advances to banks
Available-for-sale financial assets
Other assets
Total assets
Liabilities
Debt securities in issue
Other liabilities
Total liabilities
2016
2015
US$ in £m
€ in £m
US$ in £m
€ in £m
0.7
1.5
0.1
2.3
175.7
0.4
176.1
0.9
–
0.5
1.4
412.4
0.5
412.9
–
–
0.1
0.1
–
0.1
0.1
–
–
–
3.3
0.1
3.4
–
0.1
0.1
–
3.3
Notional value of derivatives affecting currency exposures
Net position
(174.1)
(412.4)
0.3
0.9
Risk Management Report
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Interest rate re-pricing of assets and liabilities
The following tables provide an analysis of the contractual re-pricing periods of assets and liabilities on the balance sheet.
Mismatches in the re-pricing timing of assets, liabilities, and off-balance sheet positions create interest rate risk quantified
in CaR and EaR.
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After
3 months
and within
6 months
£m
After
6 months
and within
1 year
£m
After 1 year
and within
5 years
£m
Non-interest
bearing
instruments
£m
After 5 years
£m
Total
£m
–
–
–
–
–
–
–
–
54.3
786.3
5.5
635.6
1,871.1
3,425.2
18,365.1
298.5
333.0
32,367.1
–
–
–
–
–
–
–
154.5
–
9,703.9
1,871.1
3,425.2
18,519.6
Deposits from banks
Customer deposits
2,132.5
–
–
18,027.5
1,157.1
4,081.4
Debt securities in issue
2,299.9
Other liabilities
Equity
Total liabilities and equity
Notional values of derivatives
affecting interest rate sensitivity
–
–
22,459.9
10,864.0
–
–
–
–
–
–
1,157.1
4,081.4
–
4,810.2
300.0
–
390.0
5,500.2
(548.2)
1,388.0
(10,395.4)
(1,240.7)
(67.7)
Total interest rate sensitivity gap
(1,892.0)
165.8
731.8
2,624.0
(516.2)
(1,113.4)
Cumulative interest rate
sensitivity gap
(1,892.0)
(1,726.2)
(994.4)
1,629.6
1,113.4
–
1 Items are allocated to time bands in the table above by reference to the earlier of the next contractual interest rate re-pricing date and the residual maturity date.
–
426.0
–
724.5
–
–
–
–
–
–
–
65.4
353.1
811.3
–
30.1
0.1
546.3
1,280.5
1,857.0
0.7
858.8
407.1
35,055.6
2,132.5
28,106.3
2,600.0
546.3
1,670.5
35,055.6
–
–
–
Within
3 months
£m
732.0
630.1
8,074.2
0.7
212.9
54.0
20161 (audited)
Assets
Cash and balances at central
banks
Loans and receivables:
Loans and advances to banks
Loans and advances to
customers
Debt securities
Available-for-sale financial assets
Other assets
Total assets
Liabilities
168 I Virgin Money Group Annual Report 2016
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Within
3 months
£m
835.5
610.0
7,201.3
1.2
373.2
–
20151 (audited)
Assets
Cash and balances at
central banks
Loans and receivables:
Loans and advances to banks
Loans and advances to
customers
Debt securities
Available-for-sale financial assets
Other assets
Total assets
Liabilities
After
3 months
and within
6 months
£m
–
–
After
6 months and
within 1 year
£m
After 1 year
and within
5 years
£m
After 5 years
£m
Non-interest
bearing
instruments
£m
Total
£m
–
–
–
–
–
–
53.1
888.6
4.5
614.5
1,710.6
3,132.4
14,407.5
516.9
140.3
27,109.0
–
4.7
–
–
59.0
–
–
177.9
–
–
612.7
–
9,021.2
1,715.3
3,191.4
14,585.4
1,129.6
(0.1)
69.4
318.9
586.1
–
11.7
(6.5)
405.7
1,180.3
1,591.2
–
–
–
–
–
–
–
1.1
1,296.9
318.9
30,229.0
1,298.7
25,144.9
2,039.4
405.7
1,340.3
30,229.0
–
–
–
Deposits from banks
1,298.7
–
–
Customer deposits
14,679.4
1,661.6
3,443.6
Debt securities in issue
1,745.9
Other liabilities
Equity
–
–
–
–
–
–
–
–
–
5,348.6
300.0
–
160.0
Total liabilities and equity
Notional values of derivatives
affecting interest rate sensitivity
17,724.0
7,698.6
1,661.6
199.8
3,443.6
5,808.6
591.2
(7,103.3)
(1,386.3)
Total interest rate sensitivity gap
(1,004.2)
253.5
339.0
1,673.5
(256.7)
(1,005.1)
Cumulative interest rate
sensitivity gap
(1,004.2)
(750.7)
(411.7)
1,261.8
1,005.1
–
The interest rate re-pricing tables shown above reflect the re-pricing of assets and liabilities without adjustments to the re-
pricing profile that reflect future pricing assumptions or taking into account expected future business that the Group hedges
ahead of becoming contractually bound. The Group manages interest rate risk taking these factors into account. Therefore,
the increased gap profile shown above does not directly translate to the CaR and EaR term mismatch quantification.
Risk Management Report Virgin Money Group Annual Report 2016 I 169
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Operational risk
Definition
Operational risk is defined as the risk of loss resulting from
inadequate or failed internal processes, people and systems or
from external events. It also includes legal risk.
Risk appetite
The Group’s operational risk appetite is designed to safeguard
the interests of customers, internal and external stakeholders,
and shareholders.
Exposures
The principal operational risks to the Group are:
> IT systems and resilience risk arising from failure to develop,
deliver and maintain effective IT solutions;
> information security risk arising from information leakage,
loss or theft;
> external fraud arising from an act of deception or omission;
> cyber risk arising from malicious attacks on the Group via
technology, networks and systems;
> service disruption;
> failure of a third party corporate partner or
strategic supplier; and
> normal business operational risk including
transaction processing, information capture and
implementation of change.
Measurement
A variety of measures is used such as scoring of potential
risks, considering impact and likelihood, assessing the
effectiveness of controls, monitoring of events and losses
by size, functional area and internal risk categories. The
Group maintains a formal approach to operational risk
event escalation. Material events are identified, captured
and escalated. The root causes of events are determined
and action plans put in place to ensure an optimum level of
control. This ensures the Group keeps customers and the
business safe, reduces costs, and improves efficiency.
Mitigation
The Group’s control environment is regularly reviewed
and reporting on material risks is discussed monthly by
senior management. Risks are managed through a range of
strategies such as mitigation, transfer (including insurance),
and acceptance. Contingency plans are maintained for a range
of potential scenarios with regular disaster recovery exercises.
Mitigating actions for the principal risks include:
> investment in IT to ensure continued availability, security
and resilience of infrastructure;
> investment in information security capability to protect
customers and the Group;
> investment in the protection of customer information,
including access to key systems and the security, durability
and accessibility of critical records;
> a risk-based approach to mitigate the financial crime
risks the Group faces, reflecting the current and emerging
financial crime risks within the market. The Group has
developed a comprehensive financial crime operating
model. The Group’s fraud awareness programme is a key
component of the financial crime control environment; and
> operational resilience measures and recovery planning
to ensure an appropriate and consistent approach to
the management of continuity risks, including potential
interruptions from a range of internal and external
incidents or threats.
Monitoring
Monitoring and reporting of operational risk is undertaken
at Board and Executive Committees. A combination of
systems, monthly reports, oversight and challenge from the
Risk function, Internal Audit and assurance teams ensures
that key risks are regularly presented and debated by
Executive Management.
Key operational risks are appropriately insured, where
possible. The insurance programme is monitored and
reviewed regularly, with recommendations made to Executive
management prior to each renewal.
170 I Virgin Money Group Annual Report 2016
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Conduct risk and compliance
Definition
Conduct risk and compliance is defined as the risk that the
Group’s operating model, culture or actions result in unfair
outcomes for customers, and the risk of regulatory sanction,
material financial loss or reputational damage if the Group
fails to design and implement operational processes, systems
and controls and maintain compliance with all applicable
regulatory requirements.
Risk appetite
The Group has no appetite for failure to remediate regulatory
breaches and no tolerance for failing to deliver fair customer
outcomes, whether through product design, sales or after
sales processes.
Exposures
Conduct risk could affect all aspects of the Group’s operations,
all types of customers and the Group’s stakeholders. The
Group faces limited conduct risk in relation to products and
services, sales processes and complaint handling.
A series of change programmes drives new legislation and
regulation into day-to-day operational and business practices
across the Group.
The Group is unburdened with legacy conduct risk issues
such as PPI, investments or derivatives mis-selling, LIBOR
manipulation and distressed asset portfolios.
Measurement
Risk assessments are regularly reviewed and include
assessments of control and material regulatory rule breaches,
complaints and whistleblowing.
Mitigation
The Group takes a range of mitigating actions with respect to
conduct risk and compliance. They include:
> policies, processes and standards which provide a
framework for the business to operate in accordance with
the relevant laws and regulations;
> putting the customer at the heart of business
planning and strategy;
> using a risk assessment framework that ensures product
design and sales processes offer customers value for
money, meet the needs of the target market, and deliver fair
outcomes to customers, including vulnerable customers;
> focusing on recruitment and training and how the Group
manages colleagues’ performance in relation to fair
customer outcomes;
> regulatory horizon scanning; and
> using oversight and assurance themed reviews to assess
compliance with rules, regulations and policies.
Monitoring
A robust assurance and quality monitoring regime is in
place to test the performance of customer critical activities.
Customer metrics are proactively used when reviewing
business performance and feedback loops have been
established to learn from issues identified.
The Risk function reports on conduct risk and compliance
exposure. The report forms the basis of challenge to the
business at the monthly Operational Risk, Conduct Risk and
Compliance Committee.
Risk Management Report Virgin Money Group Annual Report 2016 I 171
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Concentration risk1
Definition
Concentration risk is defined as the exposure of the Group
to credit concentrations in relation to retail and wholesale
portfolios, products and counterparty levels.
Risk appetite
The Group has limited appetite for concentrated exposures by
country, region, loan size and type.
Exposures
The principal source of concentration risk is from loans and
advances to customers in relation to geography, loan size and
loan type concentrations in the mortgage portfolio.
In addition, concentration risk arises from cash, debt
securities and derivatives in relation to individual
counterparty and country of exposure.
The Group has no significant concentrations of risk in the
credit card portfolio.
Measurement
Credit concentration risk is measured through the application
of limits relating to each concentration category.
.
Mitigation
Credit risk management includes portfolio controls on
product lines and risk segments to reflect risk appetite
and individual limit guidelines. Credit policy is aligned to
the Group’s risk appetite and restricts exposure to more
vulnerable sectors and segments.
Monitoring
Monthly reporting on concentration risk exposures is
made to the Board.
Secured credit
The Group’s large exposures are reported in accordance with
regulatory reporting requirements. There has been significant
focus on house price inflation since the end of 2013 with
London and the South East experiencing higher levels of
house price growth than the rest of the UK. Whilst demand
for London property may be influenced by the international
market, concerns over an asset bubble forming in these two
regions are based on the rate of growth relative to other
regions, a potential divergence in supply and demand for
property, and customer affordability being stretched. The
Group’s policy restricts LTV for higher value loans, resulting in
the lower average new lending LTVs observed in London (58%)
and the South East (65%) compared to other regions (72%).
The Group made changes to its lending policy in March 2016
in response to this risk through an income multiple cap.
1 All risk class components of financial risk are outlined on page 139. Concentration risk
is the most significant component of financial risk and therefore has been disclosed
in detail
172 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
The table below shows the geographical concentration of the mortgage portfolio.
(audited)
East Anglia
East Midlands
North
Yorkshire & Humberside
North West
West Midlands
South West
South East
Greater London
Wales
Scotland
Northern Ireland
Other
Total
2016
2016
2015
£m
726.0
1,556.4
1,025.3
1,640.3
2,209.3
1,560.9
2,320.6
7,365.7
8,365.9
673.9
1,828.0
478.3
0.8
%
2.6
5.2
3.4
5.5
7.4
5.2
7.8
24.8
28.1
2.3
6.1
1.6
–
£m
605.9
1,287.8
957.0
1,413.0
1,890.7
1,302.3
1,936.2
6,139.4
7,230.0
597.4
1,685.5
416.5
0.5
%
2.5
5.1
3.8
5.5
7.4
5.1
7.6
24.1
28.4
2.3
6.6
1.6
–
29,751.4
100.0
25,462.2
100.0
2015
■ Greater London (28%)
■ South East (25%)
■ Scotland (6%)
■ South West (8%)
■ Other Regions (33%)
■ Greater London (28%)
■ South East (24%)
■ Scotland (7%)
■ South West (8%)
■ Other Regions (33%)
The geographical split of the portfolio remains broadly stable.
Risk Management Report Virgin Money Group Annual Report 2016 I 173
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The table below shows retail secured credit concentrations by loan size.
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(audited)
0-£100k
£100k-£250k
£250k-£500k
£500k-£1m
£1m-£2.5m
>£2.5m
Total
2016
£m
5,169.9
13,989.5
7,835.2
2,536.2
207.4
13.2
%
17.4
47.1
26.3
8.5
0.7
0.0
2015
£m
4,941.5
11,878.2
6,078.0
2,334.3
211.3
18.9
%
19.4
46.6
23.9
9.2
0.8
0.1
29,751.4
100.0
25,462.2
100.0
As at 31 December 2016, 0.7% (2015: 0.9%) of mortgage balances consisted of loans in excess of £1 million.
2016
2015
■ 0 – £100k (17%)
■ £100k – £250k (47%)
■ £250k – £500k (26%)
■ £500k – £1m (9%)
■ £1m – £2.5m (1%)
■ >£2.5m (0%)
■ 0 – £100k (19%)
■ £100k – £250k (47%)
■ £250k – £500k (24%)
■ £500k – £1m (9%)
■ £1m – £2.5m (1%)
■ >£2.5m (0%)
The value of loans with balances of up to £250,000 increased by £2,339.7 million during 2016. This represents 55% of the total
secured loans portfolio growth of £4,289.2 million.
174 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
The table below shows retail secured credit average LTV by loan size.
2016 (audited)
0-£100k
£100k-£250k
£250k-£500k
£500k-£1m
£1m-£2.5m
>£2.5m
Total
2015 (audited)
0-£100k
£100k-£250k
£250k-£500k
£500k-£1m
£1m-£2.5m
>£2.5m
Total
Residential
mortgage
loans
%
Residential
buy-to-let
mortgage
loans
%
42.6
58.9
57.9
51.0
43.7
35.8
55.6
58.2
55.2
49.0
42.7
34.9
–
54.8
Residential
mortgage
loans
%
Residential
buy-to-let
mortgage
loans
%
42.9
58.9
56.5
51.6
46.5
43.8
54.9
57.9
56.5
49.5
43.9
35.9
–
55.4
Total
48.4
58.2
57.1
50.3
42.2
35.8
55.4
Total
47.9
58.5
55.9
51.0
44.9
43.8
55.0
The Group’s policy broadly restricts LTV for higher value loans. The average LTV for each loan band demonstrates that, excluding
loans under £100,000, higher value loans have lower LTVs. The average indexed LTV across the loan size bands has increased
reflecting portfolio growth, with an increased proportion of residential new lending.
Risk Management Report Virgin Money Group Annual Report 2016 I 175
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Loan type
The residential mortgage loan portfolio comprises three
principal loan repayment types:
> capital repayment loans amortise monthly through
customer repayments which comprise an interest payment
and contribution to the principal loan balance;
> part-and-part loans provide customers with the flexibility
to choose to pay a proportion of the loan on a capital
repayment basis and a proportion on interest only, with
the interest only element repaid from an acceptable
repayment vehicle; and
> interest only loans allow borrowers to pay only the interest
on the loan each month, with the capital to be repaid
in full at the end of the loan period from an acceptable
repayment vehicle.
For residential mortgage customers, the Group continues to
apply strict affordability criteria and restricts applicant LTV.
For buy-to-let customers, interest only mortgages continue
to be the predominant repayment method, with the majority
of customers looking to the sale of the mortgaged property
as the ultimate loan repayment vehicle. These loans are also
subject to stringent lending standards.
The tables below show retail secured credit concentrations by loan type.
2016 (audited)
Capital repayment
Part-and-part
Interest only
Total
2015 (audited)
Capital repayment
Part-and-part
Interest only
Total
Residential mortgage loans
Residential buy-to-let
mortgage loans
£m
19,521.7
1,115.6
3,645.7
%
80.4
4.6
15.0
24,283.0
100.0
£m
913.0
37.3
4,518.1
5,468.4
Residential mortgage loans
Residential buy-to-let
mortgage loans
£m
15,800.7
1,235.4
4,024.2
%
75.0
5.9
19.1
21,060.3
100.0
£m
761.0
26.5
3,614.4
4,401.9
%
16.7
0.7
82.6
%
17.3
0.6
82.1
100.0
29,751.4
100.0
Total
£m
20,434.7
1,152.9
8,163.8
%
68.7
3.9
27.4
Total
£m
16,561.7
1,261.9
7,638.6
%
65.0
5.0
30.0
100.0
25,462.2
100.0
176 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
Wholesale
Concentration risk is managed for both individual counterparties and for country of exposure. The Group does not set a limit on
exposures to the BoE and the UK Sovereign. The table below shows exposures by country.
(audited)
Australia
Canada
France
UK
Germany
Netherlands
Norway
Sweden
USA
Supranational
Total
The Group’s wholesale credit risk exposure outside the UK remains well-diversified.
2016
£m
19.3
169.0
105.3
2015
£m
63.2
108.9
67.7
1,747.5
2,234.9
–
102.7
–
–
104.6
129.3
2,377.7
10.9
73.8
24.0
20.0
71.7
203.7
2,878.8
Risk Management Report Virgin Money Group Annual Report 2016 I 177
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Funding and liquidity risk
Definition
Funding risk is defined as the inability to raise and maintain
sufficient funding in quality and quantity to support the
delivery of the business plan. Sound funding risk management
reduces the likelihood of liquidity risks occurring through
minimising refinancing concentration.
Liquidity risk is defined as the inability to accommodate
liability maturities and withdrawals, fund asset growth and
otherwise meet contractual obligations to make payments as
they fall due.
Risk appetite
The Group funds before it lends. The Group operates an
investment strategy for treasury assets which prioritises
liquidity and ensures that the Group holds a liquid asset buffer
in excess of internal analysis.
Exposures
Liquidity exposure represents the amount of potential stressed
outflows in any future period less expected inflows.
The Group’s primary liquidity risk exposure arises through the
redemption of retail deposits where customers are permitted
to withdraw funds with limited or no notice. Additional
exposures exist in relation to pipeline mortgage business,
undrawn card balances and wholesale funding.
The Group is exposed to refinancing risk at the point of
contractual maturity. The risk arises from both wholesale and
retail funding sources.
Measurement
A series of measures is used across the Group to monitor both
short and long-term liquidity requirements including ratios,
cash outflow triggers, wholesale and retail funding maturity
profile, early warning indicators and stress test survival
periods. Liquidity risk appetite covers a range of metrics
considered key to maintaining a strong liquidity and funding
position. Strict criteria and limits are in place to ensure highly
liquid marketable securities are available as part of the
portfolio of liquid assets.
The measurement framework has two other
important components:
> the volume and quality of the Group’s liquid asset portfolio
is defined through a series of stress tests across a range of
time horizons and stress conditions. The Group ensures a
liquidity surplus is held during normal market conditions
above liquidity stress outflow requirements. Stress cash
outflow assumptions have been established for individual
liquidity risk drivers across idiosyncratic and market
wide stresses.
Internal and regulatory liquidity requirements are
quantified on a daily basis, with holdings assessed against
a full suite of liquidity stresses weekly.
As at 31 December 2016, the results of stress testing
of liquidity outflows were £3,688.1 million (2015:
£3,069.1 million) based on the Group’s internal 90 day
liquidity stress scenario. The primary driver for the
increased liquidity outflows is growth in deposit redemption
risk arising from customer deposits which permit access.
Risk drivers of this liquidity stress outflow are detailed, in
the following table. As the Group is predominantly retail
funded, the largest potential source of liquidity stress is the
unexpected outflow of retail customer deposits.
The key risk driver assumptions applied to the scenarios are:
Liquidity risk driver Modelling assumption
Retail funding
Wholesale funding
Off-balance sheet
Franchise
viability risk
Severe unexpected withdrawal of retail
deposits arising from redemption or
refinancing risk. No additional deposit
inflows are assumed.
Limited opportunity to refinance wholesale
contractual maturities. Full outflow of
secured and unsecured funding during the
refinancing period, with no reinvestment of
funding.
Cash outflows during the period of stress as
a result of off-balance sheet commitments
such as mortgage pipeline, undrawn credit
card facilities and collateral commitments.
Lending outflows over and above those
relating to contractual obligations, as
the Group undertakes actions in order to
preserve ongoing franchise viability.
Marketable
asset risk
Assets held for liquidity purposes experience
deterioration in market availability.
178 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
The scenarios and the assumptions are reviewed to ensure
that they continue to be relevant to the nature of the
business. The Group’s liquidity risk appetite is calibrated
against a number of stressed metrics. The funding plan
is also stressed against a range of macro-economic
scenarios; and
Monitoring
Liquidity is actively monitored by the Group. Reporting is
conducted through the Asset and Liability Committee and
the Board Risk Committee. In a stress situation the level of
monitoring and reporting is increased commensurate with the
nature of the stress event.
> the Group maintains a Contingency Funding Plan which is
designed to provide an early warning indicator for liquidity
concerns and a list of potential actions to address a liquidity
shortfall. As a result, mitigating actions can be taken to
avoid a more serious situation developing.
Mitigation
The most material component of the Group’s funding and
liquidity position is the customer deposit base, which is
supplemented by wholesale funding providing a source of
stable funding for balance sheet growth. Exposures to the UK
Sovereign are described on page 183. The concentration of
exposure to other counterparties is not considered significant
for the Group. Where concentrations do exist for example,
refinancing at maturity, these are managed within the
appropriate internal risk appetite, to control the size of the
exposure. Refinancing exposures are planned in advance of
maturity with liquidity held to mitigate the potential exposure.
Longer term funding is used to manage the Group’s strategic
liquidity profile in line with limits.
The Group operates a Funds Transfer Pricing (FTP) mechanism
which supports customer pricing and the overall Group
balance sheet strategy.
FTP makes use of behavioural maturity profiles, taking
account of expected customer loan prepayments and the
stability of customer deposits. Such behavioural maturity
assumptions are subject to formal governance and
reviewed periodically.
The ability to deploy assets quickly, either through the repo
market or through outright sale, is also an important source
of liquidity for the Group. In addition to central bank reserves,
the Group holds sizeable balances of high-quality marketable
debt securities which can be sold to provide, or used to secure,
additional cash inflows should the need arise from either
market counterparties or central bank facilities (BoE).
Daily monitoring and control processes are in place to
address internal and regulatory liquidity requirements. The
Group monitors a range of market and internal early warning
indicators on a daily basis for early signs of liquidity risk in
the market or specific to the Group. These are a mixture
of quantitative and qualitative measures including daily
variation of customer balances, cash outflows, changes in
primary liquidity portfolio, credit default swap spreads and
changing funding costs.
Funding and liquidity management in 2016
During 2016 the Group has maintained a strong funding and
liquidity position in excess of risk appetite and the regulatory
short-term liquidity stress metric, the Liquidity Coverage
Ratio (LCR). As at 31 December 2016, the Group had a LCR
of 153.7% based on the PRA’s guidance for calculation. The
Net Stable Funding Ratio (NSFR) is due to become a minimum
standard from January 2018. The Group expects to meet
the minimum requirements once fully implemented into
liquidity regulation.
Wholesale funding is used to support balance sheet growth,
lengthen the contractual tenor of funding and diversify
sources of funding. During January and May 2016, the
Group raised wholesale funding in two separate issuances
from the well-established Gosforth RMBS programme and
through additional drawings from the FLS facility. The RMBS
issuance further diversified the Group’s investor base and
sources of wholesale funding, through issuing in non-sterling
denominations. The Group has made use of the TFS during
the final quarter of the year, drawing £1,268.0 million of
funding. The scheme provides the Group with a cost effective
source of funding.
Risk Management Report Virgin Money Group Annual Report 2016 I 179
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Group funding sources
The Group is funded predominantly through customer
deposits. Throughout 2016, the Group maintained a strong
presence in the retail savings market, increasing total
customer deposits by £3.0 billion, representing 81.5% of the
Group’s funding. The primary driver of retail funding growth
was the Defined Access product, which offers a higher rate of
interest than other instant access products, whilst retaining
depositors’ access to funds on demand. The balance of these
defined access products increased by £3,580.2 million since
December 2015 to £6,993.4 million at 31 December 2016.
The Group’s loan-to-deposit ratio increased to 114.5% as at
31 December 2016 (31 December 2015: 107.5%), as a result
of participation in the TFS. The Group expects the overall
loan-to-deposit ratio to increase beyond this for the period
in which the scheme is used. The following table shows the
Group’s funding position.
(audited)
Loans and advances to customers
Loans and advances to banks
Debt securities classified as loans and receivables
Available-for-sale financial assets (encumbered)
Cash and balances at central banks (encumbered)
Funded assets
Other assets
Total assets (excluding liquid assets)
On balance sheet primary liquidity assets
Cash and balances at central banks – primary
Available-for-sale financial assets (unencumbered)
Total assets
Less: Other liabilities
Funding requirement
Funded by
Customer deposits
Wholesale funding
Total equity
Total funding
2016
£m
2015
£m
32,367.1
27,109.0
635.6
0.7
10.6
168.1
614.5
1.1
–
160.5
33,182.1
27,885.1
407.1
318.9
33,589.2
28,204.0
618.2
848.2
728.1
1,296.9
35,055.6
30,229.0
(560.8)
(429.5)
34,494.8
29,799.5
28,106.3
25,144.9
4,718.0
1,670.5
3,314.3
1,340.3
34,494.8
29,799.5
180 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
The table below shows the sources of wholesale funding.
(audited)
Debt securities in issue
Liabilities in respect of securities sold under repurchase agreements
Secured loans
Total on-balance sheet sources of funds
Treasury bills raised through FLS
Total
The tables below show residual maturity of the wholesale funding book.
2016 (audited)
Debt securities in issue
Liabilities in respect of securities sold under repurchase
agreements
Secured loans
Total on-balance sheet sources of funds
Treasury bills raised through FLS
Total
2015 (audited)
Debt securities in issue
Liabilities in respect of securities sold under repurchase
agreements
Total on-balance sheet sources of funds
Treasury bills raised through FLS
Within
3 months
£m
–
500.0
–
500.0
–
500.0
Within
3 months
£m
–
749.9
749.9
–
2016
£m
2,600.0
850.0
1,268.0
4,718.0
2,683.7
7,401.7
3-12 months
£m
1-5 years
£m
After 5 years
£m
–
75.0
–
75.0
649.2
724.2
305.8
275.0
1,268.0
1,848.8
2,034.5
3,883.3
2,294.2
–
–
2,294.2
–
2,294.2
3-12 months
£m
1-5 years
£m
After 5 years
£m
–
525.0
525.0
510.0
297.5
1,741.9
–
–
297.5
2,450.0
2,747.5
1,741.9
–
1,741.9
2015
£m
2,039.4
1,274.9
–
3,314.3
2,960.0
6,274.3
Total
£m
2,600.0
850.0
1,268.0
4,718.0
2,683.7
7,401.7
Total
£m
2,039.4
1,274.9
3,314.3
2,960.0
6,274.3
Total
749.9
1,035.0
The increase in average tenor of wholesale funding during 2016 is driven by the drawings from the TFS and additional RMBS
issuances, which are categorised as ‘1-5 years’ and ‘After 5 years’ maturities.
The Group manages the average tenor of wholesale funding within a defined Board risk appetite based on cash flow maturity
as shown on page 185.
Risk Management Report Virgin Money Group Annual Report 2016 I 181
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Encumbered assets
The Group’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 following tables show asset encumbrance.
2016 (audited)
Cash and balances at central banks
Debt securities classified as loans and receivables
Available-for-sale financial assets
Derivative financial assets
Loans and advances to banks
Loans and advances to customers
Other assets
Total assets
Treasury bills raised through FLS held off balance sheet6
Total assets plus off-balance sheet Treasury bills raised
through FLS
Encumbered assets
Unencumbered assets
Pledged as
collateral2
£m
–
–
10.6
–
181.1
9,425.6
53.9
9,671.2
–
Other3
£m
168.1
–
–
–
354.4
–
–
522.5
–
Available as
collateral4
£m
–
0.7
840.3
–
–
Other5
£m
618.2
–
7.9
104.2
100.1
Total
£m
786.3
0.7
858.8
104.2
635.6
2,932.9
20,008.6
32,367.1
–
249.0
302.9
3,773.9
2,683.7
21,088.0
35,055.6
–
2,683.7
9,671.2
522.5
6,457.6
21,088.0
37,739.3
182 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
2015 (audited)1
Cash and balances at central banks
Debt securities classified as loans and receivables
Available-for-sale financial assets
Derivative financial assets
Loans and advances to banks
Loans and advances to customers
Other assets
Total assets
Treasury bills raised through FLS held off balance sheet6
Total assets plus off-balance sheet Treasury bills raised
through FLS
Encumbered assets
Unencumbered assets
Pledged as
collateral2
£m
–
–
–
–
94.3
7,524.1
0.3
7,618.7
786.0
Other3
£m
160.5
–
–
–
384.3
–
–
544.8
–
Available as
collateral4
£m
–
1.1
1,292.3
–
–
Other5
£m
728.1
–
4.6
82.3
135.9
Total
£m
888.6
1.1
1,296.9
82.3
614.5
3,153.5
16,431.4
27,109.0
–
236.3
236.6
4,446.9
2,174.0
17,618.6
30,229.0
–
2,960.0
8,404.7
544.8
6,620.9
17,618.6
33,189.0
1 The 2015 table has been restated to reclassify certain encumbered assets between the ‘Pledged as collateral and ‘Other’ categories to better reflect the underlying nature of the Group’s
collateral arrangements. This restatement has not impacted the Group’s total encumbrance ratio as at 31 December 2015.
2 Encumbered loans and advances to customers of £9,425.6 million (2015: £7,524.1 million) consists of securitised mortgages and other loan pools positioned with the Bank of England
that have been pledged as collateral for funding and liquidity transactions. At 31 December 2016, £2,302.3 million (2015: £755.0 million) of loan pools have been pledged as collateral in
respect of secured loans and repo agreements (refer note 17 to the financial statements).
3 Other encumbered assets are assets that cannot be used for secured funding due to legal or other reasons. These comprise the mandatory reserve and the minimum requirement for the
BACS payment system of £168.1 million (2015: £160.5 million) and cash reserves supporting secured funding structures of £354.4 million (2015: £384.3 million).
4 Unencumbered asserts which are classified as ‘Available for collateral’ are readily available to secure funding or to meet collateral requirements. Loans and advances to customers are
classified as ‘Available for collateral’ only if they are already in such a form that they can be used immediately to raise funding.
5 Other unencumbered assets are assets which are not subject to any restrictions and are not readily available for use.
6 These amounts represent Treasury Bills received by the Group through FLS, which are not recognised on the balance sheet. The Group is permitted to re-pledge these securities to
generate on-balance sheet financial assets, such as cash, or to fund lending. These items are classified as encumbered where the Group has used them in repurchase transactions or
unencumbered where it has not.
The Group’s total level of asset encumbrance remained at 27.0% at 31 December 2016. Encumbered assets increased by
£1,244.2 million year-on-year, in line with balance growth, due to wholesale funding to support increased lending. Encumbrance
of assets predominantly arises from the use of the BoE funding and liquidity facilities and from the Gosforth RMBS programme.
The Group manages the volume of available unencumbered collateral to meet requirements arising from current and future
secured funding transactions. Available collateral provides a source of contingent funding for use in stress conditions, as
identified within the Contingency Funding Plan.
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. These are intended to
covermore extreme stress events and provide flexibility for liquidity management. The table opposite shows the composition of
the liquidity portfolio.
Risk Management Report Virgin Money Group Annual Report 2016 I 183
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Level 1
Cash and balances at central banks
UK Government securities
Other HQLA level 1 eligible
Supranational securities
Treasury bills raised through FLS
Covered bonds (Level 1 eligible)
Total level 1
Level 2a
Covered bonds (Level 2a eligible)
Total level 2a
Level 2b
Eligible RMBS
Total level 2b
2016
£m
737.2
306.7
–
129.3
2,683.7
304.9
4,161.8
22.2
22.2
38.6
38.6
2016
Average
£m
819.6
339.3
33.8
222.0
2,528.2
434.4
4,377.3
22.4
22.4
49.1
49.1
2015
£m
846.3
409.5
25.4
203.7
2,174.0
498.2
4,157.1
22.1
22.1
59.4
59.4
2015
Average
£m
796.4
392.6
15.8
294.6
2,150.6
248.2
3,898.2
133.5
133.5
44.7
44.7
High quality liquid assets (Level 1 + 2a + 2b)
4,222.6
4,448.8
4,238.6
4,076.4
Other liquidity resources
Covered bonds
Non-eligible RMBS
Certificates of deposit
Floating rate notes
Fixed rate bonds
Money market loans
Total other liquidity resources
Self-issued RMBS
Total liquidity
–
13.6
–
25.0
–
26.0
64.6
1,306.4
5,593.6
1.2
11.6
44.5
9.6
–
38.8
105.7
550.8
15.0
–
59.0
–
–
54.0
128.0
326.7
5,105.3
4,693.3
2.3
3.0
4.5
–
17.0
30.9
57.7
197.6
4,331.7
The Group holds sufficient liquidity to meet all internal and regulatory liquidity requirements.
The tables overleaf analyse assets and liabilities of the Group into relevant maturity groupings based on the remaining
contractual period at the balance sheet date. The Group’s assets and liabilities may be repaid or otherwise mature earlier or later
than implied by their contractual terms, and readers are therefore advised to use caution when using this data to evaluate the
Group’s liquidity position.
In particular, amounts in respect of customer deposits are usually contractually payable on demand or at short notice. In practice,
these deposits are not usually withdrawn on their contractual maturity. Amounts in respect of RMBS in issue have a maximum
contractual maturity consistent with underlying mortgage assets (in excess of five years); the cashflow profile below reflects that
securitisation documents will require repayment of the securities in line with repayments of the underlying mortgages, which
may be in advance of the legal maturity date.
184 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
2016 (audited)
Assets
Cash and balances at central banks
Derivative financial instruments
Loans and receivables:
Loans and advances to banks
Loans and advances to customers
Debt securities
Available-for-sale financial assets
Other assets
Total assets
Liabilities
Deposits from banks
Customer deposits
Derivative financial instruments
Debt securities in issue
Other liabilities
Total liabilities
2015 (audited)
Assets
Cash and balances at central banks
Derivative financial instruments
Loans and receivables:
Loans and advances to banks
Loans and advances to customers
Debt securities
Available-for-sale financial assets
Other assets
Total assets
Liabilities
Deposits from banks
Customer deposits
Derivative financial instruments
Debt securities in issue
Other liabilities
Total liabilities
Net liquidity (gap) / surplus
Within 3
months
£m
737.2
1.4
635.6
2,700.3
–
–
99.2
4,173.7
Within 3
months
£m
846.9
16.1
614.5
1,778.0
–
47.5
47.5
3,350.5
773.7
20,776.5
5.9
–
158.8
3-12 months
£m
1-5 years
£m
After 5 years
£m
–
99.8
49.1
1.5
Total
£m
786.3
104.2
–
1.5
–
–
–
635.6
720.1
3,910.6
25,036.1
32,367.1
–
25.0
25.3
–
283.2
10.8
0.7
550.6
167.6
0.7
858.8
302.9
771.9
4,304.4
25,805.6
35,055.6
514.5
75.0
24,540.2
1,883.6
8.2
–
240.7
8.6
–
67.0
1,543.0
1,682.5
185.6
305.8
5.0
–
–
27.3
2,294.2
3.9
2,132.5
28,106.3
229.7
2,600.0
316.6
25,303.6
2,034.2
3,721.9
2,325.4
33,385.1
3-12 months
£m
1-5 years
£m
After 5 years
£m
–
13.3
–
47.4
41.7
5.5
Total
£m
888.6
82.3
–
–
–
614.5
572.5
3,334.6
21,423.9
27,109.0
–
4.7
20.2
610.7
525.0
2,630.2
12.1
–
46.9
–
424.4
14.8
1.1
820.3
154.1
1.1
1,296.9
236.6
3,821.2
22,446.6
30,229.0
–
1,738.2
103.2
297.5
39.5
2,178.4
1,642.8
–
–
34.8
1,741.9
4.5
1,298.7
25,144.9
156.0
2,039.4
249.7
1,781.2
28,888.7
20,665.4
1,340.3
21,714.9
3,214.2
(18,364.4)
(2,603.5)
Net liquidity (gap) / surplus
(21,129.9)
(1,262.3)
582.5
23,480.2
1,670.5
Risk Management Report
Virgin Money Group Annual Report 2016 I 185
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Cashflow profile
The tables below allocate the Group’s non-derivative cash outflows into relevant maturity groupings based on the remaining
period between the balance sheet date and the contractual maturity date. The amounts disclosed are the contractual
undiscounted cash flows. These differ from balance sheet values due to the effects of discounting on certain balance sheet items
and due to the inclusion of contractual future interest flows.
2016 (audited)
Deposits from banks
Customer deposits
Debt securities in issue
Total
2015 (audited)
Deposits from banks
Customer deposits
Debt securities in issue
Total
Within
3 months
£m
514.1
24,638.0
158.7
25,310.8
Within
3 months
£m
775.8
21,228.6
152.3
3-6 months
£m
6-12 months
£m
1-5 years
£m
Over 5 years
£m
76.7
703.8
154.4
934.9
3.1
1,393.7
304.1
1,700.9
1,556.8
1,835.9
2,056.5
5,449.2
–
–
–
–
3-6 months
£m
6-12 months
£m
1-5 years
£m
Over 5 years
£m
526.3
895.0
236.7
–
1,604.4
208.3
1,812.7
–
1,962.0
1,550.4
3,512.4
–
–
–
–
Total
£m
2,150.7
28,571.4
2,673.7
33,395.8
Total
£m
1,302.1
25,690.0
2,147.7
29,139.8
22,156.7
1,658.0
Growth in customer deposits has primarily been achieved through the Defined Access product, providing on-demand access to
depositors, shown in the ‘Within 3 months’ column. As a result, the Group’s contractual cashflow profile of customer deposits
has shortened. The reduced retail funding tenor has been partially offset by a lengthening of the wholesale funding profile.
The following tables allocate the undiscounted derivative cash outflows into relevant maturity groupings based on the
remaining period between the balance sheet date and the contractual maturity date. Cash flows for the floating legs of
derivative transactions are calculated based on market indications of future interest rates. As a result, totals in these tables
are not intended to be identical to tables on OTC derivatives or the notes to the financial statements by definition.
2016 (audited)
Settled on a net basis
Derivatives in economic and not accounting hedges
Derivatives in accounting hedge relationships
Settled on a gross basis
Outflows
Inflows
Total
Within
3 months
£m
(1.8)
(26.1)
(27.9)
1.4
(1.5)
(28.0)
3-6 months
£m
6-12 months
£m
1-5 years
£m
Over 5 years
£m
(0.5)
(21.2)
(21.7)
2.6
(3.0)
(22.1)
(4.5)
(37.6)
(42.1)
2.5
(2.8)
(42.4)
(12.2)
(110.0)
(122.2)
23.3
(26.6)
(125.5)
(0.3)
(6.2)
(6.5)
–
–
(6.5)
(224.5)
Total
£m
(19.3)
(201.1)
(220.4)
29.8
(33.9)
186 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
2015 (audited)
Settled on a net basis
Derivatives in economic and not accounting hedges
Derivatives in accounting hedge relationships
Settled on a gross basis
Outflows
Inflows
Total
Within
3 months
£m
(1.1)
(30.9)
(32.0)
–
–
3-6 months
£m
6-12 months
£m
1-5 years
£m
Over 5 years
£m
0.2
(25.1)
(24.9)
–
–
(0.6)
(35.8)
(36.4)
–
–
(13.5)
(41.6)
(55.1)
–
–
(0.9)
(3.2)
(4.1)
–
–
Total
£m
(15.9)
(136.6)
(152.5)
–
–
(32.0)
(24.9)
(36.4)
(55.1)
(4.1)
(152.5)
External credit ratings
Virgin Money Holdings (UK) plc does not have an external credit rating. Disclosures below relate to its subsidiary, Virgin Money
plc. Virgin Money plc’s short and long-term credit ratings as at 31 December 2016 are as follows.
Long term
Short term
Fitch
BBB+
F2
Outlook
Stable
Date of last rating action
Rating action type
03 October 2016
Affirmed
In October 2016 the rating agency Fitch revised Virgin Money plc’s outlook to Stable from Positive and affirmed its long-term
rating at BBB+.
The table below sets out the amount of additional collateral the Company would need to provide in the event of a one and two
notch downgrade by external credit ratings agencies.
Cumulative adjustment for a one-notch downgrade
£m
Cumulative adjustment for a two-notch downgrade
£m
2016
2015
–
–
10.0
10.0
Risk Management Report Virgin Money Group Annual Report 2016 I 187
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Capital
Definition
Capital risk is defined as the risk that the Group has a
sub-optimal amount or quality of capital or that capital is
inefficiently deployed across the Group.
Risk appetite
The Group maintains a high-quality capital base, targeting
capital ratios which support business development and the
risks inherent in the strategic plan.
The Group’s capital planning approach is focused on
maintaining sufficient capital while optimising value
for shareholders.
Measurement
The Group calculates capital resources and requirements
using the CRD IV CRR regulatory framework as implemented
by the PRA. Pillar 1 capital requirements are calculated
in respect of credit risk, operational risk, market risk and
credit valuation adjustments. The capital requirement
for residential mortgages is measured using an Advanced
Internal Ratings Based (AIRB) approach approved by the
PRA, and all other requirements are calculated using the
Standardised Approach.
The Group uses AIRB models in measuring the credit risk of
secured loans and advances to customers as described on
page 140. In contrast, impairment allowances are recognised
for financial reporting purposes only for loss events that
have occurred at the balance sheet date, based on objective
evidence of impairment.
Due to the different methodologies applied, the amount of
incurred credit loss provisions in the financial statements
differs from the amount determined from expected loss
models used for internal operational management, capital
requirement and other banking regulation purposes. Page 147
provides details of the Group’s approach to the impairment of
financial assets.
The PRA supplements the Group’s minimum total capital
requirement by setting additional Pillar 2 requirements issued
within the Group’s Individual Capital Guidance (ICG). The PRA
provided the Group’s revised ICG in 2016 which included a
Pillar 2A component of 3.87% of risk-weighted assets. The
Group’s ICG is the higher of Pillar 1 and 2A combined or the
Basel I floor. The Basel I floor is a transitional capital minimum
requirement based on the Basel I framework. Currently the
Basel I floor is the higher requirement, as it exceeds the
Pillar 1 and Pillar 2A requirement of 11.87% of the Group’s
risk-weighted assets. Any PRA buffer remains confidential
between the Group and the PRA.
188 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
As part of the capital planning process, capital positions
are subjected to stress testing and sensitivity analysis to
determine the adequacy of capital resources against minimum
requirements, including ICG, over the forecast period.
Mitigation
The Group has capital management procedures that are
designed to ensure compliance with risk appetite and
regulatory requirements and are positioned to meet
anticipated future changes to capital requirements.
The Group is able to accumulate additional capital through
profit retention, by raising equity through, for example, a
rights issue or debt exchange and by raising Tier 1 and Tier
2 capital by issuing subordinated liabilities. The cost and
availability of additional capital is dependent upon market
conditions and perceptions at the time. The Group is also
able to manage the demand for capital through management
actions including adjusting lending strategy, risk hedging
strategies and through business disposals. If necessary, this
could include limiting new business.
Monitoring
Capital is actively managed with regulatory ratios being a key
factor in the Group’s planning processes and stress analysis.
A minimum of a three year forecast of the Group’s capital
position, based upon the strategic plan, is produced at least
annually to inform the capital strategy. Shorter term forecasts
are more frequently undertaken to understand and respond to
variations of the Group’s actual performance against the plan.
Regular reporting of actual and projected ratios is undertaken,
including submissions to the Asset and Liability Committee,
the Risk Management Committee and the Board.
Capital developments
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.
A capital conservation buffer of 0.625% was introduced on
1 January 2016. This will increase each year to 2019 in line
with regulations. The countercyclical buffer applied to UK
exposures is currently 0%. However, this has the potential to
increase during 2017, up to a maximum of 2.5% by 2019. From
a capital perspective, the Common Equity Tier 1 capital ratio
for the Group was 15.2% as at 31 December 2016.
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
total Tier 1 capital and total consolidated exposures (total
exposure is the sum of on-balance sheet exposures, derivative
exposures, securities financing transaction exposures
and off-balance sheet items). This applies to the Group
from 1 January 2018. The Group is not subject to the PRA
Leverage Framework until it has core deposits of £50 billion.
To avoid capital cliffs the Group maintains a prudent risk
appetite for leverage.
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 4.4% as at 31 December 2016.
The Financial Services (Banking Reform) Act 2013 introduces a
ring-fence for UK retail banks, with the aim of separating core
banking services critical to individuals and small and medium-
sized enterprises from wholesale and investment banking
services. The Group anticipates being a fully ring-fenced
bank by the 2019 implementation date and is preparing
for this change.
Minimum Requirements for Own Funds and Eligible Liabilities
(MREL) were applicable from 1 January 2016 on a transitional
basis with full implementation required by 1 January 2022.
The BoE provided the Group’s MREL guidance and transitional
arrangements during 2016.
From 1 January 2020 until 31 December 2021 the Group will
be required to hold 18% of risk-weighted assets. The Group is
working towards implementation of these requirements and
has reflected requirements in strategic plans.
The Group completed a £230 million Additional Tier 1 capital
raise in November 2016 strengthening its capital base in
support of business growth and supporting the leverage ratio.
Risk Management Report Virgin Money Group Annual Report 2016 I 189
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i
l
R
e
s
u
l
t
s
G
o
v
e
r
n
a
n
c
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R
i
s
k
M
a
n
a
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e
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e
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t
R
e
p
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The Group’s approach
to risk management
Risk management framework
Emerging risks
Risk classes
Full analysis of risk classes
133
135
136
139
140
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The table below shows the Group’s capital resources.
Share capital and share premium account
Other equity instruments
Other reserves
Retained earnings
Total equity per balance sheet (audited)
Regulatory capital adjustments
Deconsolidation of non-regulated companies
Foreseeable distribution on Additional Tier 1 securities
Foreseeable distribution on ordinary shares
Other equity instruments
Cash flow hedge reserve
Prudential valuation assessment
Intangible assets
Excess of expected loss over impairment
Deferred tax on tax losses carried forward
Common Equity Tier 1 capital
Additional Tier 1 securities
Total Tier 1 capital
Tier 2 capital
General credit risk adjustments
Total Tier 2 capital
Total own funds
Common Equity Tier 1 ratio
Tier 1 ratio
Total capital ratio
2016
£m
654.6
384.1
(27.4)
659.2
2015
£m
654.6
156.5
(15.6)
544.8
1,670.5
1,340.3
5.4
(4.9)
(15.5)
(384.1)
31.5
(1.2)
(80.6)
(41.1)
(7.3)
1,172.7
384.1
1,556.8
11.9
11.9
4.5
(2.1)
(13.7)
(156.5)
15.3
–
(64.4)
(35.4)
(18.0)
1,070.0
156.5
1,226.5
7.6
7.6
1,568.7
1,234.1
15.2%
20.2%
20.4%
17.5%
20.1%
20.2%
As required by Article 26(2) of the Capital Requirements Regulation, a deduction has been made for foreseeable dividends
on 2016 profits.
190 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
The table below shows movements in Common Equity Tier 1 capital.
At 1 January
Movement in retained earnings
Prudential valuation adjustment
Movement in available-for-sale reserve
Add back 2016 distributions made during the year
Additional foreseeable distributions on AT1 notes
Movements in foreseeable distribution on ordinary shares
Exclude losses from non-regulated companies
Movement in intangible assets
Movement in excess of expected loss over impairment
Movement in deferred tax on tax losses carried forward
At 31 December
2016
£m
1,070.0
114.4
(1.2)
4.4
13.7
(2.8)
(15.5)
0.9
(16.2)
(5.7)
10.7
2015
£m
980.5
110.3
–
(7.3)
–
–
(13.7)
0.4
(18.3)
(2.0)
20.1
1,172.7
1,070.0
The main driver for the increase in capital resources is the increase in retained earnings and the reduction in deferred tax asset
on tax losses, offset by expected distributions, and other items as set out in the table above.
The table below shows risk-weighted assets.
Retail mortgages
Retail unsecured lending
Treasury
Other assets
Credit valuation adjustments
Operational risk
Total risk-weighted assets
The table below shows Pillar 1 risk-weighted assets and capital requirements by business line.
2016
£m
4,764.5
1,847.4
178.6
226.4
22.6
655.3
2015
£m
3,952.9
1,192.7
229.0
196.3
14.3
525.2
7,694.8
6,110.4
Mortgages and savings
Credit cards
Financial services
Central functions
Total
2016
Risk-
weighted
assets
£m
2016
Pillar 1
Capital
requirement
£m
2015
Risk-
weighted
assets
£m
2015
Pillar 1
Capital
requirement
£m
5,204.5
2,012.3
50.4
427.6
7,694.8
416.4
161.0
4.0
34.2
615.6
4,284.5
1,334.7
51.6
439.6
6,110.4
342.8
106.8
4.1
35.1
488.8
Risk Management Report Virgin Money Group Annual Report 2016 I 191
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The Group’s approach
to risk management
Risk management framework
Emerging risks
Risk classes
Full analysis of risk classes
133
135
136
139
140
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Movement in risk-weighted assets
The table below shows the movement in risk-weighted assets
during the year to 31 December 2016. Growth in the mortgage
and credit card books has resulted in a £1,823.9 million
increase in risk-weighted assets. ‘Other movements’ includes
a £369.6 million reduction, which relates primarily to changes
in the quality of the assets already on the balance sheet and
reflects lower arrears emergence and growth in HPI. This is
offset by an increase in operational risk-weighted assets of
£130.1 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 2012 to 2015.
RWAs at 1 January 2016
Book size
Other movements
IRB
mortgage
£m
Standardised
lending
£m
3,952.9
1,168.1
(356.5)
1,192.7
655.8
(1.1)
RWAs at 31 December 2016
4,764.5
1,847.4
Other
standardised
assets
£m
Credit
valuation
adjustment
£m
Operational
risks
£m
425.3
–
(20.3)
405.0
14.3
–
8.3
22.6
525.2
–
130.1
655.3
Total
£m
6,110.4
1,823.9
(239.5)
7,694.8
Leverage ratio
CRD IV introduced a new balance sheet metric, the leverage
ratio, as a requirement from 1 January 2014. The leverage
ratio is risk insensitive, requiring capital to be held against
total and off-balance sheet exposures such as undrawn
credit facilities.
The Basel Committee is testing this ratio at a minimum
threshold of 3.0% until 2017. The Group’s leverage ratio as at
31 December 2016 was 4.4% (2015: 4.0%) as disclosed below.
A number of adjustments are applied to the exposures used in
the leverage ratio, in line with CRD IV rules.
The derivative measure for leverage has been adjusted for
regulatory netting rules, potential future exposures, and for
2016, cash collateral.
Off-balance sheet items include undrawn credit facilities
or those that may be cancelled unconditionally at any time.
Credit conversion factors have been applied to these items in
accordance with the CRD IV rules subject to a floor of 10%.
Other regulatory adjustments include those applied to the
Tier 1 capital (such as intangible assets, deferred tax on tax
losses carried forward and excess expected losses). These
are applied to the leverage ratio exposure measure to ensure
consistency between the Tier 1 capital numerator and the
total exposure denominator of the ratio.
Tier 1 capital
Exposures measure
Total regulatory balance sheet assets
Removal of accounting values for derivatives
Exposure value for derivatives
Exposure value for securities financing transactions
Off-balance sheet items
Other regulatory adjustments
Total exposures
Leverage ratio
2016
£m
2015
£m
1,556.8
1,226.5
35,060.9
30,233.2
(104.2)
(29.4)
222.4
714.5
(98.7)
(82.3)
61.8
261.7
659.5
(102.5)
35,765.5
31,031.4
4.4%
4.0%
192 I Virgin Money Group Annual Report 2016
Full analysis of risk classes
31 December 2016 accounting reconciliation
Accounting balance sheet
as in published financial
statements
£m
Deconsolidation
of entities outside
of regulatory
scopes
£m
Under regulatory
scope of
consolidation
£m
Assets
Cash and balances with central banks
Derivative financial instruments
Loans and receivables:
Loans and advances to banks
Loans and advances to customers
Debt securities
Available-for-sale financial assets
Intangible assets
Tangible fixed assets
Deferred tax
Other assets
Intercompany assets
Total assets
Liabilities
Deposits from banks
Customer deposits
Derivative financial instruments
Debt securities in issue
Provisions
Other liabilities
Intercompany liabilities
Total liabilities
Equity
Share capital and share premium
Other equity instruments
Other reserves
Retained earnings
Total equity
Total liabilities and equity
786.3
104.2
635.6
32,367.1
0.7
858.8
80.6
77.4
23.0
121.9
–
35,055.6
2,132.5
28,106.3
229.7
2,600.0
8.5
308.1
–
–
–
(0.1)
–
–
–
–
–
–
(0.3)
5.7
5.3
–
–
–
–
(0.1)
–
–
786.3
104.2
635.5
32,367.1
0.7
858.8
80.6
77.4
23.0
121.6
5.7
35,060.9
2,132.5
28,106.3
229.7
2,600.0
8.4
308.1
–
33,385.1
(0.1)
33,385.0
654.6
384.1
(27.4)
659.2
1,670.5
33,055.6
–
–
–
5.4
5.4
5.3
654.6
384.1
(27.4)
664.6
1,675.9
35,060.9
Risk Management Report
Virgin Money Group Annual Report 2016 I 193
Financial statements
195 Independent Auditors’ Report
202 Consolidated Financial Statements
257 Parent Company Financial Statements
Virgin Money Lounge, Norwich
194 I Virgin Money Group Annual Report 2016
Financial statements
Independent Auditors’ Report
Consolidated income statement
Consolidated statement of
comprehensive income
Consolidated balance sheet
Consolidated statement of
changes in equity
195
202
203
204
206
Consolidated cash flow statement
208
Notes to the consolidated
financial statements
209
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
Basis of preparation and
accounting policies
Segmental analysis
Net interest income
Net fee and commission
income
Other operating income
Operating expenses
Share based payments
Allowance for impairment
losses on loans and receivables
Taxation
Earnings per share
Dividends
Analysis of financial assets
and financial liabilities by
measurement basis
Derivative financial
instruments
Loans and advances to banks
Loans and advances to
customers
Available-for-sale financial
assets
Collateral pledged and
received
18.
Securitisation
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
Intangible assets
Tangible fixed assets
Deferred tax
Other assets
Deposits from banks
Customer deposits
Debt securities in issue
Provisions
Other liabilities
Share capital and share
premium
Other equity instruments
Other reserves
Retained earnings
Contingent liabilities and
commitments
Fair value of financial assets
and financial liabilities
Offsetting of financial assets
and financial liabilities
Cash flow statements
Related party transactions
Events after balance
sheet date
Future accounting
developments
39.
Country by country reporting
Parent Company balance sheet
Parent Company statement of
changes in equity
257
258
Parent Company cash flow statement 259
Notes to the Parent Company
financial statements
260
1.
2.
3.
4.
5.
6.
Basis of preparation and
accounting policies
Investment in subsidiary
undertakings
Deferred tax
Other assets
Other liabilities
Share capital and share
premium
7.
8.
9.
10.
11.
12.
Other equity instruments
Retained earnings
Analysis of financial assets
and financial liabilities by
measurement basis
Fair value of financial assets
and financial liabilities
Cash flow statements
Related party transactions
Virgin Money Group Annual Report 2016 I 195
Independent Auditors’ Report to the members of
Virgin Money Holdings (UK) plc
Report on the financial statements
Our opinion
In our opinion:
> Virgin Money Holdings (UK) plc’s consolidated financial
statements and Parent Company financial statements
(the financial statements) give a true and fair view of the
state of the Group’s and of the Parent Company’s affairs
as at 31 December 2016 and of the Group’s profit and
the Group’s and the Parent Company’s cash flows for the
year then ended;
> the consolidated financial statements have been
properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the
European Union;
What we have audited
The financial statements, included within the Annual Report
and Accounts (the Annual Report), comprise:
> the consolidated income statement and the consolidated
statement of comprehensive income for the year
then ended;
> the consolidated and Parent Company balance sheet as at
31 December 2016;
> the consolidated and Parent Company statement of
changes in equity for the year then ended;
> the consolidated and Parent Company cash flow statement
for the year then ended; and
> the Parent Company financial statements have been
> the consolidated and Parent Company notes to the financial
properly prepared in accordance with IFRSs as adopted by
the European Union and as applied in accordance with the
provisions of the Companies Act 2006; and
> the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as
regards the consolidated financial statements, Article 4 of
the IAS Regulation.
statements, which include a summary of significant
accounting policies and other explanatory information.
Certain required disclosures have been presented elsewhere
in the Annual Report, rather than in the notes to the financial
statements. These are cross-referenced from the financial
statements and are identified as audited.
The financial reporting framework that has been applied in the
preparation of the financial statements is IFRSs as adopted
by the European Union and, as regards the Parent Company
financial statements, as applied in accordance with the
provisions of the Companies Act 2006, and applicable law.
Our audit approach
Overview
Materiality
Audit scope
Overall Group materiality: £9.8 million which represents 5 per cent of profit before tax adjusted for
£2.4 million of strategic items (as detailed on page 54), as these are not considered to be recurring.
This adjusted measure of profit is deemed as the most appropriate measure of underlying business
performance and hence an appropriate benchmark upon which to base our materiality.
The consolidated financial statements include its five 100% owned subsidiaries as well as a number
of securitisation related Special Purpose Vehicles (SPVs). As the statutory audit of subsidiaries is
undertaken concurrently with the Group audit, all five subsidiaries were designated as in-scope
components for Group purposes. Additionally certain SPV balances were scoped in on a line by line
basis based on their contribution to the consolidated financial statement line item. 99% of Revenue,
99% of profit before tax (99% of the adjusted profit before tax figure as used for our overall materiality
calculation) and 99% of Total Assets were subject to audit.
Areas of
focus
> Impairment of loans and advances to customers;
> Revenue recognition – Effective Interest Rate (EIR) accounting; and
> Impairment of intangible assets.
196 I Virgin Money Group Annual Report 2016
Independent Auditor’s Report to the members of
Virgin Money Holdings (UK) plc
Report on the financial statements
The scope of our audit and our areas of focus
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) (ISAs (UK & Ireland)).
evaluating whether there was evidence of bias by the
Directors that represented a risk of material misstatement
due to fraud.
We designed our audit by determining materiality and
assessing the risks of material misstatement in the financial
statements. In particular, we looked at where the Directors
made subjective judgements, for example in respect of
significant accounting estimates that involved making
assumptions and considering future events that are inherently
uncertain. As in all of our audits we also addressed the risk
of management override of internal controls, including
The risks of material misstatement that had the greatest
effect on our audit, including the allocation of our resources
and effort, are identified as ‘areas of focus’ in the table below.
We have also set out how we tailored our audit to address
these specific areas in order to provide an opinion on the
financial statements as a whole, and any comments we make
on the results of our procedures should be read in this context.
This is not a complete list of all risks identified by our audit.
Area of focus
How our audit addressed the area of focus
Impairment of loans and advances to customers
See note 1 of the financial statements for the Directors’ disclosure of the
related accounting policies and also page 99 for the Audit Committee’s
consideration of principal risks.
The impairment provision of £50.1 million consists of provisions of
£10.6 million in relation to secured lending and £39.5 million in relation
to unsecured lending. Total loans and advances as at 31 December
2016 relating to secured lending was £29.8 billion and £2.5 billion
for unsecured lending.
We focused on this area because the Directors make complex and
subjective judgments over both the timing of recognition and the size
of provisions for impairment of the Group’s loans and advances. This
judgement includes considering the completeness of the provisions and
whether any specific judgemental overlays are required to recognise the
impact of emerging trends not captured in the impairment models.
The Group have developed historic data based models that derive key
assumptions used within the provision calculation such as Probability
of Default and Loss Given Default. The output of these models is then
applied to the provision calculation with other information including the
selection of an appropriate Loss Emergence Period and the Exposure at
Default.
We assessed and tested the design and operating effectiveness of the
controls over data flows and model governance.
Our detailed work in auditing the impairment provisions included:
- Using credit risk modelling specialists to assess the provision and
material assumption calculation methodology applied by the
Group in the context of industry practice and the requirements of
accounting standards;
- Testing key assumptions used within the models to internal and
external information where appropriate;
- Comparing the key assumptions within the models with our industry
experience;
- Reading the model calculation scripts to ensure that their
application was consistent with our understanding of the Group’s
methodology and the requirements of accounting standards;
- Examining the basis for the judgemental overlays made to the
results produced by models and agreeing the rationale for the
adjustments to supporting data; and
- Considering the appropriateness of judgemental overlays applied in
the context of our industry experience.
We found the approach taken in relation to the Group’s impairment
provisions to be consistent with the requirements of accounting
standards. Our testing did not result in any material matters that we
considered necessary to report to the Audit Committee.
Virgin Money Group Annual Report 2016 I 197
Independent Auditor’s Report to the members of
Virgin Money Holdings (UK) plc
Area of focus
Revenue Recognition – EIR accounting
See note 1 of the financial statements for the Directors’ disclosure
of the related accounting policies and also page 98 for the Audit
Committee’s consideration of principal risks.
The Group’s total loans and advances to customers balance of
£32.4 billion and net interest income of £522.4 million include certain
EIR adjustments as per the requirements of IAS 39.
The vast majority of the Group’s income is system generated and requires
minimal judgement, therefore we focused our work in relation to the risk
of fraud in revenue recognition on EIR accounting due to the inherent
subjectivity involved in forecasting future customer behaviour that is
included in the EIR adjustment calculation. Changes in assumptions
used in the forecasting model could have a material impact on EIR
adjustments and hence, the revenue recognised in any one accounting
period.
How our audit addressed the area of focus
Across both the secured and unsecured lending EIR calculation
models, we tested controls over data input and checked the accuracy
of model calculations by reading the formulas used and considering
these with our expectation for an EIR calculation.
In relation to secured lending EIR we completed the following testing:
- Substantively tested a sample of fees incorporated within the
calculation back to underlying secured lending agreements; and
- Assessed the Group’s estimate of the expected life applied and
forecast cash flows during this life by comparing to recent Group
experience and our industry experience.
In relation to unsecured lending EIR we completed the following
testing:
- Tested controls over the Group’s ongoing monitoring of actual vs.
expected cash flows and compared 2016 experience with expected
experience for that period on a sample basis;
The most significant assumption for secured lending EIR is the estimation
of the expected life of the product over which fees are spread.
- Assessed the Group’s assumption over expected life by comparing
to recent Group experience and our industry experience; and
In relation to unsecured lending, additional judgement is applied in
calculating the EIR adjustment, by considering movements in customer
balances over the expected life and the related future revenue associated
with these balances in the context of the Group’s historic experience of
expected life cash flows on similar products.
- Performed sensitivity analyses of key judgements to understand the
materiality of impact that potential realistic changes in assumptions
may have, either individually or in combination, on the EIR asset.
Our testing did not result in any material matters that we considered
necessary to report to the Audit Committee.
Impairment of intangible assets
See note 1 of the financial statements for the Directors’ disclosure of the
related accounting policies and also page 99 for the Audit Committee’s
consideration of principal risks.
A fast changing economic and competitive landscape requires constant
innovation and investment by banks in keeping up with consumer
expectations.
As technology and customer expectations continue to change there is
a risk that certain technology assets may not generate the return that
the Group had initially anticipated and therefore may be subject to
impairment.
We read the Group’s capitalisation policy to check that it met the
requirements of IAS 38.
We tested the design and operating effectiveness of the control
environment in relation to the recording, budgeting and approval of
project costs which form the basis of capitalisation accounting entries.
We selected a sample of intangible assets and undertook the
following procedures:
- Substantively tested a selection of costs to check that these meet
the criteria of IAS 38 for capitalisation as intangible assets;
- Discussed the Group’s stock of material capitalised assets with
management to identify any that may be at higher risk of potential
impairment; and
- Where higher risk items were noted, we discussed the asset
and related forecast economic benefits this would bring with
management to inform our independent consideration as to
whether any possible impairment triggers existed.
Our testing did not identify any material matters which we considered
necessary to report to the Audit Committee.
198 I Virgin Money Group Annual Report 2016
Independent Auditor’s Report to the members of
Virgin Money Holdings (UK) plc
Report on the financial statements
The consolidated financial statements include its five 100%
owned subsidiaries as well as a number of securitisation
related Special Purpose Vehicles (SPVs). As the statutory
audit of subsidiaries is undertaken concurrently with the
Group audit, all five subsidiaries were designated as in-scope
components for Group purposes. Additionally certain SPV
balances were scoped in on a line by line basis based on their
contribution to the consolidated financial statement line item.
99% of Revenue, 99% of profit before tax (99% of the adjusted
profit before tax figure as used for our overall materiality
calculation) and 99% of Total Assets were subject to audit.
In establishing the overall approach to the Group audit, we
determined the type of work that needed to be performed
over the components. All of the audit work was completed by
the Group engagement team.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we
performed enough work to be able to give an opinion on
the financial statements as a whole, taking into account the
geographic structure of the Group, the accounting processes
and controls, and the industry in which the Group operates.
Because this was our first year as the Group’s external
auditors, we performed specific procedures over opening
balances by shadowing the prior year audit clearance
and year end Audit Committee meetings, reviewing the
predecessor auditors’ working papers and re-evaluating the
key management judgements in the opening balance sheet
at 1 January 2016.
We then performed year one process walkthroughs to
understand and evaluate the key financial processes
and controls across the Group and, in accordance with
International Standard on Review Engagements (UK and
Ireland) 2410, a review of the half year financial information.
Following this work, we planned our audit and presented our
audit plan to the Audit Committee. As we conducted our audit
procedures, we identified changes that we needed to make to
that initial plan and tailored our work accordingly. As required
by ISAs (UK&I), we communicated these changes and the
reasons for them, to the Audit Committee. These changes
did not affect our assessment of the audit risk associated
with any of the areas of focus described above. Following
the changes in our audit approach, we were able to obtain
sufficient appropriate audit evidence to form a basis for our
audit opinion.
Virgin Money Group Annual Report 2016 I 199
Independent Auditor’s Report to the members of
Virgin Money Holdings (UK) plc
Other required reporting
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and
extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of
misstatements, both individually and on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall Group materiality
£9.8 million
How we determined it
5 per cent of profit before tax adjusted for £2.4 million of strategic items (as detailed on page 54), as
these are not considered to be recurring
Rationale for benchmark applied
This adjusted measure of profit is deemed as the most appropriate measure of underlying business
performance and hence an appropriate benchmark upon which to base our materiality
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above
£0.47 million as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Going concern
Under the Listing Rules we are required to review the Directors’ statement, set out on page 126, in relation to going concern.
We have nothing to report having performed our review.
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation
to the Directors’ statement about whether they considered it appropriate to adopt the going concern basis in preparing the
financial statements. We have nothing material to add or to draw attention to.
As noted in the Directors’ statement, the Directors have concluded that it is appropriate to adopt the going concern basis in
preparing the financial statements. The going concern basis presumes that the Group and Parent Company have adequate
resources to remain in operation, and that the Directors intend them to do so, for at least one year from the date the financial
statements were signed. As part of our audit we have concluded that the Directors’ use of the going concern basis is appropriate.
However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s
and Parent Company’s ability to continue as a going concern.
Consistency of other information and compliance with applicable requirements
Companies Act 2006 reporting
In our opinion, based on the work undertaken in the course of the audit:
> the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
> the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
In addition, in light of the knowledge and understanding of the Group, the Parent Company and their environment obtained in
the course of the audit, we are required to report if we have identified any material misstatements in the Strategic Report and the
Directors’ Report. We have nothing to report in this respect.
200 I Virgin Money Group Annual Report 2016
Independent Auditor’s Report to the members of
Virgin Money Holdings (UK) plc
Other required reporting
ISAs (UK & Ireland) reporting
Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:
> information in the Annual Report is:
We have no exceptions to report.
– materially inconsistent with the information in the audited financial statements; or
– apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group
and Parent Company acquired in the course of performing our audit; or
– otherwise misleading.
> the statement given by the Directors on page 131, in accordance with provision C.1.1 of the UK Corporate
Governance Code (the Code), that they consider the Annual Report taken as a whole to be fair, balanced
and understandable and provides the information necessary for members to assess the Group’s and
Parent Company’s position and performance, business model and strategy is materially inconsistent with
our knowledge of the Group and Parent Company acquired in the course of performing our audit.
We have no exceptions to report.
> the section of the Annual Report on pages 98 and 99, as required by provision C.3.8 of the Code,
We have no exceptions to report.
describing the work of the Audit Committee does not appropriately address matters communicated by
us to the Audit Committee.
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or
liquidity of the Group
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to:
> the Directors’ confirmation on page 138 of the Annual Report, in accordance with provision C.2.1 of the
Code, that they have carried out a robust assessment of the principal risks facing the Group, including
those that would threaten its business model, future performance, solvency or liquidity.
We have nothing material to add or
to draw attention to.
> the disclosures in the Annual Report that describe those risks and explain how they are being managed
or mitigated.
> the Directors’ explanation on pages 126 and 127 of the Annual Report, in accordance with provision C.2.2
of the Code, as to how they have assessed the prospects of the Group, over what period they have done
so and why they consider that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they
fall due over the period of their assessment, including any related disclosures drawing attention to any
necessary qualifications or assumptions.
We have nothing material to add or
to draw attention to.
We have nothing material to add or
to draw attention to.
Under the Listing Rules we are required to review the Directors’ statement that they have carried out a robust assessment of the principal risks
facing the Group and the Directors’ statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than
an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements
are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by
us in the course of performing our audit. We have nothing to report having performed our review.
Adequacy of accounting records and
information and explanations received
Directors’ remuneration
Directors’ remuneration report – Companies Act 2006 opinion
Under the Companies Act 2006 we are required to report to
you if, in our opinion:
> we have not received all the information and explanations
we require for our audit; or
> adequate accounting records have not been kept by the
Parent Company, or returns adequate for our audit have not
been received from branches not visited by us; or
> the Parent Company financial statements and the part of
the Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns.
We have no exceptions to report arising from this
responsibility.
In our opinion, the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance with
the Companies Act 2006.
Other Companies Act 2006 reporting
Under the Companies Act 2006 we are required to report
to you if, in our opinion, certain disclosures of Directors’
remuneration specified by law are not made. We have no
exceptions to report arising from this responsibility.
Corporate governance statement
Under the Listing Rules we are required to review the part of
the Corporate Governance Statement relating to ten further
provisions of the Code. We have nothing to report having
performed our review.
Virgin Money Group Annual Report 2016 I 201
Independent Auditor’s Report to the members of
Virgin Money Holdings (UK) plc
Responsibilities for the financial statements and the audit
We test and examine information, using sampling and other
auditing techniques, to the extent we consider necessary to
provide a reasonable basis for us to draw conclusions. We
obtain audit evidence through testing the effectiveness of
controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial
information in the Annual Report to identify material
inconsistencies with the audited financial statements and
to identify any information that is apparently materially
incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing
the audit. If we become aware of any apparent material
misstatements or inconsistencies we consider the
implications for our report. With respect to the Strategic
Report and Directors’ Report, we consider whether those
reports include the disclosures required by applicable
legal requirements.
Catrin Thomas (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Edinburgh
27 February 2017
Our responsibilities and those of the
Directors
As explained more fully in the Statement of Directors’
responsibilities set out on pages 130 and 131, the Directors
are responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the
financial statements in accordance with applicable law and
ISAs (UK & Ireland). Those standards require us to comply with
the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for
and only for the Parent Company’s members as a body in
accordance with Chapter 3 of Part 16 of the Companies Act
2006 and for no other purpose. We do not, in giving these
opinions, accept or assume responsibility for any other
purpose or to any other person to whom this report is shown
or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What an audit of financial statements
involves
An audit involves obtaining evidence about the amounts
and disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud or
error. This includes an assessment of:
> whether the accounting policies are appropriate to the
Group’s and the Parent Company’s circumstances and have
been consistently applied and adequately disclosed;
> the reasonableness of significant accounting estimates
made by the Directors; and
> the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the
Directors’ judgements against available evidence, forming
our own judgements, and evaluating the disclosures in the
financial statements.
202 I Virgin Money Group Annual Report 2016
Consolidated income statement
For the year ended 31 December
Interest and similar income
Interest and similar expense
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Other operating income
Fair value losses on financial instruments
Other income
Total income
Operating expenses
Profit before tax from operating activities
Impairment
Profit before tax
Taxation
Profit for the year
Profit attributable to equity owners
Profit for the year
Basic earnings per share (pence)
Diluted earnings per share (pence)
The accompanying notes are an integral part of these consolidated financial statements.
Note
3
4
5
13
6
8
9
10
10
2016
£ million
948.1
(425.7)
522.4
2015
£ million
839.3
(384.5)
454.8
28.8
(1.2)
27.6
40.3
(8.9)
59.0
581.4
(349.4)
232.0
(37.6)
194.4
(54.3)
140.1
140.1
140.1
29.4
29.1
27.4
(1.2)
26.2
41.3
(0.4)
67.1
521.9
(353.6)
168.3
(30.3)
138.0
(26.8)
111.2
111.2
111.2
22.9
22.7
Virgin Money Group Annual Report 2016 I 203
Consolidated statement of comprehensive income
For the year ended 31 December
Profit for the year
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
Income statement transfers in respect of disposals
Taxation
Movements in cash flow hedge reserve:
Effective portion of changes in fair value taken to other comprehensive income
Net income statement transfers
Taxation
Other comprehensive expense for the year, net of tax
Total comprehensive income for the year
Note
2016
£ million
140.1
2015
£ million
111.2
30
30
30
30
30
30
44.4
(38.3)
(1.7)
4.4
(36.1)
13.6
6.3
(16.2)
(11.8)
128.3
25.1
(33.6)
1.2
(7.3)
(13.2)
5.1
1.6
(6.5)
(13.8)
97.4
Total comprehensive income attributable to equity owners
128.3
97.4
The accompanying notes are an integral part of these consolidated financial statements.
204 I Virgin Money Group Annual Report 2016
Consolidated balance sheet
As at 31 December
Assets
Cash and balances at central banks
Derivative financial instruments
Loans and receivables:
> Loans and advances to banks
> Loans and advances to customers
> Debt securities
Available-for-sale financial assets
Intangible assets
Tangible fixed assets
Deferred tax assets
Other assets
Total assets
Note
2016
£ million
2015
£ million
13
14
15
16
19
20
21
22
786.3
104.2
888.6
82.3
635.6
614.5
32,367.1
27,109.0
0.7
1.1
33,003.4
27,724.6
858.8
1,296.9
80.6
77.4
23.0
121.9
64.4
74.6
38.0
59.6
35,055.6
30,229.0
Virgin Money Group Annual Report 2016 I 205
Consolidated balance sheet
As at 31 December
Equity and liabilities
Liabilities
Deposits from banks
Customer deposits
Derivative financial instruments
Debt securities in issue
Provisions
Other liabilities
Current tax liabilities
Total liabilities
Equity
Share capital and share premium
Other equity instruments
Other reserves
Retained earnings
Total equity
Total liabilities and equity
Note
2016
£ million
2015
£ million
23
24
13
25
26
27
28
29
30
31
2,132.5
1,298.7
28,106.3
25,144.9
229.7
2,600.0
8.5
291.4
16.7
156.0
2,039.4
8.4
235.0
6.3
33,385.1
28,888.7
654.6
384.1
(27.4)
659.2
654.6
156.5
(15.6)
544.8
1,670.5
1,340.3
35,055.6
30,229.0
The accompanying notes are an integral part of these consolidated financial statements.
The financial statements on pages 202 to 256 were approved and authorised for issue by the Board and were signed on its behalf
on 27 February 2017.
Glen Moreno
Chairman
Jayne-Anne Gadhia CBE
Chief Executive
206 I Virgin Money Group Annual Report 2016
Consolidated statement of changes in equity
For the year ended 31 December
Attributable to equity holders
Balance at 1 January 2016
Comprehensive income
Profit for the year
Other comprehensive income
Net movement in revaluation reserve in respect of
available-for-sale financial assets
Net movement in cash flow hedge reserve
Total other comprehensive expense
Total comprehensive (expense)/income for the year
Transactions with equity holders
Dividends paid to ordinary shareholders
Distribution to Additional Tier 1 security holders
Tax attributable to Additional Tier 1 securities
Purchase of own shares
Issue of Additional Tier 1 securities
Share based payments – charge for the year
Deferred tax on share based payments
Total transactions with equity holders
Share capital
and share
premium
£ million
Other equity
instruments
£ million
Other
reserves
£ million
Retained
earnings
£ million
Total equity
£ million
654.6
156.5
(15.6)
544.8
1,340.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
227.6
–
227.6
384.1
–
140.1
140.1
4.4
(16.2)
(11.8)
(11.8)
–
–
–
–
–
–
–
(27.4)
–
–
–
140.1
(20.8)
(12.6)
2.5
(7.3)
–
12.8
(0.3)
(25.7)
659.2
4.4
(16.2)
(11.8)
128.3
(20.8)
(12.6)
2.5
(7.3)
227.6
12.8
(0.3)
201.9
1,670.5
Balance at 31 December 2016
654.6
The accompanying notes are an integral part of these consolidated financial statements.
Further details of movements in the Group’s share capital and reserves are provided in notes 28 to 31.
Virgin Money Group Annual Report 2016 I 207
Consolidated statement of changes in equity
For the year ended 31 December
Attributable to equity holders (continued)
Balance at 1 January 2015
Comprehensive income
Profit for the year
Other comprehensive income
Net movement in revaluation reserve in respect of
available-for-sale financial assets
Net movement in cash flow hedge reserve
Total other comprehensive expense
Total comprehensive (expense)/income for the year
Transactions with equity holders
Dividends paid to ordinary shareholders
Distribution to Additional Tier 1 security holders
Tax attributable to Additional Tier 1 securities
Purchase of own shares
Share based payments – charge for the year
Deferred tax on share based payments
Total transactions with equity holders
Share capital
and share
premium
£ million
Other equity
instruments
£ million
Other
reserves
£ million
Retained
earnings
£ million
Total equity
£ million
654.6
156.5
(1.8)
434.5
1,243.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
111.2
111.2
(7.3)
(6.5)
(13.8)
(13.8)
–
–
–
–
–
–
–
–
–
–
111.2
(6.2)
(12.6)
2.6
(5.0)
20.0
0.3
(0.9)
(7.3)
(6.5)
(13.8)
97.4
(6.2)
(12.6)
2.6
(5.0)
20.0
0.3
(0.9)
Balance at 31 December 2015
654.6
156.5
(15.6)
544.8
1,340.3
The accompanying notes are an integral part of these consolidated financial statements.
Further details of movements in the Group’s share capital and reserves are provided in notes 28 to 31.
208 I Virgin Money Group Annual Report 2016
Consolidated cash flow statement
Profit before taxation
Adjustments for:
Changes in operating assets
Changes in operating liabilities
Non-cash and other items
Tax paid
Net cash used in operating activities
Cash flows from investing activities
Purchase of securities
Proceeds from sale and redemption of securities
Purchase and investment in intangible assets
Purchase of tangible fixed assets
Disposal of tangible fixed assets
Net cash provided by investing activities
Cash flows from financing activities
Dividends paid to ordinary shareholders
Distributions to Additional Tier 1 security holders
Net proceeds from issue of debt securities
Repayments of debt securities in issue
Purchase of own shares
Issue of Additional Tier 1 securities (net of costs)
Net cash provided by financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The accompanying notes are an integral part of these consolidated financial statements.
Note
35(a)
35(b)
35(c)
11
35(d)
2016
£ million
194.4
2015
£ million
138.0
(5,387.3)
(4,037.3)
3,957.3
3,146.4
(19.5)
(22.1)
62.4
(5.0)
(1,277.2)
(695.5)
(670.0)
1,150.0
(31.6)
(8.6)
0.7
440.5
(20.8)
(12.6)
(659.2)
900.5
(29.5)
(10.2)
–
201.6
(6.2)
(12.6)
1,278.9
1,047.2
(718.3)
(601.9)
(7.3)
227.6
747.5
(89.2)
1,461.4
1,372.2
(5.0)
–
421.5
(72.4)
1,533.8
1,461.4
For the year ended 31 December Virgin Money Group Annual Report 2016 I 209
Note 1: Basis of preparation and accounting policies
1.1 Reporting entity
1.4 Presentation of information
Virgin Money Holdings (UK) plc (the Company) is a public
limited company incorporated and registered in England
and Wales. The registered office is Jubilee House, Gosforth,
Newcastle-Upon-Tyne, NE3 4PL.
The Company was incorporated on 4 August 1995 as a
private limited company with registered number 03087587.
On 24 July 2014 the Company was re-registered as a public
limited company.
The Company is the parent entity and the ultimate controlling
party of the Virgin Money Group (the Group), which consists of
the Company and its subsidiaries.
1.2 Basis of preparation
The Group consolidated financial statements, which should
be read in conjunction with the Directors’ Report, have
been prepared on a going concern basis in accordance
with International Financial Reporting Standards (IFRS)
as adopted by the EU, including interpretations issued
by the IFRS Interpretations Committee, and with those
parts of the Companies Act 2006 applicable to companies
reporting under IFRS.
The Directors have reviewed the strategic plan which shows
the financial position, cash flow, liquidity and capital forecasts
for the Group. The Directors are confident that the Group
will have sufficient resources to meet its liabilities as they
fall due and to continue to operate for a period of at least 12
months from the date of approval of the financial statements.
Accordingly the Directors believe that it remains appropriate
to prepare the financial statements on a going concern basis.
1.3 Changes in accounting policy
New standards, amendments to standards and
interpretations adopted
In 2016, the Group adopted a number of minor interpretations
and amendments to standards, which were endorsed for
adoption by the EU, and mandatory for annual reporting
periods beginning on or after 1 January 2016. These included
amendments published through the Annual Improvements
to IFRSs 2010-2012 and 2012-2014 cycles, in addition to a
number of stand-alone amendments.
The adoption of these interpretations and amendments
to standards or interpretations had an insignificant
impact on the Group and did not result in any change in
accounting policies.
New accounting standards issued by the IASB that are
relevant to the Group and effective in future periods are
presented in note 38.
Presentation of risk and capital management
disclosures
Disclosures under IFRS 7 ‘Financial Instruments: Disclosure’
concerning the nature and extent of risks relating to
financial instruments and under IAS 1 ’Presentation of
financial statements’ concerning objectives, policies and
processes for managing capital have been included within
the audited sections of the Risk Management Report. Where
marked as ‘audited’ these are covered by the Independent
Auditors’ Report.
1.5 Basis of consolidation
The Group consists of the Company and its subsidiaries.
The subsidiaries are listed in note 2 of the parent company
financial statements. The consolidated financial statements
comprise the financial statements of the Group.
Entities are regarded as subsidiaries where the Group has the
power over an investee, exposure or rights to variable returns
from its involvement with the investee and the ability to affect
those returns. Inter-company transactions and balances are
eliminated upon consolidation. Subsidiaries are consolidated
from the date on which control is transferred to the Group
and are deconsolidated from the date that power over an
investee, exposure or rights to variable returns and the ability
to affect these returns ceases. Accounting policies are applied
consistently across the Group.
The Virgin Money Foundation, launched in August 2015, is
managed and controlled by a Board of independent Trustees,
such that the Group has no power over the Foundation
or, exposure or ability to affect variable returns. The
Foundation is therefore not consolidated in the financial
statements of the Group.
Special Purpose Vehicles (SPV) are entities created to
accomplish a narrow and well defined objective. For the
Group this is the securitisation of mortgage assets. An SPV is
consolidated if the Group has control over the SPV, through
its exposure to variable returns from its involvement in the
SPV and the ability to affect those returns through its power
over the entity.
1.6 Basis of measurement
The financial statements have been prepared under the
historical cost convention as modified by the revaluation of
derivative financial instruments, available-for-sale and other
assets held at fair value through profit or loss. A summary of
the material accounting policies of the Group are included
within note 1.9. Policies which are relevant to the financial
statements as a whole are set out below.
Notes to the consolidated financial statements 210 I Virgin Money Group Annual Report 2016
Note 1: Basis of preparation and accounting policies (continued)
The accounting policies have been applied consistently to all
periods presented in these financial statements.
1.7 Client money
The Group’s unit trust management and investment
intermediary subsidiaries administer money on behalf of
some clients in accordance with the Client Money Rules of the
Financial Conduct Authority. Client money is not recognised
in the balance sheet or in the notes to the financial statements
as the Group is not the beneficial owner.
1.8 Foreign currency translation
The Group’s financial statements are presented in Sterling,
which is the functional currency of the Company, all of its
subsidiaries and the SPVs included within the consolidated
financial statements.
Foreign currency transactions are translated into functional
currency using the exchange rates prevailing at the dates of
the transactions. Monetary items denominated in foreign
currencies are translated at the rate prevailing at the balance
sheet date. Foreign exchange gains and losses resulting from
the restatement and settlement of such transactions are
recognised in the income statement, except when recognised
in other comprehensive income if relating to a qualifying
cash flow hedge or available-for-sale assets. Non-monetary
items (which are assets or liabilities which do not attach to a
right to receive or an obligation to pay currency) measured
at historical cost and denominated in foreign currencies are
translated at the exchange rate at the date of the transaction.
Non-monetary items measured at fair value are translated at
the exchange rate at the date of valuation. Where these are
held at fair value through the income statement, exchange
differences are reported as part of the fair value gain or loss.
1.9 Accounting policies
The accounting policies of the Group are set out below.
(a) Operating segments
The Group determines operating segments according to
similar economic characteristics and the nature of its products
and services in accordance with IFRS 8 ‘Operating Segments’.
Management reviews the Group’s internal reporting based
around these segments in order to assess performance and
allocate resources.
Segment performance is evaluated based on underlying profit
or loss and is measured consistently with underlying profit
or loss in the consolidated financial statements (income tax
is unallocated). Segment results are regularly reviewed and
reported to the Board of Directors to allocate resources to
segments and to assess their performance.
Operating segments are reported in a manner consistent
with the internal reporting provided to the Board. The Group
Executive Committee (Management) has been determined to
be the chief operating decision maker for the Group.
(b) Interest income and expense
Interest income and expense are recognised in the income
statement for all instruments measured at amortised cost
using the effective interest rate method.
This method calculates the amortised cost of a financial asset
or liability, and allocates the interest income or expense over
the relevant period. The effective interest rate is the rate that
exactly discounts estimated future cash receipts or payments
through the expected life of the financial instrument or, where
appropriate, a shorter period to the net carrying amount of
the financial asset or liability. The Group estimates cash flows
considering all contractual terms of the financial instrument
(for example prepayment options) but does not consider
future credit losses. The calculation includes all amounts
received or paid by the Group that are an integral part of the
overall return, direct incremental transaction costs related to
the acquisition or issue of a financial instrument and all other
premiums and discounts.
Once a financial asset or group of similar financial assets
has been written down as a result of an impairment loss,
interest income is recognised using the rate of interest used
to discount the future cash flows for the purpose of measuring
the impairment loss.
Interest receivable or payable on derivatives, whether in
economic or accounting hedges, is recorded on an accruals
basis in interest receivable or payable. Interest on available-
for-sale (AFS) debt securities is recorded in interest receivable
using the effective interest rate method.
(c) Fees and commissions
Where they are not included in the effective interest rate
calculation, fees and commissions are recognised on an
accruals basis when the service has been received or provided.
Loan commitment fees for loans that are likely to be drawn
down are deferred (together with related incremental direct
costs) and recognised as an adjustment to the effective
interest rate on the loan.
Fee income from general insurance and life insurance policies
is recognised in full on the effective date of commencement or
renewal of the related policies to reflect underlying contracts
with product providers.
(d) Other operating income
Other operating income comprises the fair value for services,
net of value added tax, rebates and discounts. Other
operating income is attributable to the sale and management
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 211
Note 1: Basis of preparation and accounting policies (continued)
of stocks and shares ISAs, pensions, authorised unit trusts and
other financial services products.
are held separately from those of the Group in independently
administered funds.
Other operating income from sales of units in managed funds
is recognised daily based on the average volume of funds
under management.
Fees charged to register with Virgin Money Giving Limited
are recognised from the date on which recovery is reasonably
certain. The commission charged on donations and event
fees is recognised from the date donations and event
fees are transacted on the website. Both of these income
streams contribute towards costs incurred by Virgin Money
Giving Limited.
Other income includes commission on donations and other
sundry income.
(e) Total operating expenses
Operating expenses are recognised on an accruals basis as
services are provided. Included within the employee benefits
expense are employee share based payments. The accounting
policy in relation to share based payments is set out in policy (f).
Staff costs
The Group accounts for components of employee costs on the
following bases:
> Short-term employee benefits
Short term employee benefits include salaries and social
security costs and are recognised over the period in which the
employees provide the services to which the payments relate.
Cash bonus awards are recognised to the extent that the
Group has a present obligation to its employees that can
be measured reliably and are recognised over the period
of service that employees are required to work to qualify
for the payment.
> Other long-term employee benefits
Other long-term employee benefits include deferred cash
bonus awards. Deferred cash bonus awards are recognised
at the present value of the obligation at the reporting date.
These costs are recognised over the period of service that
employees are required to work to qualify for the payment.
> Retirement benefit obligations
A defined contribution plan is a post-employment benefit
plan into which the Group pays fixed contributions and has
no legal or constructive obligation to pay further amounts.
Contributions are recognised as staff expenses in profit or
loss in the periods during which related employee services
are fulfilled.
The Group operates defined contribution pension schemes
for its Directors and employees. The assets of the schemes
Leases
If the lease agreement in which the Group is a lessee transfers
the risks and rewards of the asset, the lease is recorded as a
finance lease and the related asset is capitalised. At inception,
the asset is recorded at the lower of the present value of the
minimum lease payments or fair value and is depreciated over
the estimated useful life. The lease obligations are recorded
as borrowings.
If the lease does not transfer the risks and rewards of the
asset, the lease is recorded as an operating lease.
Operating lease payments are charged to profit or loss on
a straight line basis over the lease term unless a different
systematic basis is more appropriate. Where an operating
lease is terminated before the lease period has expired, any
payment required to be made to the lessor in compensation
is charged to profit or loss in the period in which
termination is made.
(f) Share based payments
The Group puts in place share schemes for employees to
reward strong long-term business performance and to
incentivise growth for the future.
The Group engages in equity settled share based payment
transactions in respect of services received from certain of
its employees.
For these transactions the grant date fair value of the award
is recognised as an employee expense with a corresponding
increase in equity over the period that the employees become
unconditionally entitled to the awards.
The grant date fair value of the award is determined using
valuation models which take into account the terms and
conditions attached to the awards. Inputs into valuation
models may include the exercise price, the risk-free interest
rate, the expected volatility of the Company’s share price and
other various factors which relate to performance conditions
attached to the awards.
The amount recognised as an expense is adjusted to reflect
the actual number of awards for which the related service and
non-market vesting conditions are expected to be met such
that the amount ultimately recognised as an expense is based
on the number of awards that do meet the related service and
non-market performance conditions at the vesting date.
(g) Impairment losses
The Group assesses its financial assets or groups of financial
assets for objective evidence of impairment at each balance
sheet date. An impairment loss is recognised if a loss event (or
events) has occurred after initial recognition, and on or before
Notes to the consolidated financial statements 212 I Virgin Money Group Annual Report 2016
Note 1: Basis of preparation and accounting policies (continued)
the balance sheet date, that has an impact on the estimated
future cash flows of the financial assets or groups of financial
assets that can be reliably measured. Losses incurred as a
result of events occurring after the balance sheet date are not
recognised in these financial statements.
is measured as the difference between the asset carrying
amount and the present value of the estimated future cash
flows (excluding future credit losses that have not been
incurred) discounted at the financial asset’s original effective
interest rate. The carrying amount of the asset is reduced
through the use of an impairment allowance and the amount
of the loss is recognised in profit or loss.
> Assets held at amortised cost
The Group first assesses whether objective evidence of
impairment exists individually for financial assets that are
individually significant, and individually or collectively for
financial assets that are not individually significant.
Objective evidence that a financial asset is impaired includes
observable data that comes to the attention of the Group
about the following loss events:
> there is evidence of the customer or issuer experiencing
financial difficulty;
> there is a breach of contract, such as a default or
delinquency in repayments;
> the customer is granted a concession that would otherwise
not be considered;
> the borrower will enter bankruptcy or other financial
reorganisation;
> the disappearance of an active market for that financial
asset because of financial difficulties; and
> observable data indicating that there is a measurable
decrease in the estimated future cash flows from a portfolio
of assets since the initial recognition of those assets,
although the decrease cannot yet be identified with the
individual financial assets in the portfolio, including:
- there are adverse changes in the payment status of
borrowers in the portfolio; and
- economic conditions that correlate with defaults on the
assets in the portfolio.
If the Group determines that no objective evidence of
impairment exists for an individually assessed financial asset,
whether significant or not, it includes the asset in a group
of financial assets with similar credit risk characteristics
and collectively assesses them for impairment. In assessing
collective impairment the Group uses statistical modelling of
historic trends to assess the probability of a group of financial
assets going into default and the subsequent loss incurred.
Regular model monitoring is performed to ensure model
assumptions remain appropriate.
Assets that are individually assessed and for which an
impairment loss is or continues to be recognised are not
included in a collective assessment of impairment.
If there is objective evidence that an impairment loss on loans
and receivables has been incurred, the amount of the loss
When a loan or receivable is uncollectible, it is written off
against the related provision for loan impairment. Such
loans are written off after all the necessary procedures
have been completed and the amount of the loss has been
determined. Subsequent recoveries of amounts previously
written off are recognised directly in the income statement.
If, in a subsequent period, the amount of the impairment
loss decreases and the decrease can be related objectively
to an event occurring after the impairment was recognised
(such as an improvement in the customer’s credit rating), the
previously recognised impairment loss is reversed by adjusting
the impairment allowance. The amount of the reversal is
recognised in profit or loss.
A provision is also made in the case of accounts, which
may not currently be in arrears, where losses may have
been incurred but not yet recognised. An increased level of
provision is held for accounts where an impairment trigger
event has occurred which includes accounts benefiting
from forbearance and those in arrears. Refer to the Risk
Management Report for details of the forbearance policy.
> Available-for-sale financial assets
The Group assesses at each balance sheet date whether
there is objective evidence that a financial asset, or group
of financial assets are impaired. The amount of the loss is
measured as the difference between the asset’s acquisition
cost less principal repayments and amortisation and the
current fair value. The amount of the impairment loss is
recognised in profit or loss. This includes cumulative gains and
losses previously recognised in other comprehensive income
which are recycled from other comprehensive income to the
income statement.
If, in a subsequent period, the fair value of a debt instrument
classified as available-for-sale increases and the increase
can be objectively related to an event occurring after
the impairment loss was recognised in profit or loss, the
impairment loss is reversed through profit or loss. Impairment
losses recognised in profit or loss on equity instruments are
not reversed through profit and loss.
(h) Taxation
Taxation comprises current tax and deferred tax. Current tax
and deferred tax are recognised in profit or loss except to the
extent that they relate to items recognised directly in equity
or other comprehensive income. Current tax is based on the
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 213
Note 1: Basis of preparation and accounting policies (continued)
taxable income or loss for the year, using tax rates enacted
or substantively enacted at the reporting date, and any
adjustment to tax payable in respect of previous years. The
Group has adopted the Code of Practice on Taxation for Banks
issued by HM Revenue and Customs.
> held to maturity; or
> available-for-sale;
> financial assets at fair value through profit or loss.
Deferred tax is recognised in respect of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for
taxation purposes. Deferred tax is measured at the tax rates
that are expected to be applied to temporary differences when
they reverse, based on the laws that have been enacted or
substantively enacted by the reporting date.
Deferred tax assets are recognised for unused tax losses, tax
credits and deductible temporary differences, to the extent
that it is probable that future taxable profits will be available
against which they can be utilised. Deferred tax assets are
reviewed at each reporting date and are reduced to the extent
that it is no longer probable that the related tax benefit
will be realised.
(i) Earnings per share
Basic earnings per share is calculated by dividing the profit
attributable to ordinary shareholders of the parent company
by the weighted-average number of ordinary shares
outstanding during the period excluding own shares held in
employee benefit trusts or held for trading.
The diluted earnings per share is calculated by adjusting the
profit or loss that is attributable to ordinary shareholders and
the weighted-average number of ordinary shares outstanding
for the effects of all dilutive potential ordinary shares, which
comprise share options granted to employees.
For the calculation of diluted earnings per share the weighted-
average number of ordinary shares in issue is adjusted to
assume conversion of all dilutive potential ordinary shares, if
any, that arise in respect of share options and rewards granted
to employees. The number of shares that could have been
acquired at the average annual share price of the Company’s
shares based on the monetary value of the subscription
rights attached to outstanding share options and awards
is determined. This is deducted from the number of shares
issuable under such options and awards to leave a residual
bonus amount of shares which are added to the weighted-
average number of ordinary shares in issue, but no adjustment
is made to the profit attributable to equity shareholders.
(j) Financial instruments
> Financial assets
Management determines the classification of its financial
instruments at initial recognition.
Financial assets can be classified in the following categories:
> loans and receivables;
Purchases and sales of financial assets at fair value through
profit or loss, held to maturity and available-for-sale are
recognised on the trade date, the date on which the Group
commits to purchase or sell the asset.
> Loans and receivables at amortised cost
The Group’s loans and advances to banks and customers and
asset backed securities for which there is no active market
are classified as loans and receivables. Loans and receivables
are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market, whose
recoverability is based solely on the credit risk of the customer
and where the Group has no intention of trading the loan
or receivable. Loans and receivables are initially recognised
at fair value including direct and incremental transaction
costs. Subsequent recognition is at amortised cost using
the effective interest rate method, less any provision
for impairment.
> Available-for-sale financial assets
Available-for-sale financial assets are non-derivative assets
that are either designated as available-for-sale or are assets
that do not meet the definition of loans and receivables
and are not derivatives or assets held at fair value through
profit or loss. These are principally, but not exclusively,
investment securities intended to be held for an indefinite
period of time which may be sold in response to a need for
liquidity or changes in interest rates, exchange rates or equity
prices. They are initially measured at fair value including
direct and incremental transaction costs. Fair values are
obtained from quoted market prices in active markets and,
where these are not available, from valuation techniques
including discounted cash flow models (refer to policy (m)).
With the exception of certain unquoted equity instruments
measured at cost less impairment because their fair value
cannot be measured reliably, subsequent measurement is
at fair value, with changes in fair value being recognised
in other comprehensive income except for impairment
losses and translation differences, which are recognised
in profit or loss. Upon derecognition of the asset, or where
there is objective evidence that the investment security
is impaired, the cumulative gains and losses recognised
in other comprehensive income are removed from other
comprehensive income and recycled to profit or loss.
> Held to maturity financial assets
Held to maturity financial assets are non-derivative financial
assets with fixed or determinable payments that the Group
has the ability and intention to hold to maturity. They
are initially measured at fair value including direct and
Notes to the consolidated financial statements 214 I Virgin Money Group Annual Report 2016
Note 1: Basis of preparation and accounting policies (continued)
incremental transaction costs. Subsequent measurement is
at amortised cost using the effective interest rate method.
No financial assets were classified as held to maturity during
either the current or prior year.
and repurchase price is treated as interest and accrued over
the life of the agreements using the effective interest rate
method. Securities lent to counterparties are also retained in
the financial statements.
> Financial assets at fair value through profit or loss
> Derecognition of financial assets and liabilities
This category consists of derivative financial assets. Assets
in this category are carried at fair value. The fair values of
derivative instruments are calculated by discounted cash
flow models using yield curves that are based on observable
market data or are based on valuations obtained from
counterparties. Gains and losses arising from the changes
in the fair values are recognised in the income statement or
other comprehensive income (refer policy (n)).
The fair values of quoted investments in active markets are
based on current bid prices. If the market for a financial asset
is not active (and for unlisted securities), the Group establishes
fair value using valuation techniques. These include the
use of recent arm’s length transactions, discounted cash
flow analysis, option pricing models and other valuation
techniques commonly used by market participants.
> Financial liabilities
The Group measures all of its financial liabilities at amortised
cost, other than derivatives and those instruments which have
been designated as part of a hedging relationship (refer policy
(n)). Borrowings, including deposits and debt securities in issue
are recognised initially at fair value, being the issue proceeds
net of premiums, discounts and transaction costs incurred.
All borrowings are subsequently measured at amortised cost
using the effective interest rate method. Amortised cost is
adjusted for the amortisation of any premiums, discounts and
transaction costs. The amortisation is recognised in interest
expense and similar charges using the effective interest rate
method. The Group does not hold any financial liabilities
classified as held for trading.
> Offsetting financial instruments
Financial assets and liabilities are offset and the net amount
reported in the balance sheet when there is a legally
enforceable right to offset the recognised amounts and there
is an intention to settle on a net basis, or realise the asset and
settle the liability simultaneously.
> Sale and repurchase agreements
Securities sold subject to repurchase agreements (repos) are
reclassified in the financial statements as assets pledged
when the transferee has the right by contract or custom to
sell or repledge the collateral. The counterparty liability is
included in deposits from banks or customer deposits, as
appropriate. Securities purchased under agreements to resell
(reverse repos) are recorded as loans and advances to banks
or customers as appropriate. The difference between sale
Derecognition is the point at which the Group removes an
asset or liability from its balance sheet. The Group’s policy is to
derecognise financial assets only when the contractual right
to the cash flows from the financial asset expires or when the
Group transfers the financial assets to another party provided
the transfer of the asset also transfers the right to receive
the cash flows of the financial asset or where the Group has
transferred substantially all the risks and rewards of ownership.
Where the transfer does not result in the Group transferring
the right to receive the cash flows of the financial assets, but it
does result in the Group assuming a corresponding obligation
to pay the cash flows to another recipient, the financial assets
are also accordingly derecognised. The Group derecognises
financial liabilities only when the obligation specified in the
contract is discharged, converted to shares, cancelled or
has expired or is transferred to a third party. There were no
transactions in the year where the Group transferred financial
assets that should have been derecognised in their entirety.
(k) Loans and advances to banks
The Group’s loans and advances to banks are classified as
loans and receivables.
(l) Loans and advances to customers
The Group’s loans and advances to customers are classified as
loans and receivables.
(m) Available-for-sale financial assets
The Group’s debt securities and equity instruments are
classified as available-for-sale assets. Debt securities are
principally available-for-sale as they are intended to be held
for an indefinite period of time but may be sold in response to a
need for liquidity, changes in interest rates or exchange rates.
Equity instruments are classified as available-for-sale because
they do not meet the definition of loans and receivables, have
no defined maturity dates and are not derivatives or assets
held at fair value through profit or loss.
(n) Derivative financial instruments and hedge
accounting
The Group is authorised to undertake the following types of
derivative financial instrument transactions for non-trading
purposes: cross currency swaps, interest rate swaps, equity
swaps, interest rate caps, forward rate agreements, options,
foreign exchange contracts and similar instruments.
The Group’s derivative activities are entered into for the
purpose of matching or eliminating risk from potential
movements in interest rates, foreign exchange rates and
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 215
The most frequently used fair value hedges are:
> hedging the interest rate risk of a portfolio of prepayable
fixed rate assets with interest rate derivatives. This solution
is used to establish a macro fair value hedge for derivatives
hedging fixed rate mortgages;
Note 1: Basis of preparation and accounting policies (continued)
equity exposures inherent in the Group’s assets, liabilities and
positions. All derivative transactions are for economic hedging
purposes and it is decided at the outset which position the
derivative will be hedging. Derivatives are reviewed regularly
for their effectiveness as hedges and corrective action taken,
if appropriate. Derivatives are measured initially at fair value
and subsequently remeasured to fair value. Fair values are
obtained from quoted market prices in active markets and,
where these are not available, from valuation techniques
including discounted cash flow models and option pricing
models. Where derivatives are not designated as part of
an accounting hedge relationship, changes in fair value
are recorded in the income statement. Where derivatives
are designated within accounting hedge relationships, the
treatment of the changes in fair value depends on the nature
of the hedging relationship as explained below.
> hedging the interest rate risk of a portfolio of non-
prepayable fixed rate assets with interest rate derivatives.
This solution is used to establish a macro fair value hedge
for fixed rate investments; and
> hedging the interest rate and foreign currency exchange
> hedging the interest rate risk of a portfolio of fixed rate
liabilities with interest rate derivatives. This solution is
used to establish a macro fair value hedge for derivatives
hedging fixed rate savings;
Hedge accounting is used for derivatives designated in this
way provided certain criteria are met. The Group documents
at the inception of the accounting hedge relationship the link
between the hedging instrument and the hedged item as well
as its risk management objective and strategy for undertaking
various hedge transactions. The Group also documents its
assessment both at hedge inception and on an ongoing basis
of whether the derivatives used in hedging transactions are
highly effective in offsetting changes in the fair values or
cash flows of hedged items. The Group designates certain
derivatives as either:
> Cash flow hedges
A cash flow hedge is used to hedge exposures to variability in
cash flows, such as variable rate financial assets and liabilities.
The effective portion of changes in the derivative fair value is
recognised in other comprehensive income, and recycled to
the income statement in the periods when the hedged item
will affect profit and loss. Interest rate derivatives designated
as cash flow hedges primarily hedge the exposure to cash flow
vulnerability from forecast loans and advances to customers.
The fair value gain or loss relating to the ineffective portion is
recognised immediately in profit or loss.
> Fair value hedges
A fair value hedge is used to hedge exposures to variability
in the fair value of financial assets and liabilities, such as
fixed rate loans. Changes in fair value of derivatives that are
designated and qualify as fair value hedges are recorded in
the income statement, together with any changes in the fair
value of the hedged asset or liability that are attributable to
the hedged risk. If the hedge no longer meets the criteria for
hedge accounting, the adjustment to the carrying amount of
the hedged item is amortised to the income statement over
the period to maturity.
risk of non-prepayable, foreign currency denominated fixed
rate assets or liabilities on a one-for-one basis with fixed/
floating or floating/fixed cross currency interest rate swaps.
(o) Securitisation transactions
Certain Group companies have issued debt securities in
order to finance specific loans and advances to customers.
Both the debt securities in issue and the loans and advances
to customers remain on the Group balance sheet within the
appropriate balance sheet headings unless:
> a fully proportional share of all or of specifically identified
cash flows have been transferred to the holders of the
debt securities, in which case that proportion of the assets
are derecognised;
> substantially all the risks and rewards associated with the
assets have been transferred, in which case the assets are
fully derecognised; and
> a significant proportion of the risks and rewards have been
transferred, in which case the assets are recognised only to
the extent of the Group’s continuing involvement.
The Group has also entered into self-issuance of securitised
debt which may be used as collateral for repurchase or
similar transactions. Investments in self-issued debt and
the equivalent deemed loan, together with the related
income, expense and cash flows, are not recognised in the
financial statements.
> Debt securities in issue
Issued securities are classified as financial liabilities where
the contractual arrangements result in the Group having an
obligation to deliver either cash or another financial asset
to the security holder, or to exchange financial instruments
under conditions that are potentially unfavourable to the
Group. Issued securities are classified as equity where they
meet the definition of equity and confer a residual interest in
the Group’s assets on the holder of the securities.
Notes to the consolidated financial statements 216 I Virgin Money Group Annual Report 2016
Note 1: Basis of preparation and accounting policies (continued)
Financial liabilities are carried at amortised cost using the
effective interest rate method. Equity instruments are initially
recognised at net proceeds, after deducting transaction costs
and any related income tax. Appropriations to holders of
equity securities are deducted from equity, net of any related
income tax, as they become irrevocably due to the holders of
the securities.
economic benefits; and
> the development cost of the asset can be measured reliably.
Following the initial recognition of development expenditure,
the cost is amortised over the estimated useful lives of the
assets created. Amortisation commences on the date that the
asset is brought into use.
> it is probable that the asset created will generate future
Securitisation is a means used by the Group to fund an
element of its mortgage portfolio. These securitised advances
are subject to non-recourse finance arrangements. These
advances have been transferred at their principal value
to Special Purpose Vehicles (SPV) and have been funded
through the issue of amortising mortgage backed securities
to investors.
As discussed in note 1.5, the Group controls the securitisation
SPVs and therefore consolidates the assets and liabilities of
the securitisation SPVs, on a line by line basis.
(p) Funding for Lending Scheme
The Group participates in the Funding for Lending Scheme
(FLS). The scheme allows the Group to receive Treasury bills in
return for eligible collateral, including approved portfolios of
loans and advances to customers.
Receipt of Treasury bills under the FLS does not involve the
substantial transfer of the risks and rewards on the collateral,
or the right to receive its related cash flows, hence the
derecognition criteria outlined in policy (j) are not satisfied.
Therefore the collateral assets will continue to be recognised
in the financial statements and the Treasury bills are not
separately recognised.
In the event that Treasury bills are utilised for repo
transactions, the related collateral assets are categorised as
pledged assets and the associated liability to the counterparty
is recognised in the financial statements.
(q) Intangible assets and amortisation
Intangible assets purchased separately from a business
combination are capitalised at their cost and amortised
from the date from which they become available for use
over their useful economic life which is generally 3 to 10
years. Intangible assets acquired as part of an acquisition
are capitalised at their fair value where this can be measured
reliably in accordance with IFRS 13 ‘Fair Value Measurement’.
Expenditure incurred in relation to scoping, planning and
researching the build of an asset as part of a project is
expensed as incurred.
Development expenditure incurred on a project is capitalised
only if the following criteria are met:
> an asset is created that can be identified;
Internally generated intangible assets relate to computer
software and core banking platforms.
> Computer software
Costs incurred in acquiring and developing computer software
for internal use are capitalised as intangible assets where
the software leads to the creation of an identifiable non-
monetary asset and it is probable that the expected future
economic benefits that are attributable to the asset will flow
to the Group from its use for a period of over one year. The
software is classified as an intangible asset where it is not an
integral part of the related hardware and amortised over its
estimated useful life on a straight line basis which is generally
3 to 10 years.
Costs associated with maintaining software are expensed as
they are incurred.
> Core banking platforms
Core banking platforms primarily represent the construction
of core operating platforms, which are internally generated.
Core banking platforms are amortised on a straight line basis
over 3 to 10 years.
> Impairment of intangible assets
Intangible assets are assessed for indications of impairment
at each balance sheet date, or more frequently where
required by events or changes in circumstances. If indications
of impairment are found, these assets are subject to an
impairment review. The impairment review compares the
carrying value of the assets with their recoverable amounts,
which are defined as the higher of the fair value less costs
to sell and their value in use. Fair value less costs to sell is
the amount at which the asset could be sold in a binding
agreement in an arm’s length transaction. Value in use is
calculated as the discounted cash flows generated as a result
of the asset’s continued use including those generated by its
ultimate disposal, discounted at a market rate of interest on a
pre-tax basis.
Where impairments are indicated, the carrying values of
intangible assets are written down by the amount of the
impairment and the charge is recognised in the income
statement in the period in which it occurs. A previously
recognised impairment charge on an asset may be reversed in
full or in part through the income statement where a change
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 217
Note 1: Basis of preparation and accounting policies (continued)
in circumstances leads to a change in the estimates used to
determine its recoverable amount. The carrying value will only
be increased to the value at which it would have been held had
the impairment not been recognised.
on an asset may be reversed in full or in part through the income
statement where a change in circumstances leads to a change
in the estimates used to determine its recoverable amount. The
carrying value will only be increased to the value at which it
would have been held had the impairment not been recognised.
(r) Tangible fixed assets and depreciation
Tangible fixed assets are stated at cost less accumulated
depreciation and provision for impairment, as appropriate.
Cost includes the original purchase price of the asset and
the costs attributable to bringing the asset to its working
condition for its intended use. Additions and subsequent
expenditure are included in the asset’s carrying value or are
recognised as a separate asset only when they improve the
expected future economic benefits to be derived from the
asset. All other repairs and maintenance are charged to the
income statement in the period in which they are incurred.
Depreciation is provided using the straight line method to
allocate costs less residual values over estimated useful
lives, as follows:
Freehold property
Leasehold property
50-100 years
Unexpired
period of the lease
Plant and leasehold improvements
5-30 years
Computer equipment
Office equipment
Motor vehicles
3-5 years
3-10 years
4 years
The residual values and useful lives of assets are reviewed, and
adjusted if appropriate, at each balance sheet date. Where
the cost of freehold land can be identified separately from
buildings, the land is not depreciated.
> Impairment of tangible fixed assets
Tangible fixed assets are assessed for indications of
impairment at each balance sheet date, or more frequently
where required by events or changes in circumstances. If
indications of impairment are found, these assets are subject
to an impairment review. The impairment review compares
the carrying value of the assets with their recoverable amount,
which are defined as the higher of the fair value less costs
to sell and their value in use. Fair value less costs to sell is
the amount at which the asset could be sold in a binding
agreement in an arm’s length transaction. Value in use is
calculated as the discounted cash flows generated as a result
of the asset’s continued use including those generated by its
ultimate disposal, discounted at a market rate of interest on a
pre-tax basis.
Where impairments are indicated, the carrying values of fixed
assets are written down by the amount of the impairment and
the charge is recognised in the income statement in the period
in which it occurs. A previously recognised impairment charge
(s) Other assets
Other assets include prepayments and other amounts the
Group is due to receive from third parties in the normal
course of business.
(t) Deposits from banks
Deposits by banks are initially measured at fair value, which is
normally the proceeds received net of any directly attributable
transaction costs incurred. Subsequent measurement is at
amortised cost, using the effective interest rate method.
(u) Customer deposits
Customer deposits are initially measured at fair value, which is
normally the proceeds received. Subsequent measurement is
at amortised cost, using the effective interest rate method.
(v) Provisions
Provisions are recognised for present obligations arising from
past events where it is more likely than not that an outflow of
resources will be required to settle the obligations and they
can be estimated reliably.
Provisions for levies are recognised when the conditions that
trigger the payment of the levy are met.
(w) Other liabilities
Deferred income represents amounts received in advance
of the Group providing services, and will be recognised as
income in profit or loss when the services have been provided.
Other creditors represent amounts the Group is due to pay to
third parties in the normal course of business. These include
expense accruals, which have been incurred, but not yet billed.
Accrued expenses are amounts that the Group is due to pay to
third parties in the normal course of business.
(x) Share capital and share premium
> Share capital
The financial instruments issued by the Company are treated
as equity (i.e. forming part of shareholders’ funds) only to the
extent that they meet the following two conditions:
> they include no contractual obligations upon the Company
to deliver cash or other financial assets or to exchange
financial assets or financial liabilities with another party
under conditions that are potentially unfavourable to
the Group; and
Notes to the consolidated financial statements 218 I Virgin Money Group Annual Report 2016
Note 1: Basis of preparation and accounting policies (continued)
> where the instrument will or may be settled in the
(aa) Contingent liabilities
Company’s own equity instruments, it is either a non-
derivative that includes no obligation to deliver a variable
number of the Company’s own equity instruments or is a
derivative that will be settled by the Company exchanging
a fixed amount of cash or other financial assets for a fixed
number of its own equity instruments.
To the extent that this definition is not met, the proceeds of
issue are classified as a financial liability.
> Share issue costs
Incremental costs directly attributable to the issue of new
shares or options are shown in equity as a deduction, net of
tax, from the proceeds.
> Dividends and appropriations
Dividends are recognised in equity in the period in which they
are approved by the Company’s shareholders or paid.
> Share premium
Share premium substantially represents the aggregate of
all amounts that have ever been paid above par value to the
Company when it has issued Ordinary and Deferred Shares.
Certain expenses in relation to the issue of share capital
can be offset against the share premium account. These
expenses must be the incremental expenses arising on issue
of the shares.
(y) Other equity instruments
Issued financial instruments are recognised as equity where
there is no contractual obligation to deliver either cash or
another financial asset. The proceeds are included in equity,
net of transaction costs. Distributions and other returns to
equity holders are treated as a deduction from equity.
(z) Other reserves
> Revaluation reserve in respect of available-for-sale
financial assets
The revaluation reserve in respect of available-for-sale
financial assets represents the unrealised change in
the fair value of available-for-sale investments since
initial recognition.
> Cash flow hedge reserve
For derivatives designated in a cash flow hedge, the effective
portion of changes in fair value is recognised in the cash flow
hedge reserve and recycled to profit or loss in the periods
when the hedged item will affect profit or loss.
Contingent liabilities are possible obligations whose existence
depends upon the outcome of uncertain future events or
are present obligations where the outflows of resources
are uncertain or cannot be reliably measured. Contingent
liabilities are not recognised in the financial statements but
are disclosed unless they are remote.
(ab) Fair value of financial assets and liabilities
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date in the
principal, or in its absence, the most advantageous market
to which the Group has access at that date. The fair value
of a liability reflects its non-performance risk (the risk the
Group will not fulfil an obligation), including the Group’s
own credit risk.
For the majority of instruments, fair value is determined with
reference to quoted prices in an active market. A market is
regarded as active if transactions for the asset or liability take
place with sufficient frequency and volume to provide pricing
information on an ongoing basis.
Where quoted prices are not available, fair value is based upon
cash flow models, which use wherever possible independently
sourced observable market parameters such as interest rate
yield curves, currency rates and option volatilities. The chosen
valuation technique incorporates all the factors that market
participants would take into account in pricing a transaction
and is discounted at a risk free rate.
Refer to note 33 for a description of different levels within the
fair value hierarchy. Levels are reviewed at each balance sheet
date and this determines where transfers between levels
are required.
The best evidence of the fair value of a financial instrument
at initial recognition is normally the transaction price – i.e.
the fair value of consideration given or received. The Group
does not apply a credit valuation adjustment (CVA) or
debit valuation adjustment (DVA) to reflect the credit risk
of its derivative exposures as the Group’s portfolio is fully
collateralised.
If an asset or a liability measured at fair value has a bid
price and an ask price, the Group measures assets and long
positions at bid price and liabilities and short positions
at an ask price.
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 219
Note 1: Basis of preparation and accounting policies (continued)
1.10 Critical estimates and judgements
profiles and post-promotional retention rates based on
previous customer experience.
The preparation of financial statements in conformity with
IFRS requires management to make judgements, estimates
and assumptions that affect the application of accounting
policies and the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts
of income and expenses during the reporting period. Although
these estimates are based on management’s best knowledge
of the amount, actual results ultimately may differ from
those estimates.
The areas involving a higher degree of judgement or
complexity, or where assumptions and estimates are
significant to the 2016 financial statements were as follows:
(a) Effective interest rates
IAS 39 requires interest earned from mortgages and credit
cards to be measured under the effective interest rate
method. The effective interest rate is the rate that exactly
discounts estimated future cash flows through the expected
life of the financial instrument to the net carrying value
amount of the financial instrument. The accuracy of the
effective interest rate can be affected when actual cash flows
vary from the initial estimation of future cash flows. In that
circumstance the carrying value of the financial instrument is
adjusted to reflect the revisions to estimated cash flows with
the adjustment made to profit and loss.
For secured lending management model future expected cash
flows for each tranche of lending (by year of lending, product
and LTV banding). In determining the future cash flows
management must use judgement to estimate the average life
of each tranche of lending. Management estimate expected
repayment and redemption profiles of mortgage customers
based on previous customer behaviour, this incorporates
estimates of the proportion of borrowers expected to incur
early redemption charges.
Management consider the estimated life to be the most
significant estimate in the secured effective interest rate
calculation. The accuracy of the estimated life would
be affected by altered customer behaviour arising from
unexpected market movements. For secured loans to the
extent that the estimated life differs by +/- one month, the
value of such loans on the balance sheet would be £4.5 million
(2015: £3.6 million) higher or £4.6 million (2015: £3.7 million)
lower respectively.
For unsecured lending management model future expected
cash flows for each tranche of lending (by year of lending and
product) over the customer life, up to a maximum of seven
years from origination. In determining the future cash flows
management must use judgement to estimate the life of the
card relationship. Management estimate customer behaviour
including card balance, transaction activity, repayment
Management consider the estimated life to be the most
significant measure of performance in assessing the
unsecured effective interest calculation. The accuracy
of the effective interest rate would be affected by altered
customer behaviour giving rise to actual cash flows that differ
to expected cash flows. For unsecured loans to the extent
that that estimated life differs by +/- one month, the value
of such loans on the balance sheet would be £2.1 million
(2015: £1.1 million) higher or £2.1 million (2015: £1.1 million)
lower respectively.
(b) Impairment of loans and receivables
Individual impairment losses on secured loans and advances
are calculated based on an individual valuation of the
underlying asset. Collective impairment losses on loans and
advances are calculated using a statistical model.
The key assumptions within the impairment models are
monitored regularly to ensure the impairment allowance
is entirely reflective of current portfolio experience. Key
assumptions used within the models are based on various
behavioural and arrears status segments, which vary by
exposure type:
> The secured impairment model is based on measuring
the probability of default; the probability of this default
resulting in possession; and the subsequent loss incurred in
the event of possession.
> The unsecured impairment model is based on measuring
the probability of default; the probability of this default
resulting in charge-off; and the subsequent loss incurred in
the event of charge-off.
The accuracy of the impairment calculation would therefore
be affected by unanticipated changes to the economic
environment and assumptions which differ from actual
outcomes. For mortgage loan receivables to the extent that:
> the loss given default differs by +/- 10%, for example
if the loss given default is 10% then it is increased to
11%, the impairment allowance would be an estimated
£0.3 million (2015: £0.3 million) higher or £0.3 million (2015:
£0.3 million) lower respectively;
> the level of house prices differs by +/- 10%, for example a
property value of £100,000 is increased to £110,000, the
impairment allowance would be an estimated £1.3 million
(2015: £1.3 million) lower or £2.6 million (2015: £3.0 million)
higher respectively;
> the emergence period of 6 months differs by +/- 3
months, the impairment allowance would be an estimated
£0.3 million (2015: £0.2 million) higher or £0.3 million (2015:
£0.2 million) lower respectively.
Notes to the consolidated financial statements 220 I Virgin Money Group Annual Report 2016
Note 1: Basis of preparation and accounting policies (continued)
For unsecured loans, to the extent that the loss given default
differs by +/- 10%, the impairment allowance would be
an estimated £3.9 million (2015: £2.9 million) higher or
£3.9 million (2015: £2.9 million) lower respectively, and to
the extent the emergence period of 6 months differs by +/-3
months, the impairment allowance would be an estimated
£5.9 million (2015: £3.8 million) higher or £5.9 million (2015:
£3.8 million) lower respectively.
Taxation involves estimation techniques to assess the
liability in terms of possible outcomes. The assessment of the
recoverability or otherwise of deferred tax assets is based
mainly on a determination of whether the relevant entity
will generate sufficient profits within 5 years to realise the
deferred tax assets.
(d) Deferred tax
(c) Capitalisation and impairment of intangibles
Intangibles are initially recognised when they are separable
or arise from contractual or other legal rights, the cost can
be measured reliably and, in the case of intangible assets
not acquired in a business combination, where it is probable
that future economic benefits attributable to the assets will
flow from their use. Management review and monitor the
capitalisation of significant project development costs on a
regular basis to ensure that they meet the recognition criteria
for capitalisation of an intangible asset and to ensure the
costs are directly attributable to the individual projects where
an asset is under construction. A review of capitalisation of
intangibles has been undertaken to ensure these conditions
have been met.
A review of intangible assets which are not yet in use for
indications of impairment is undertaken at each reporting
date. If there are indicators of impairment, an estimate of
the recoverable amount is made. The recoverable amount of
the asset is the higher of its fair value less costs to sell and
its value in use. Value in use is calculated by discounting the
future cash flows (both costs to complete and benefits post
completion) generated from the continuing use of the asset.
If the carrying value of the asset is less than the greater of the
value in use and the fair value less costs to sell, an impairment
charge is recognised.
Through their assessment of intangible assets and review for
impairment indicators Management have not identified any
assets that have an impairment, therefore a £nil impairment
charge has been recognised (2015: £nil).
This is reviewed at each reporting date by the Directors with a
detailed exercise conducted to establish the validity of profit
forecasts and other relevant information including timescales
over which the profits are expected to arise and the deferred
tax assets will reverse. Deferred tax is determined using tax
rates that have been enacted or substantially enacted by the
balance sheet date and which are expected to apply when the
related deferred tax assets are realised or the deferred tax
liabilities are settled.
The judgement required in the assessment of whether to
recognise deferred tax assets is set out in policy (h). Based on
their assessment of future profitability and interpretation of
the timing and level of reversal of existing taxable temporary
differences, in line with relevant accounting standards,
the Directors conclude that a net deferred tax asset of
£23.0 million (2015: £38.0 million) should be recognised at the
balance sheet date.
(e) Fair value of financial assets and liabilities
Management must use judgement and estimates calculating
fair value where not all necessary inputs are observable or
where factors specific to the Group’s holdings need to be
considered. The accuracy of the fair value calculations would
therefore be affected by unexpected market movements,
inaccuracies within the models used compared to actual
outcomes and incorrect assumptions. For example, to the
extent the interest yield curve differs by +/- 10 bps, the net
impact on fair values of derivative financial instruments would
be an estimated increase of £33.1 million (2015: £23.5 million)
or decrease of £33.3 million (2015: £23.7 million) respectively.
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 221
Note 2: Segmental analysis
For Management reporting purposes, the Group is organised
into the following business segments:
> Mortgages and savings;
> Credit cards;
> Financial services; and
> Central functions.
These business groupings reflect how the Group Executive
Committee, in its capacity as the chief operating decision
maker for the Group, assesses performance and makes
decisions regarding the allocation of resources to the
business on the basis of product and customers. Internal and
external sources of revenue are allocated to the appropriate
business segment.
Mortgages and savings
Mortgage products include residential and buy-to-let
mortgages. Savings products include ISAs, easy access, fixed
term accounts and current accounts.
Following a change in Management reporting of the financial
performance and position of current accounts in 2016, these
are now reported within this business segment. Previously
these were reported within ‘Current accounts, insurance and
investments’ (renamed ‘Financial services’).
Credit cards
Credit card products include balance transfer and
retail credit cards.
Financial services
Financial services include financial products offered
beyond the core banking products and include investments,
international money transfers, travel money, pensions, life
insurance, travel insurance, home insurance, motor insurance
and pet insurance.
Central functions
Central functions provide shared support services to each of
the Group’s business lines and Virgin Money Giving Limited
(VMG). These services include information technology and
property along with central services such as Risk, Finance,
Human Resources and Management. It is not the policy of the
Group to allocate the cost of these shared services to each
business line. All depreciation and amortisation is allocated to
the central functions business line.
The Group does not manage Treasury as a profit centre, and
so the interest expense incurred from its Group funding and
liquidity operations has been allocated to the other business
lines. Treasury is not engaged in trading activities. Central
functions segment assets and liabilities includes fixed assets
and treasury assets and liabilities.
Due to the nature of the Group’s operations there are no
inter-segmental transactions
Notes to the consolidated financial statements
222 I Virgin Money Group Annual Report 2016
Note 2: Segmental analysis (continued)
Mortgages
and savings1
£m
Credit cards
£m
Financial
services
£m
Central
functions
£m
Underlying
basis total
£m
Year ended 31 December 2016
Net interest income
Other income
Total underlying income
Total costs
Impairment
Underlying profit/(loss) before tax
Segment assets
Segment liabilities
Year ended 31 December 2015
Net interest income
Other income
Total underlying income
Total costs
Impairment
Underlying profit/(loss) before tax
Segment assets
Segment liabilities
383.0
2.0
385.0
(97.4)
(2.8)
284.8
136.0
17.7
153.7
(37.8)
(34.8)
81.1
29,743.9
28,214.9
2,453.0
3.9
–
37.5
37.5
–
10.7
10.7
(15.6)
(185.2)
–
(174.5)
–
21.9
3.2
2.6
2,855.5
5,163.7
35,055.6
33,385.1
519.0
67.9
586.9
(336.0)
(37.6)
213.3
Mortgages
and savings
£m
Credit cards
£m
Financial
services
£m
Central
functions
£m
Underlying
basis total
£m
358.5
2.5
361.0
(92.7)
(3.0)
265.3
97.6
18.0
115.6
(37.1)
(27.3)
51.2
–
36.6
36.6
(16.7)
–
19.9
–
10.3
10.3
(186.0)
–
(175.7)
456.1
67.4
523.5
(332.5)
(30.3)
160.7
25,457.5
25,286.2
1,585.2
4.0
2.6
4.5²
3,183.7
3,594.0
30,229.0
28,888.7
1 Current accounts are now included in the Mortgages and savings segment.
2 Current account balances of £230.3 million are now shown in the Mortgages and savings segment.
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 223
Note 2: Segmental analysis (continued)
Reconciliation of statutory results to underlying basis
The underlying basis is the basis on which financial information is presented to the chief operating decision maker which
excludes certain items included in the statutory results, of which further information is provided on pages 54 and 55. The table
below reconciles the statutory results to the underlying basis.
Adjusted for
Statutory
results
£m
IPO
Share based
awards
£m
Strategic
items
£m
Simplification
costs
£m
Fair value
losses on
financial
instruments
£m
Underlying
basis
£m
Year ended 31 December 2016
Net interest income
Other income
Total income
Total operating expenses
Profit before tax from operating activities
Impairment
Profit before tax
522.4
59.0
581.4
(349.4)
232.0
(37.6)
194.4
–
–
–
2.0
2.0
–
2.0
–
–
–
5.6
5.6
–
5.6
(3.4)
–
(3.4)
5.8
2.4
–
2.4
Adjusted for
–
8.9
8.9
–
8.9
–
8.9
519.0
67.9
586.9
(336.0)
250.9
(37.6)
213.3
Statutory
results
£m
IPO
Share based
awards
£m
Strategic
items
£m
Simplification
costs
£m
Fair value
losses on
financial
instruments
£m
Underlying
basis
£m
454.8
67.1
521.9
(353.6)
168.3
(30.3)
138.0
–
–
–
10.5
10.5
–
10.5
1.3
(0.1)
1.2
6.9
8.1
–
8.1
–
–
–
3.7
3.7
–
3.7
–
0.4
0.4
–
0.4
–
0.4
456.1
67.4
523.5
(332.5)
191.0
(30.3)
160.7
Year ended 31 December 2015
Net interest income
Other income
Total income
Total operating expenses
Profit before tax from operating activities
Impairment
Profit before tax
Geographical areas
The Group’s operating activities are exclusively in the UK.
Notes to the consolidated financial statements 224 I Virgin Money Group Annual Report 2016
Note 3: Net interest income
Interest and similar income:
Loans and advances to customers
Loans and advances to banks
Interest receivable on loans and receivables
Available-for-sale financial assets
Cash and balances at central banks
Total interest and similar income
Interest and similar expense:
Deposits from banks
Customer deposits
Debt securities in issue
Other
Total interest and similar expense
Net interest income
Interest accrued on individually impaired assets was £5.8 million (2015: £6.8 million).
Note 4: Net fee and commission income
Fee and commission income:
On loans and advances to customers
Other fee and commission income
Total fee and commission income
Fee and commission expense:
Other fee and commission expense
Net fee and commission income
2016
£m
933.1
2.3
935.4
8.9
3.8
948.1
(7.6)
(370.7)
(40.6)
(6.8)
(425.7)
522.4
2016
£m
19.5
9.3
28.8
(1.2)
27.6
2015
£m
822.4
2.4
824.8
10.5
4.0
839.3
(6.8)
(342.7)
(29.0)
(6.0)
(384.5)
454.8
2015
£m
21.0
6.4
27.4
(1.2)
26.2
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 225
2016
£m
31.7
6.8
1.8
40.3
2016
£m
156.8
14.6
10.7
12.8
194.9
4.6
14.3
18.9
21.0
7.8
13.7
72.1
2015
£m
31.5
8.8
1.0
41.3
2015
£m
138.9
16.2
10.6
20.0
185.7
4.6
14.0
18.6
22.3
12.5
10.7
84.2
114.6
129.7
5.6
15.4
21.0
349.4
8.4
11.2
19.6
353.6
Note 5: Other operating income
Investment and protection income
Gains on sale of available-for-sale financial assets (refer note 16)
Other
Total other operating income
Note 6: Operating expenses
Staff costs:
Wages and salaries
Social security costs
Other pension costs
Employee share option schemes
Premises and equipment:
Hire of equipment
Rent and rates
Other expenses:
Marketing costs
FSCS levy
Professional fees
Other
Depreciation and amortisation:
Depreciation of tangible fixed assets
Amortisation of intangible assets
Total operating expenses
Notes to the consolidated financial statements 226 I Virgin Money Group Annual Report 2016
Note 6: Operating expenses (continued)
Average headcount
Retirement benefit obligations
The monthly average number of persons (including Directors)
employed by the Group during the year was as follows:
Full time
Part time
Total
2016
2,394
746
3,140
2015
2,359
699
3,058
The Group operates defined contribution pension schemes
for its Directors and employees. The assets of the schemes
are held separately from those of the Group in independently
administered funds.
The Group made contributions of £10.7 million (2015:
£10.6 million) during the year. There were no contributions
overdue at the year end (2015: £nil).
Fees payable to the auditors
During the year the Group obtained the following services from the Group’s auditors as detailed below:
Fees payable for the audit of the current year annual report and accounts
Fees payable for other services:
Audit of the subsidiaries pursuant to legislation
Total audit fees
Audit-related assurance services
Total audit and audit-related fees
Other non-audit fees:
Other assurance services
Total other non-audit fees
Total fees payable to the auditors by the Group
All amounts are shown exclusive of VAT.
2016
£m
2015
£m
0.2
0.7
0.9
0.2
1.1
0.1
0.1
1.2
0.3
0.6
0.9
0.2
1.1
0.2
0.2
1.3
The following types of services are included in the categories listed above:
Audit and audit-related fees
This category includes fees in respect of the audit of the Group’s annual financial statements and other services in connection
with regulatory filings and services for assurance and related services that are reasonably related to the performance of the
audit or review of the financial statements.
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 227
Note 7: Share based payments
All share based payments charges relate to equity settled schemes.
The scheme details are summarised below.
(A)
(B)
(C)
(D)
(E)
(F)
Award plan
Eligible employees Nature of award
Vesting conditions1
Long-term incentive
plan
Selected senior
employees
Conditional share
award
Continuing employment or leavers in certain
circumstances and achievement of performance
conditions
Issue dates2
2015 & 2016
Deferred bonus
share plan
Selected senior
employees
Phantom share
award
Selected senior
employees
Deferred bonus –
conditional share
award
Deferred bonus –
conditional share
award
Continuing employment or leavers in certain
circumstances
2014, 2015 &
2016
Continuing employment or leavers in certain
circumstances
2012 & 2013
IPO incentive
scheme
Selected senior
employees
Conditional share
award
Continuing employment or leavers in certain
circumstances
Recruitment award
Two senior
employees
Conditional share
award
Continuing employment or leavers in certain
circumstances
IPO share award
All employees
excluding the
Group’s Executive
Committee
Conditional share
award
Continuing employment or leavers in certain
circumstances
2013
2013
2014
1 All awards have vesting conditions and therefore some may not vest.
2 Issue dates show the year in which issues have been made under the relevant scheme. There could be further issuances in future years under the scheme.
The terms of the equity settled schemes the Group operated during the year are as follows:
(A) Long-term incentive plan (LTIP)
(B) Deferred bonus share plan
The LTIP introduced in 2014 is aimed at delivering shareholder
value by linking the receipt of shares to performance
measures that are based on delivering the Group’s strategic
objectives over a 3 year period. Awards are made within limits
set by the rules of the plan.
During 2016, selected senior employees of the Group were
granted up to a maximum of 1,572,717 Ordinary Shares
under the LTIP scheme. This number includes awards
granted to senior employees who joined the Company in
2016 in recognition of outstanding awards over shares in
their previous employing company that lapsed on accepting
employment with the Group. Awards granted under the LTIP
have performance and service conditions, with vesting dates
prescribed for each participant.
The weighted-average fair value of awards granted during
2016 was £3.64 based on market prices at the date of grant.
The deferred bonus share plan is an equity settled scheme
that is operated in conjunction with the short-term incentive
plan for Executive Directors and other senior managers
of the Group.
Share awards for the deferred element of 2016 bonuses will be
granted under this scheme in 2017.
During 2016, selected senior employees of the Group were
granted up to a maximum of 1,695,266 Ordinary Shares under
the scheme. This number includes awards granted to senior
employees who joined the Company in 2016 in recognition of
outstanding awards over shares in their previous employing
company that lapsed on accepting employment with the
Group. Awards granted under the scheme have service
conditions, with vesting dates prescribed for each participant.
The weighted-average fair value of awards granted during
2016 was £3.64 based on market prices at the date of grant.
Notes to the consolidated financial statements 228 I Virgin Money Group Annual Report 2016
Note 7: Share based payments (continued)
(C) Phantom share award
(E) Recruitment award
In 2012 a notional (phantom) share award for senior
individuals was established. During 2014 an approved change
to existing awards under this scheme resulted in a change in
accounting treatment from a cash settled to an equity settled
share based payment.
The fair value of the converted award was recalculated and is
being recognised over the remaining vesting period within the
income statement through to 2018. No awards were granted
in 2016 (2015: none) under this scheme.
(D) IPO incentive scheme
The IPO incentive scheme was introduced in December 2013
for selected senior employees. Participants were entitled
to receive shares in the event of a listing. The award was a
pre-determined percentage of the listing value, which was
then converted to a number of Ordinary Shares based on the
listing price.
The final tranche of share awards made under this scheme
vested in December 2016. No awards were granted in 2016
(2015: none) under this scheme.
Under the scheme the participants received shares in 2014,
2015 and 2016. The final tranche of share awards made under
this scheme vested in March 2016. No awards were granted in
2016 (2015: none) under this scheme.
(F) IPO share award
On listing, the Group granted all employees below Executive
level a one-off share award. A small number of senior
employees received an award over Ordinary Shares of either
10% or 20% of salary. All other employees received an award
over Ordinary Shares with a value of £1,000. The majority of
awards vested on the first anniversary of the listing. Certain
awards granted to senior employees were subject to different
vesting schedules, and holding periods, to comply with the
PRA Remuneration Code. No awards were granted in 2016
(2015: none) under this scheme.
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 229
Note 7: Share based payments (continued)
Movement in share options and conditional shares
Ordinary Shares
Former
Chairman’s
interest
in share
options1
Long-term
incentive
plan2
Deferred
bonus share
plan2
Phantom
share
award2
IPO incentive
scheme2
Recruitment
award2
IPO share
award2
625,328
1,399,453
1,157,800
3,061,820
332,334
175,810
139,041
1,572,717
1,695,266
–
–
–
–
(98,349)
(754,417)
(950,550)
(305,676)
(175,810)
(68,885)
(222,483)
–
(66,790)
(26,658)
625,328
2,651,338
2,098,649
2,044,480
–
–
–
–
–
(1,236)
68,920
–
Shares in existence at 1 January
2016
Granted in year
Exercised or vested in year
Forfeited in year
Outstanding 31 December
2016
–
–
–
Of which exercisable
625,328
–
–
–
Ordinary Shares
Former
Chairman’s
interest
in share
options1
Long-term
incentive
plan2
Deferred
bonus share
plan2
Phantom
share
award2
IPO incentive
scheme2
Recruitment
award2
IPO share
award2
Shares in existence at 1 January
2015
Granted in year
Exercised or vested in year
Forfeited in year
Outstanding 31 December
2015
625,328
–
14,918
3,120,900
664,658
327,760
1,773,880
–
–
–
1,727,770
2,032,683
(95,075)
(761,247)
–
–
–
–
–
(332,324)
(151,950)
(1,431,866)
(233,242)
(128,554)
(59,080)
–
–
(202,973)
625,328
1,399,453
1,157,800
3,061,820
332,334
175,810
139,041
Of which exercisable
625,328
–
–
–
–
–
–
1 This scheme was set up for the previous Chairman, Sir David Clementi. All share options granted under the scheme had vested prior to 1 January 2015. No share options have been
exercised during 2016 or 2015. The weighted-average exercise price for options outstanding at 1 January 2016 and 31 December 2016 was £2.15. The options outstanding will expire
10 years from the date of listing if not exercised.
2 Awards have vesting conditions.
Notes to the consolidated financial statements 230 I Virgin Money Group Annual Report 2016
Note 8: Allowance for impairment losses on loans and receivables
2016
On
unsecured
loans
£m
31.2
(32.3)
40.6
39.5
On secured
loans
£m
8.7
(0.8)
2.7
10.6
2015
Total
£m
39.9
(33.1)
43.3
50.1
On secured
loans
£m
On unsecured
loans
£m
7.6
(1.9)
3.0
8.7
23.0
(26.0)
34.2
31.2
Total
£m
30.6
(27.9)
37.2
39.9
At 1 January
Advances written off
Gross charge to the income statement
As at 31 December
Of the total allowance in respect of loans and advances to customers, £49.4 million (2015: £38.8 million) was assessed on a
collective basis.
During the year, sales of credit card receivables which had previously been written-off resulted in net recoveries of £5.7 million
(2015: £6.9 million). The full amount of the proceeds have been recognised as a gain and the net charge to the income statement
is summarised below.
Gross charge to the income statement
Debt sale recoveries
Net charge to the income statement
Note 9: Taxation
(A) Analysis of the tax charge for the year
UK corporation tax
Current tax on profit for the year
Adjustments in respect of prior years
Current tax charge
Deferred tax (refer note 21)
Origination and reversal of temporary differences
Adjustments in respect of prior years
Reduction in UK corporation tax rate
Deferred tax charge to the income statement
Tax charge
2016
£m
43.3
(5.7)
37.6
2016
£m
(40.3)
0.4
(39.9)
(14.0)
(0.2)
(0.2)
(14.4)
(54.3)
2015
£m
37.2
(6.9)
30.3
2015
£m
(13.6)
–
(13.6)
(15.0)
(0.7)
2.5
(13.2)
(26.8)
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 231
Note 9: Taxation (continued)
Analysis of tax charge recognised in Other Comprehensive Income:
Current tax
Available-for-sale financial assets
Cash flow hedge
Deferred tax
Available-for-sale financial assets
Cash flow hedge
Total credit
2016
£m
2015
£m
–
4.9
(1.7)
1.4
4.6
2.1
–
(0.9)
1.6
2.8
(B) Factors affecting the tax charge for the year
A reconciliation of the charge that would result from applying the standard UK corporation tax rate to the profit before tax to the
actual tax charge for the year is given below:
Profit before tax
Tax charge at standard tax rate of 20% (2015: 20.25%)
Factors affecting charge:
Disallowed items
Bank corporation tax surcharge
Non-taxable income
UK corporation tax rate change
Deferred tax charge in respect of share schemes
Adjustments in respect of prior years
Total tax charge
2016
£m
194.4
(38.9)
(1.8)
(12.5)
–
(0.2)
(1.1)
0.2
(54.3)
2015
£m
138.0
(27.9)
(1.5)
–
0.8
2.5
–
(0.7)
(26.8)
During the year the Group resolved an open HMRC enquiry relating to the tax treatment of certain funding transactions dating
back to 2009. A payment of £2.1 million was made to HMRC in final and full settlement. This has resulted in a prior year credit of
£0.2 million in the year to 31 December 2016.
The Finance (No. 2) Act 2015 was substantively enacted on 26 October 2015. This reduced the main rate of corporation tax to
19% with effect from 1 April 2017 and to 18% with effect from 1 April 2020. A further reduction in the main corporation tax rate
to 17% from 1 April 2020 was announced in the 2016 Budget and substantively enacted in the Finance Act 2016.
The corporation tax surcharge for banks was introduced from 1 January 2016. The surcharge imposes an 8% charge on the
banking profits of the Group (less a £25 million allowance against those profits).
Notes to the consolidated financial statements 232 I Virgin Money Group Annual Report 2016
Note 10: Earnings per share
Profit attributable to equity shareholders – basic and diluted
Distributions to Additional Tier 1 security holders (net of tax)
Profit attributable to equity holders for the purposes of basic and diluted EPS
Weighted-average number of ordinary shares in issue – basic
Adjustment for share options and awards
Weighted-average number of ordinary shares in issue – diluted
Basic earnings per share (pence)
Diluted earnings per share (pence)
2016
£m
140.1
(10.1)
130.0
2015
£m
111.2
(10.0)
101.2
2016
Number
of shares
(million)
2015
Number
of shares
(million)
442.8
4.7
447.5
29.4
29.1
441.0
4.7
445.7
22.9
22.7
Basic earnings per share has been calculated after deducting 1.7 million (2015: 1.8 million) ordinary shares representing the
Group’s holdings of own shares in respect of employee share schemes.
Of the total number of employee share options and share awards at 31 December 2016 none were anti-dilutive (2015: nil).
Note 11: Dividends
The 2016 interim dividend of 1.6p per ordinary share, amounting to £7.1 million, was paid in September 2016 and a final dividend
in respect of the year ended 31 December 2015 of 3.1 pence per Ordinary Share amounting to £13.7 million, was paid in May
2016. These dividends were deducted from retained profits in the current year.
The Directors have recommended for approval at the 2017 AGM the payment of a final dividend in respect of the year ended
31 December 2016 of 3.5p per ordinary share, amounting to £15.5 million. If approved, this final dividend will be paid on
10 May 2017 to shareholders on the register at close of business on 6 April 2017. The financial statements for the year ended
31 December 2016 do not reflect this final dividend, which will be accounted for in shareholders’ equity as an appropriation of
retained profits in the year ending 31 December 2017.
An interim dividend for 2015 of 1.4 pence per Ordinary Share amounting to £6.2 million, was paid in October 2015.
Under the trust deed of the Employee Benefit Trust (EBT), a standing waiver is in force in respect of any dividends declared on
shares held by the EBT.
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 233
Note 12: Analysis of financial assets and financial liabilities
by measurement basis
Held at
amortised
cost
£m
Loans and
receivables
£m
Available-
for-sale
securities
£m
Derivatives
not
designated
as hedging
instruments
£m
Derivatives designated
as hedging instruments
Fair value
hedges
£m
Cash flow
hedges
£m
Total
£m
–
–
–
–
–
–
–
–
786.3
–
635.6
32,367.1
0.7
–
68.8
–
–
–
–
–
858.8
–
–
18.5
–
21.0
–
64.7
786.3
104.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
635.6
32,367.1
0.7
858.8
68.8
33,858.5
858.8
18.5
21.0
64.7
34,821.5
2,132.5
28,106.3
–
2,600.0
189.5
33,028.3
–
–
–
–
–
–
–
–
–
–
–
–
234.1
35,055.6
2,132.5
28,106.3
229.7
2,600.0
189.5
–
–
–
–
–
–
–
–
–
22.9
206.8
–
–
–
–
22.9
206.8
–
33,258.0
127.1
33,385.1
1,670.5
35,055.6
As at 31 December 2016
Financial assets
Cash and balances at central banks
Derivative financial instruments
Loans and receivables:
> Loans and advances to banks
> Loans and advances to customers
> Debt securities
Available-for-sale financial assets
Other assets
Total financial assets
Non financial assets
Total assets
Financial liabilities
Deposits from banks
Customer deposits
Derivative financial instruments
Debt securities in issue
Other liabilities
Total financial liabilities
Non financial liabilities
Total liabilities
Equity
Total liabilities and equity
Notes to the consolidated financial statements
234 I Virgin Money Group Annual Report 2016
Note 12: Analysis of financial assets and financial liabilities
by measurement basis (continued)
Held at
amortised
cost
£m
Loans and
receivables
£m
Available-
for-sale
securities
£m
Derivatives
not
designated
as hedging
instruments
£m
Derivatives designated
as hedging instruments
Fair value
hedges
£m
Cash flow
hedges
£m
Total
£m
–
–
–
–
–
–
–
–
888.6
–
614.5
27,109.0
1.1
–
14.6
–
–
–
–
–
1,296.9
–
–
18.3
–
63.5
–
0.5
888.6
82.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
614.5
27,109.0
1.1
1,296.9
14.6
28,627.8
1,296.9
18.3
63.5
0.5
30,007.0
222.0
30,229.0
1,298.7
25,144.9
–
2,039.4
155.1
28,638.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,298.7
25,144.9
15.4
139.6
1.0
156.0
–
–
–
–
–
–
2,039.4
155.1
15.4
139.6
1.0
28,794.1
94.6
28,888.7
1,340.3
30,229.0
As at 31 December 2015
Financial assets
Cash and balances at central banks
Derivative financial instruments
Loans and receivables:
> Loans and advances to banks
> Loans and advances to customers
> Debt securities
Available-for-sale financial assets
Other assets
Total financial assets
Non financial assets
Total assets
Financial liabilities
Deposits from banks
Customer deposits
Derivative financial instruments
Debt securities in issue
Other liabilities
Total financial liabilities
Non financial liabilities
Total liabilities
Equity
Total liabilities and equity
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2016 I 235
Note 13: Derivative financial instruments
As at 31 December 2016
As at 31 December 2015
Contract/
notional
amount
£m
Asset
fair value
£m
Liability
fair value
£m
Contract/
notional
amount
£m
Asset
fair value
£m
Liability
fair value
£m
Derivatives in accounting hedge relationships
Derivatives designated as fair value hedges:
Interest rate derivatives
Derivatives designated as cash flow hedges:
Interest rate derivatives
Currency derivatives
Total derivative assets/(liabilities) –
in accounting hedge relationships
21,584.8
21,584.8
1,287.0
520.3
23,392.1
21.0
21.0
–
64.7
85.7
(206.8)
(206.8)
23,421.6
23,421.6
–
–
369.7
–
(206.8)
23,791.3
Derivatives in economic hedging relationships but not in accounting hedge relationships
7,549.6
56.0
149.5
7,755.1
13.2
3.4
1.9
18.5
(14.8)
(3.8)
(4.3)
(22.9)
3,651.4
–
58.2
3,709.6
Interest rate derivatives
Currency derivatives
Equity and other options
Total derivative assets/(liabilities) –
in economic hedging relationship but
not in accounting hedge relationships
Total recognised derivative
assets/(liabilities)
63.5
63.5
0.5
–
64.0
16.8
–
1.5
18.3
(139.6)
(139.6)
(1.0)
–
(140.6)
(15.4)
–
–
(15.4)
31,147.2
104.2
(229.7)
27,500.9
82.3
(156.0)
The principal amount of the contract does not represent the Group’s real exposure to credit risk which is limited to the current
cost of replacing contracts with a positive value to the Group should the counterparty default. To reduce credit risk the Group
uses a variety of credit enhancement techniques such as netting and collateralisation, where security is provided against the
exposure. Further details are provided in the Risk Management Report.
Hedged cash flows
For designated cash flow hedges the following table shows when the Group’s hedged cash flows are expected to occur and when
they will impact income:
Within one year
In one to five years
Total
2016
£m
(9.2)
(22.3)
(31.5)
2015
£m
(5.5)
(9.8)
(15.3)
Notes to the consolidated financial statements 236 I Virgin Money Group Annual Report 2016
Note 13: Derivative financial instruments (continued)
Gains/(losses) from derivatives and hedge accounting
Gain from fair value hedge accounting¹:
Derivatives designated as fair value hedges
Fair value movement attributable to hedged risk
Loss from cash flow hedges
Fair value (losses)/gains from other derivatives²
Loss from derivatives and hedge accounting
2016
£m
(69.9)
81.8
11.9
(13.6)
(7.2)
(8.9)
2015
£m
53.7
(50.7)
3.0
(5.1)
1.7
(0.4)
1 Gains or losses from fair value hedges can arise where there is an IAS 39 hedge accounting relationship in place and either:
– the fair value of the derivative was not exactly offset by the change in fair value attributable to the hedged risk; or
– the derivative was designated in or dedesignated from the IAS 39 hedge accounting relationship and in the following months leads to amortisation of existing balance sheet positions.
2 Other derivatives are those used for economic hedging but which are not in an IAS 39 hedge accounting relationship.
Note 14: Loans and advances to banks
Balances within securitisation vehicles
Money market placements with banks
Other lending to banks
Total loans and advances to banks
Note 15: Loans and advances to customers
Advances secured on residential property not subject to securitisation
Advances secured on residential property subject to securitisation
Residential buy-to-let loans not subject to securitisation
Total loans and advances to customers secured on residential property
Unsecured receivables not subject to securitisation
Total loans and advances to customers before allowance for impairment losses
Allowance for impairment losses on loans and receivables (refer note 8)
Total loans and advances to customers excluding portfolio hedging
Fair value of portfolio hedging
Total loans and advances to customers
2016
£m
354.3
33.0
248.3
635.6
2016
£m
19,375.2
4,907.8
24,283.0
5,468.4
29,751.4
2,486.6
32,238.0
2015
£m
384.3
97.1
133.1
614.5
2015
£m
17,389.9
3,670.4
21,060.3
4,401.9
25,462.2
1,610.0
27,072.2
(50.1)
(39.9)
32,187.9
27,032.3
179.2
76.7
32,367.1
27,109.0
The fair value of portfolio hedging represents an accounting adjustment which offsets the fair value movement on derivatives
designated in IAS 39 hedge accounting relationships with the mortgage portfolio. Such relationships are established to protect
the Group from interest rate risk on fixed rate products. See the Risk Management Report for further details.
For collateral held in respect of the values included in the table above, refer to the Risk Management Report.
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 237
Note 16: Available-for-sale financial assets
At 1 January
Additions
Disposals (sales and redemptions)
Reclassification of equity investments1
Exchange differences
Changes due to amortisation and accrued interest
Net gains/(losses) on changes in fair value
At 31 December
2016
£m
1,296.9
670.0
(1,111.1)
–
0.1
(11.6)
14.5
858.8
2015
£m
1,539.6
659.2
(858.5)
1.3
(0.7)
(9.6)
(34.4)
1,296.9
1 Represents investments in unquoted equity securities relating to the Group’s participation in banking and credit card operations, previously recognised within other assets.
Gains on sale of available-for-sale securities amounted to £6.8 million (2015: £8.8 million).
Analysis of the composition of debt securities categorised as available-for-sale financial assets is set out in the Risk
Management Report on page 162. All assets have been individually assessed for impairment and following this assessment
no write down of assets was required.
Note 17: Collateral pledged and received
The Group receives and accepts collateral in the form
of cash and marketable securities in respect of the
following transactions:
> derivatives;
> sale and repurchase and reverse sale and repurchase
agreements; and
> secured loans.
Collateral in respect of derivatives is subject to the standard
industry terms of ISDA Credit Support Annex. This means that
securities received or given as collateral can be pledged or
sold during the term of the transaction but must be returned
on maturity of the transaction. The terms also give each
counterparty the right to terminate the related transactions
upon the counterparty’s failure to post collateral.
At 31 December 2016 cash collateral of £235.0 million
had been pledged by the Group, comprising £181.1 million
recognised within loans and advances to banks and
£53.9 million within Other assets (2015: £94.6 million,
comprising £94.3 million recognised within loans and
advances to banks and £0.3 million within Other assets)
and £14.0 million (2015: £23.8 million) has been received
as cash collateral by the Group and recognised within
deposits from banks.
At 31 December 2016 available-for-sale financial assets of
£10.6 million (2015: £nil) are pledged as collateral in respect of
derivative transactions.
At 31 December 2016 loans and advances of £2,302.3 million
(2015: £755.0 million) are pledged as collateral in respect of
secured loans and sale and repurchase agreements under
terms that are usual and customary for such activities.
Notes to the consolidated financial statements 238 I Virgin Money Group Annual Report 2016
Note 18: Securitisation
Assets and liabilities of the SPVs included in these consolidated financial statements comprise:
Assets
Derivative financial instruments
Loans and advances to customers
Loans and advances to banks
Other assets
Total assets
Liabilities
Debt securities in issue
Deposits by banks
Derivative financial instruments
Other liabilities
Total liabilities
2016
£m
64.5
2015
£m
–
4,907.8
3,670.4
354.3
0.1
384.3
0.3
5,326.7
4,055.0
2,294.2
1,741.9
0.4
0.1
3.4
13.2
–
3.1
2,298.1
1,758.2
The following table sets out the carrying amount of financial assets that did not qualify for derecognition and their associated
liabilities. Where relevant, the table also sets out the net position of the fair value of financial assets where the counterparty to
the associated liabilities has recourse only to the financial assets.
Carrying amount of transferred assets
Fair value of transferred assets
Carrying amount of associated liabilities
Fair value of associated liabilities
2016
£m
4,907.8
4,982.7
2,294.2
2,300.1
2015
£m
3,670.4
3,728.4
1,741.9
1,740.0
There were no transactions in the year where the Group transferred financial assets that should have been derecognised in
their entirety.
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 239
Core
deposit
intangible
£m
Software
£m
Core
banking
platform
£m
4.8
–
–
4.8
–
–
4.8
3.7
(0.3)
–
3.4
1.4
–
4.8
–
1.4
82.0
27.9
(24.8)
85.1
31.6
(2.1)
19.9
1.6
–
21.5
–
–
114.6
21.5
56.9
8.6
(24.8)
40.7
10.4
(2.1)
49.0
65.6
44.4
–
2.9
–
2.9
3.6
–
6.5
15.0
18.6
Total
£m
106.7
29.5
(24.8)
111.4
31.6
(2.1)
140.9
60.6
11.2
(24.8)
47.0
15.4
(2.1)
60.3
80.6
64.4
Note 19: Intangible assets
Cost:
At 1 January 2015
Additions
Disposals
At 31 December 2015
Additions
Disposals
At 31 December 2016
Accumulated amortisation:
At 1 January 2015
Charge for the year
Disposals
At 31 December 2015
Charge for the year
Disposals
At 31 December 2016
Balance sheet amount at 31 December 2016
Balance sheet amount at 31 December 2015
Notes to the consolidated financial statements 240 I Virgin Money Group Annual Report 2016
Note 20: Tangible fixed assets
Cost:
At 1 January 2015
Additions
Disposals
At 31 December 2015
Additions
Disposals
At 31 December 2016
Accumulated depreciation and impairment:
At 1 January 2015
Depreciation charge for the year
Disposals
At 31 December 2015
Depreciation charge for the year
Disposals
At 31 December 2016
Balance sheet amount at 31 December 2016
Balance sheet amount at 31 December 2015
Plant,
equipment
fixtures,
fittings and
vehicles
£m
Land and
buildings
£m
61.2
2.1
–
63.3
1.8
(0.6)
64.5
7.3
2.2
–
9.5
0.1
(0.5)
9.1
55.4
53.8
41.6
8.1
(10.2)
39.5
6.8
(3.0)
43.3
22.6
6.2
(10.1)
18.7
5.5
(2.9)
21.3
22.0
20.8
Total
£m
102.8
10.2
(10.2)
102.8
8.6
(3.6)
107.8
29.9
8.4
(10.1)
28.2
5.6
(3.4)
30.4
77.4
74.6
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 241
Note 21: Deferred tax
Deferred tax assets/(liabilities):
Accelerated capital allowances
Revaluation reserve in respect of available-for-sale financial assets
Cash flow hedge reserve
Change in accounting basis on adoption of IFRS
Tax losses carried forward
Other temporary differences
Fair value adjustments on acquisition of Northern Rock
Total deferred tax assets
2016
£m
12.9
(2.6)
5.2
(4.0)
7.3
4.2
–
23.0
2015
£m
15.1
–
3.8
(4.8)
18.0
4.3
1.6
38.0
The Group has not recognised deferred tax assets in respect of gross unused tax losses of £31.2 million (2015: £31.2 million).
The movement in the net deferred tax balance is as follows:
At 1 January
Income statement (charge)/credit (refer note 9):
Accelerated capital allowances
Tax losses carried forward
Other temporary differences
Amounts (charged)/credited to equity:
Available-for-sale financial assets
Cash flow hedges
Adjustments relating to share based payments
At 31 December
Note 22: Other assets
Trade debtors
Prepayments and accrued income
Other
Total other assets
2016
£m
38.0
(2.2)
(10.7)
(1.5)
(14.4)
(1.7)
1.4
(0.3)
(0.6)
23.0
2016
£m
17.7
27.9
76.3
121.9
2015
£m
50.2
8.0
(20.1)
(1.1)
(13.2)
(0.9)
1.6
0.3
1.0
38.0
2015
£m
9.7
22.4
27.5
59.6
Included within ‘Other’ assets are amounts receivable from clearing houses on centrally cleared derivative financial instruments
of £50.7 million (2015: £0.2 million) recorded on a net basis.
Notes to the consolidated financial statements
242 I Virgin Money Group Annual Report 2016
Note 23: Deposits from banks
Liabilities in respect of securities sold under repurchase agreements
Secured loans
Other deposits from banks
Total deposits from banks
Note 24: Customer deposits
Savings and investment accounts
Personal current accounts
Total customer deposits
Note 25: Debt securities in issue
At 1 January 2015
Repayments
Issues
Other movements
At 31 December 2015
Repayments
Issues
Revaluations
Other movements
At 31 December 2016
2016
£m
850.0
1,268.0
14.5
2015
£m
1,274.9
–
23.8
2,132.5
1,298.7
2016
£m
2015
£m
27,762.7
24,914.6
343.6
230.3
28,106.3
25,144.9
Secured
£m
1,594.1
(601.9)
750.0
(0.3)
1,741.9
(798.1)
1,278.9
73.0
(1.5)
2,294.2
Unsecured
£m
–
–
298.9
(1.4)
297.5
–
–
–
8.3
305.8
Total
£m
1,594.1
(601.9)
1,048.9
(1.7)
2,039.4
(798.1)
1,278.9
73.0
6.8
2,600.0
Other movements comprise unamortised issue costs and hedge accounting adjustments.
On 16 April 2015, the Group issued 5 year Medium Term Notes with a nominal value of £300 million at a coupon of 2.25% per
annum. The notes were issued as part of the Group’s £3 billion Global Medium Term Note programme. On 8 June 2015, the Group
raised £750 million from institutional investors through the issuance of Residential Mortgage Backed Securities in the Gosforth
Funding 2015-1 transaction in Sterling.
On 25 January 2016, the Group raised £803 million from institutional investors through the issuance of Residential Mortgage
Backed Securities in the Gosforth Funding 2016-1 transaction in Euro, US Dollars and Sterling. On 9 May 2016, the Group raised
£474 million from institutional investors through the issuance of Residential Mortgage Backed Securities (RMBS) in the Gosforth
Funding 2016-2 transaction in Euro and Sterling. For all RMBS funding raised in currencies other than Sterling, the Group enters
into cross-currency derivatives which swap the foreign currency liabilities into Sterling.
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2016 I 243
Note 26: Provisions
At 1 January 2016
Provisions applied
Charge for the year
At 31 December 2016
FSCS
£m
6.6
(6.7)
7.8
7.7
Other
£m
1.8
(1.1)
0.1
0.8
Total
£m
8.4
(7.8)
7.9
8.5
The Financial Services Compensation Scheme (FSCS) is the UK’s statutory compensation fund of last resort for customers of
authorised financial services firms and pays compensation if a firm is unable to pay claims against it. The FSCS is funded by levies
on the authorised financial services industry. Each deposit-taking institution contributes towards the FSCS levies in proportion
to their share of total protected deposits on 31 December of the year preceding the scheme year, which runs from 1 April to
31 March. The FSCS can only raise a levy within its scheme year (which commences 1 April) and under IFRIC 21 ‘Levies’ the Group
recognises its FSCS provision in the scheme year itself.
Following the default of a number of deposit takers in 2008, the FSCS borrowed funds from HM Treasury to meet the
compensation costs for customers of those firms. At 31 March 2016, the end of the latest FSCS scheme year for which it has
published accounts, the principal balance outstanding on these loans was £15,655 million (31 March 2015: £15,798 million).
Although it is anticipated that the substantial majority of this loan will be repaid from funds the FSCS receives from asset sales,
surplus cash flow or other recoveries in relation to the assets of the firms that defaulted, any shortfall will be funded by deposit-
taking participants of the FSCS. The amount of future levies payable by the Group depends on a number of factors including the
amounts recovered by the FSCS from asset sales, the Group’s participation in the deposit-taking market at 31 December, the
level of protected deposits and the population of deposit taking participants.
Note 27: Other liabilities
Trade creditors and accruals
Deferred income
Accrued interest
Other liabilities
Total other liabilities
2016
£m
59.0
3.0
127.2
102.2
291.4
2015
£m
55.5
5.0
131.1
43.4
235.0
Deferred income represents income advanced from partners that will be recognised in future periods.
Accrued interest primarily represents interest which has accrued on savings and investment accounts.
Notes to the consolidated financial statements
244 I Virgin Money Group Annual Report 2016
Note 28: Share capital and share premium
Share capital
Share premium
Total share capital and share premium
Issued and fully paid share capital
2016
£m
0.1
654.5
654.6
Ordinary Shares of £0.0001 each
At 1 January
Issued during year
At 31 December
Deferred Shares of £0.001 each
2016
Number of shares
2016
£
2015
Number of shares
443,711,458
1,230,550
444,942,008
44,371
123
44,494
441,933,180
1,778,278
443,711,458
2015
£m
0.1
654.5
654.6
2015
£
44,193
178
44,371
At 1 January and at 31 December
10,052,161
10,052
10,052,161
10,052
The following describes the rights attaching to each share class at 31 December 2016:
Ordinary Shares
The holders of Ordinary Shares are entitled to one vote per share at meetings of the Group. All Ordinary Shares in issue in the
Company rank equally and carry the same voting rights and the same rights to receive dividends and other distributions declared
or paid by the Company.
Deferred Shares
As set out in the Articles of Association adopted on listing (and pursuant to the provisions of the Companies Act in respect of
shares held in own shares), the Deferred Shares have no voting or dividend rights and, on a return of capital on a winding up, have
no valuable economic rights. No application has been made or is currently intended to be made for the Deferred Shares to be
admitted to the Official List or to trade on the London Stock Exchange or any other investment exchange.
The Deferred Shares are held in treasury. This is to ensure that the aggregate nominal value of the Company’s share capital will
be not less than £50,000, which is the minimum level of nominal share capital required by the Companies Act for a company to
be established as a public limited company.
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2016 I 245
2016
£m
156.5
227.6
384.1
2015
£m
156.5
–
156.5
their first reset dates on 10 November 2021 and 31 July
2019 respectively;
> interest on the securities will be due and payable only at the
sole discretion of the Company, and the Company has sole
and absolute discretion at all times and for any reason to
cancel (in whole or in part) any interest payment that would
otherwise be payable on any interest payment date;
> the securities are perpetual with no fixed redemption date
and are repayable, at the option of the Company, all (but not
part) on the first reset date or any reset date thereafter. In
addition, the AT1 securities are redeemable, at the option of
the Company, in whole for certain regulatory or tax reasons.
Any optional redemption requires the prior consent
of the PRA; and
> all AT1 securities will be converted into Ordinary Shares
of the Company, at a pre-determined price, should the
Common Equity Tier 1 ratio of the Group fall below 7.0%
as specified in the terms.
2016
£m
(0.3)
52.8
(38.3)
(8.4)
(1.7)
4.1
2016
£m
(15.3)
(36.1)
13.6
6.3
(31.5)
2015
£m
7.0
(0.8)
(33.6)
25.9
1.2
(0.3)
2015
£m
(8.8)
(13.2)
5.1
1.6
(15.3)
Note 29: Other equity instruments
At 1 January
Additional Tier 1 securities issued in the year (net of issue costs)
At 31 December
The Company issued Fixed Rate Resettable Additional Tier 1
(AT1) securities on the Luxembourg Stock Exchange of
£230.0 million on 10 November 2016 and £160.0 million on
31 July 2014. The issues are treated as equity instruments
in accordance with IAS 32 ‘Financial Instruments:
Presentation’ with the proceeds included in equity, net
of transaction costs of £5.9 million (2015: £3.5 million).
Dividends and other returns to equity holders are treated
as a deduction from equity.
The principal terms of the AT1 securities in issue are
described below:
> the securities constitute direct, unsecured and
subordinated obligations of the Company and rank pari
passu with holders of other Tier 1 instruments and the
holders of that class or classes of preference shares but
rank junior to the claims of senior creditors;
> the securities bear a fixed rate of interest from the issue
date of 8.750% and 7.875% from their issue dates up to
Note 30: Other reserves
Other reserves comprise:
Revaluation reserve in respect of available-for-sale financial assets
At 1 January
Net gains/(losses) from changes in fair value
Net gains on disposal transferred to net income
Amounts transferred to net income due to hedge accounting
Taxation
At 31 December
Cash flow hedge reserve
At 1 January
Amounts recognised in equity
Amounts transferred to income statement
Taxation
At 31 December
Notes to the consolidated financial statements
246 I Virgin Money Group Annual Report 2016
Note 31: Retained earnings
At 1 January
Profit for the year
Dividends paid to ordinary shareholders
Distributions to Additional Tier 1 security holders (net of tax)
Purchase of own shares
Share based payments (including deferred tax)
As at 31 December
Employee Benefit Trust (EBT)
2016
£m
544.8
140.1
(20.8)
(10.1)
(7.3)
12.5
659.2
2015
£m
434.5
111.2
(6.2)
(10.0)
(5.0)
20.3
544.8
Retained earnings are stated after deducting £6.9 million (2015: £2.9 million) representing 2,922,220 (2015: 1,815,387) own
shares held in an EBT.
The Company established an EBT in 2011 in connection with the operation of the Company’s share plans. The Company funded
the EBT by means of a cash loan and is therefore considered to be the sponsoring entity. The EBT purchased shares in the
Company using the cash loan which is accounted for as a purchase of own shares by the Company. The investment in own shares
at 31 December 2016 is £6.9 million (2015: £2.9 million). The market value of the shares held in the EBT at 31 December 2016
was £8.8 million.
Note 32: Contingent liabilities and commitments
Contingent liabilities
The Board was not aware of any significant contingent liabilities as at 31 December 2016 (31 December 2015: none).
The Company is, from time to time and in the normal course of business, subject to a variety of legal or regulatory claims, actions
or proceedings. When such circumstances arise, the Board considers the likelihood of a material outflow of economic resources
and provides for its best estimate of costs where an outflow of economic resources is considered probable. While there can be no
assurances, the Directors believe, based on information currently available to them, that the likelihood of material outflows from
such matters is remote.
The Board does not expect the ultimate resolution of any other threatened or actual legal proceedings to have a significant
adverse effect on the financial position of the Group.
Loan commitments
Contractual amounts to which the Group is committed for extension of credit to customers.
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Total loan commitments
2016
£m
2015
£m
4,854.3
3,980.7
88.2
346.6
102.5
396.6
5,289.1
4,479.8
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 247
Note 32: Contingent liabilities and commitments (continued)
Operating lease commitments – land and buildings
Minimum future lease payments under non-cancellable operating leases:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Total operating lease commitments – land and buildings
Operating lease commitments – other operating leases
Minimum future lease payments under non-cancellable operating leases:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Total operating lease commitments – other operating leases
Capital commitments
Capital commitments for the acquisition of buildings and equipment:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Total capital commitments
2016
£m
7.1
25.0
20.0
52.1
2016
£m
4.6
4.6
–
9.2
2016
£m
1.0
–
–
1.0
2015
£m
7.2
25.2
24.1
56.5
2015
£m
4.6
9.2
–
13.8
2015
£m
2.9
–
–
2.9
Notes to the consolidated financial statements 248 I Virgin Money Group Annual Report 2016
Note 33: Fair value of financial assets and financial liabilities
Fair value of financial assets and liabilities recognised at cost
The following table summarises the fair values of those financial assets and liabilities not presented on the Group’s balance sheet
at their fair value, by the level in the fair value hierarchy into which each fair value measurement is categorised. The accounting
policy in note 1.9 (j) sets out the key principles for estimating the fair values of financial instruments.
At 31 December 2016
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities classified as loans and receivables
Available-for-sale financial assets
Other assets
–
–
–
0.7
–
–
786.3
635.6
–
–
–
68.8
Level 1
£m
Level 2
£m
Level 3
£m
Total
fair
value
£m
786.3
635.6
Total
carrying
value
£m
786.3
635.6
32,514.0
32,514.0
32,367.1
–
0.3
–
0.7
0.3
0.7
0.3
68.8
68.8
Total financial assets at fair value
0.7
1,490.7
32,514.3
34,005.7
33,858.8
Deposits from banks
Customer deposits
Debt securities in issue
Other liabilities
Total financial liabilities at fair value
–
–
2,132.5
28,222.7
2,610.8
–
–
189.5
2,610.8
30,544.7
–
–
–
–
–
2,132.5
2,132.5
28,222.7
28,106.3
2,610.8
2,600.0
189.5
189.5
33,155.5
33,028.3
At 31 December 2015
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities classified as loans and receivables
Available-for-sale financial assets
Other assets
Total financial assets at fair value
Deposits from banks
Customer deposits
Debt securities in issue
Other liabilities
Total financial liabilities at fair value
Total
fair
value
£m
888.6
614.5
Total
carrying
value
£m
888.6
614.5
Level 1
£m
Level 2
£m
Level 3
£m
–
–
–
1.2
–
–
888.6
614.5
–
–
–
14.6
27,243.2
27,243.2
27,109.0
–
1.3
–
1.2
1.3
14.6
1.1
1.3
14.6
1.2
1,517.7
27,244.5
28,763.4
28,629.1
–
–
1,298.7
25,162.5
2,032.1
–
–
155.1
2,032.1
26,616.3
–
–
–
–
–
1,298.7
1,298.7
25,162.5
25,144.9
2,032.1
2,039.4
155.1
155.1
28,648.4
28,638.1
–
–
–
–
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 249
Note 33: Fair value of financial assets and financial liabilities (continued)
Fair value hierarchy
The table above summarises the carrying value and fair value
of assets and liabilities held on the balance sheet. There are
three levels to the hierarchy as follows:
Level 1 – Quoted prices (unadjusted) in active markets for
identical assets and liabilities.
Level 2 – Inputs other than quoted prices included within Level 1
that are observable for the asset or liability, whether directly (i.e.
as prices) or indirectly (i.e. derived from prices).
Level 3 – Inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
Valuation methods for calculations of fair values of
financial assets and liabilities recognised at cost
are set out below:
Cash and balances at central banks
Fair value approximates to carrying value because cash and
balances at central banks have minimal credit losses and are
either short-term in nature or reprice frequently.
Loans and advances to banks
Fair value was estimated by using discounted cash flows
applying either market rates where practicable or rates
offered by other financial institutions for loans with similar
characteristics. The fair value of floating rate placements,
fixed rate placements with less than six months to maturity
and overnight deposits is considered to approximate to their
carrying amount.
Loans and advances to customers
The Group provides loans of varying rates and maturities
to customers. The fair value of loans with variable interest
rates is considered to approximate to carrying value as the
interest rate can be moved in line with market conditions. For
loans with fixed interest rates, fair value was estimated by
discounting cash flows using market rates or rates normally
offered by the Group. The change in interest rates since the
majority of these loans were originated means that their
fair value can vary significantly from their carrying value.
However, as the Group’s policy is to hedge fixed rate loans in
respect of interest rate risk, this does not indicate that the
Group has an exposure to this difference in value.
Loans and advances to customers are categorised as level 3 as
unobservable pre-payment rates are applied.
Debt securities classified as loans and receivables
Fair values are based on quoted prices, where available, or by
discounting cash flows using market rates.
Available-for-sale financial assets
These are unquoted equity securities held by the Group and
relating to participation in banking and credit card operations
(refer note 16). They are categorised as level 3 as the fair value
of these securities cannot be reliably measured, due to the
lack of equivalent instruments with observable prices.
Other assets and liabilities – trade debtors/creditors,
accrued income and accrued interest
Fair value is deemed to approximate the carrying value.
Deposits from banks and customer deposits
Fair values of deposit liabilities repayable on demand or
with variable interest rates are considered to approximate
to carrying value. The fair value of fixed interest deposits
with less than six months to maturity is their carrying
amount. The fair value of all other deposit liabilities was
estimated by discounting cash flows, using market rates or
rates currently offered by the Group for deposits of similar
remaining maturities.
Debt securities in issue
Fair values are based on quoted prices where available or by
discounting cash flows using market rates.
Notes to the consolidated financial statements 250 I Virgin Money Group Annual Report 2016
Note 33: Fair value of financial assets and financial liabilities (continued)
Fair value of financial assets and liabilities recognised at fair value
The following table summarises the fair values of those financial assets and liabilities recognised at fair value, by the level in the
fair value hierarchy into which each fair value measurement is categorised. The accounting policy in note 1.9(j) sets out the key
principles for estimating the fair values of financial instruments.
2016
Financial assets
Derivative financial instruments
Available-for-sale financial assets
Financial liabilities
Derivative financial instruments
2015
Financial assets
Derivative financial instruments
Available-for-sale financial assets
Financial liabilities
Derivative financial instruments
Level 1 Valuations
Level 1
£m
Level 2
£m
Level 3
£m
–
850.9
104.2
–
–
7.6
Total
£m
104.2
858.5
–
229.7
–
229.7
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
–
1,233.3
82.3
59.0
–
3.3
82.3
1,295.6
–
156.0
–
156.0
The fair value of debt securities categorised as available-for-sale financial assets is derived from unadjusted quoted prices in an
active market.
Level 2 Valuations
The fair values of derivative instruments are calculated by discounted cash flow models using yield curves that are based on
observable market data or are based on valuations obtained from counterparties.
The fair value of level 2 available-for-sale securities were calculated using valuation techniques, including discounted
cash flow models.
Level 3 Valuations
Level 3 available-for-sale financial assets represent the Group’s best estimates of the value of certain equity investments in
unlisted companies and of Visa Inc. preferred stock.
The level 3 valuation of £3.3 million at 31 December 2015 represented the Group’s best estimate at that time of the value of
its equity investment in Visa Europe Limited, with reference to the consideration expected to be received from the proposed
acquisition of that company by Visa Inc.
The acquisition by Visa Inc. completed on 21 June 2016, resulting in disposal of the investment and receipt of Visa Inc. preferred
stock and cash consideration and recognition of a gain on disposal of £5.3 million, included within Other Operating Income.
The Visa Inc. preferred stock value was determined by reference to the Visa Inc. common stock price at 31 December 2016, less
a discount to reflect restrictions on transferability and the risk of future reduction in conversion to Visa Inc. common stock. The
discount applied is the most significant unobservable input to the valuation.
The Company has determined of the fair value of the investments in the relevant unlisted entities by reference to third party
valuations, taking into account pertinent information received on the individual investments to adjust those valuations, where
considered appropriate.
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 251
Note 34: Offsetting of financial assets and financial liabilities
Related amounts where set
off in the balance sheet not
permitted2
Gross
amounts of
assets and
liabilities
£m
Amounts
offset in
the balance
sheet¹
£m
Net amounts
presented in
the balance
sheet
£m
Subject
to master
netting
agreements
£m
Collateral
received/
pledged
£m
Potential
net amounts
if offset
of related
amounts
permitted
£m
123.9
635.6
72.0
2,132.5
254.1
188.0
(19.7)
–
(3.2)
104.2
635.6
68.8
–
2,132.5
(24.4)
1.5
229.7
189.5
(25.4)
–
–
–
(25.4)
–
(78.8)
(168.1)
–
(10.7)
(168.1)
–
–
467.5
68.8
2,121.8
36.2
189.5
Related amounts where set
off in the balance sheet not
permitted2
Gross
amounts of
assets and
liabilities
£m
Amounts
offset in
the balance
sheet¹
£m
Net amounts
presented in
the balance
sheet
£m
Subject
to master
netting
agreements
£m
Collateral
received/
pledged
£m
Potential
net amounts
if offset
of related
amounts
permitted
£m
82.6
614.5
14.7
1,298.7
156.4
155.1
(0.3)
–
(0.1)
–
(0.4)
–
82.3
614.5
14.6
1,298.7
156.0
155.1
(70.4)
–
–
–
(70.4)
–
(10.6)
(72.5)
–
(10.6)
(72.5)
–
1.3
542.0
14.6
1,288.1
13.1
155.1
As at 31 December 2016
Financial assets
Derivative financial instruments
Loans and advances to banks
Other assets
Financial liabilities
Deposits from banks
Derivative financial instruments
Other liabilities
As at 31 December 2015
Financial assets
Derivative financial instruments
Loans and advances to banks
Other assets
Financial liabilities
Deposits from banks
Derivative financial instruments
Other liabilities
1 The amounts set off in the balance sheet as shown above represent derivatives and variation margin cash collateral with central clearing houses which meet the criteria for offsetting
under IAS 32.
2 The Group enters into derivatives with various counterparties which are governed by industry standard master netting agreements. The Group holds and provides cash and securities
collateral in respect of derivative transactions covered by these agreements. The right to set off balances under these master netting agreements or to set off cash and securities
collateral only arises in the event of non-payment or default and, as a result, these arrangements do not qualify for offsetting under IAS 32.
The effects of over collateralisation have not been taken into account in the above table.
Notes to the consolidated financial statements 252 I Virgin Money Group Annual Report 2016
Note 35: Cash flow statements
(a) Change in operating assets
Change in loans and advances to customers
Change in derivative financial assets
Change in other operating assets
Change in operating assets
(b) Change in operating liabilities
Change in customer deposits
Change in derivative financial liabilities
Change in other operating liabilities
Change in operating liabilities
(c) Non-cash and other items
Depreciation and amortisation
Other non-cash items
Total non-cash and other items
Cash and balances at central banks
Less: mandatory reserve deposits1
Loans and advances to banks
Deposits from banks
Less: amounts not repayable on demand
Total cash and cash equivalents
1 Mandatory reserves with central banks are not available for use in day-to-day operations.
(d) Analysis of cash and cash equivalents as shown in the balance sheet
2016
£m
2015
£m
(5,295.7)
(4,046.2)
(21.9)
(69.7)
18.9
(10.0)
(5,387.3)
(4,037.3)
2016
£m
2015
£m
2,961.4
2,779.2
73.7
922.2
(72.2)
439.4
3,957.3
3,146.4
2016
£m
21.0
(40.5)
(19.5)
2016
£m
786.3
(49.1)
737.2
635.6
2015
£m
19.6
42.8
62.4
2015
£m
888.6
(41.7)
846.9
614.5
(2,132.5)
(1,298.7)
2,131.9
1,298.7
(0.6)
–
1,372.2
1,461.4
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 253
Note 36: Related party transactions
Key Management Personnel
Key Management Personnel refer to the Executive Team of the Group, Non-Executive Directors and Directors of
subsidiary companies.
Compensation
Salaries and other short-term benefits
Share based payments (Refer note 7)
Post-employment benefits
Total compensation
2016
£m
7.4
7.6
0.8
15.8
2015
£m
8.2
12.3
0.9
21.4
Aggregate contributions in respect of Key Management Personnel to defined contribution pension schemes £0.8 million (2015:
£0.9 million).
Deposits
At 1 January
Placed
Withdrawn
Deposits outstanding at 31 December
2016
£m
2.2
1.5
(2.3)
1.4
2015
£m
1.1
1.8
(0.7)
2.2
Deposits placed by Key Management Personnel attracted interest rates of up to 3.0% (2015: 2.8 %). At 31 December 2016, the
Group did not provide any guarantees in respect of Key Management Personnel (2015: none).
At 31 December 2016, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with Key
Management Personnel included amounts outstanding in respect of loans and credit card transactions of £0.9 million with
7 Key Management Personnel (2015: £0.3 million with 5 Key Management Personnel).
Notes to the consolidated financial statements 254 I Virgin Money Group Annual Report 2016
Note 36: Related party transactions (continued)
Subsidiaries
Transactions and balances with subsidiaries have been eliminated on consolidation. A full list of the company’s subsidiaries and
SPVs included within the consolidation is provided in note 2 to the parent company financial statements.
The Virgin Money Foundation, launched in August 2015, is managed and controlled by a Board of independent Trustees, such
that the Group has no power over the Foundation or, exposure or ability to affect variable returns. The Foundation is therefore
not consolidated in the financial statements of the Group.
Other transactions
Transaction value at year end:
Trademark licence fees to Virgin Enterprises Limited
Virgin Atlantic Airways Limited
Dividend payment to Virgin Group Holdings Limited
Other costs to Virgin Management Group Companies
Balance outstanding at year end:
Trademark licence fees to Virgin Enterprises Limited
Other costs to Virgin Management Group Companies
Trademark licence fees to Virgin
Enterprises Limited
Licence fees are payable to Virgin Enterprises Limited for the
use of the Virgin Money brand trademark.
Virgin Atlantic Airways Limited
The Group incurs credit card commissions and air mile charges
to Virgin Atlantic Airways Limited (VAA) in respect of an
agreement between the two parties.
Dividend payment to Virgin Group
Holdings Limited
The Group made dividend payments totalling £7.3 million
to Virgin Group Holdings Limited in the year, comprising a
2016
£m
5.9
0.2
7.3
1.2
2016
£m
–
(0.1)
2015
£m
5.1
–
2.2
0.4
2015
£m
(0.4)
(0.1)
£4.8 million payment in May 2016 and a £2.5 million payment
in September 2016, which represented that company’s
proportionate share of the total final 2015 dividend and the
total interim 2016 dividend respectively. In the prior year, a
dividend payment of £2.2 million was made to Virgin Group
Holdings Limited in October 2015 which represented that
Company’s proportionate share of the total interim 2015
dividend. Refer to note 11.
Other costs to Virgin Management Group
Companies
These costs include transactions with other companies in
the Virgin Group.
Note 37: Events after balance sheet date
There have been no significant events between 31 December 2016 and the date of approval of the financial statements which
would require a change or additional disclosure in the financial statements.
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 255
Note 38: Future accounting developments
A number of new accounting standards and amendments to accounting standards have been issued by the IASB, however are
not yet effective and have not been early adopted by the Group. Those which may be relevant to the Group are set out below.
IASB effective date
1 January 2018
(EU endorsed on 22
November 2016)
Pronouncement
Nature of change
IFRS 9 ‘Financial
Instruments’
IFRS 9 ‘Financial Instruments’ replaces IAS 39 ‘Financial Instruments: Recognition and
Measurement’. IFRS 9 is split over 3 core areas of change.
Classification and Measurement
IFRS 9 requires financial assets to be classified into one of three measurement categories,
fair value through profit or loss, fair value through other comprehensive income and
amortised cost. Classification is based on the objectives of the entity’s business model
for managing its financial assets and the contractual cash flow characteristics of the
instruments, while it retains most of the existing requirements for financial liabilities.
The Group has undertaken an assessment to determine the potential impact of changes
in classification and measurement of financial assets and liabilities. The adoption of IFRS 9
is unlikely to result in a significant change to the current asset and liability measurement
bases, however, the final impact will be dependent on the facts and circumstances that
exist on 1 January 2018.
Impairment
IFRS 9 replaces the existing ‘incurred loss’ impairment approach with an expected credit
loss approach, resulting in earlier recognition of credit losses. The IFRS 9 impairment model
has three stages. Entities are required to recognise a 12 month expected loss allowance
on initial recognition (stage 1) and a lifetime expected loss allowance when there has been
a significant increase in credit risk (stage 2). Stage 3 requires objective evidence that an
asset is credit-impaired, which is similar to the guidance on incurred losses in IAS 39. Loan
commitments and financial guarantees not measured at fair value through profit or loss are
also in scope for impairment.
The assessment of whether a significant increase in credit risk has occurred is a key aspect
of the IFRS 9 methodology. It involves quantitative and qualitative measures and therefore
requires considerable management judgement. In addition IFRS 9 also requires the use
of more forward-looking information including reasonable and supportable forecasts of
future economic conditions. The need to consider multiple economic scenarios and how
they could impact the loss allowance is a subjective feature of the IFRS 9 impairment model.
The Group’s final methodology for significant increase in credit risk and multiple economic
scenarios are still under development.
These changes may result in a material increase in the Group’s balance sheet provisions for
credit losses and may therefore negatively impact the Group’s regulatory capital position,
although the regulatory capital transitional arrangements are still in consultation and the
impact may be spread over a period of time. The extent of any increase in provisions will
depend upon, amongst other things, the composition of the Group’s lending portfolios and
forecast economic conditions at the date of implementation. The requirement to transfer
assets between stages and to incorporate forward-looking data into the expected credit
loss calculation, including multiple economic scenarios, is likely to result in impairment
charges being more volatile when compared to the current IAS 39 impairment model.
Hedge Accounting
The hedge accounting requirements of IFRS 9 are more closely aligned with risk
management practices and follow a more principle-based approach than IAS 39.
However, there is an option to maintain the existing IAS 39 hedge accounting rules until
the IASB completes its project on macro hedging. The Group currently expects to continue
applying IAS 39 hedge accounting in accordance with this accounting policy choice.
Accounting Transition
IFRS 9 is effective for annual periods beginning on or after 1 January 2018 with no
requirement to restate prior periods. If comparative periods are not restated, at the date
of initial application, any difference between the carrying amount of financial assets and
the change in loss allowance shall be recognised in opening retained earnings.
Notes to the consolidated financial statements 256 I Virgin Money Group Annual Report 2016
Note 38: Future accounting developments (continued)
Pronouncement
Nature of change
IASB effective date
IFRS 9 implementation programme
The Group has an established IFRS 9 programme to ensure a high quality implementation
in compliance with the standard and regulatory guidance. The programme involves
multiple functions from across the Group with steering committees providing oversight.
The key responsibilities of the programme include defining IFRS 9 methodology and
accounting policy, development of expected loss models, identifying data and system
requirements and establishing an appropriate operating model and governance
framework.
The Group is building new expected credit loss models using three key input parameters
for the computation of expected loss: probability of default, loss given default and
exposure at default. The initial build phase of the programme is complete and the Group is
currently testing and refining the models in line with the Group’s delivery plans. The Group
will continue to refine the expected credit loss approach under IFRS 9 and provide an
update on the progress made at each reporting period until implementation.
IFRS 15 ‘Revenue
from Contracts with
Customers’
IFRS 15 replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ as a comprehensive
standard to address current inconsistencies in accounting practice for revenue
recognition. Financial instruments and other contractual rights or obligations within the
scope of IFRS 9 are excluded from the scope of this standard.
1 January 2018
(EU endorsed on 22
September 2016)
IFRS 16 ‘Leases’
The Group has reviewed the requirements of the new standard and it is not expected to
have a significant impact, as a substantial proportion of the Group’s income is generated
from financial instruments.
This standard replaces IAS 17 ‘Leases’ and will result in most leases for lessees being
brought on to the Balance Sheet under a single lease model, removing the distinction
between finance and operating leases. It requires a lessee to recognise a ‘right-of-use’
asset and a lease liability. Lessor accounting remains largely unchanged.
The Group is currently assessing the impact of the new standard.
1 January 2019 (has not
been EU endorsed)
Note 39: Country by country reporting
The Capital Requirements (Country by Country Reporting) Regulations came into effect on 1 January 2014 and place certain
reporting obligations on financial institutions within CRD IV.
The activities of the Group are described in the Strategic Report.
All companies consolidated within the Group’s financial statements are UK registered entities.
Number of employees (average FTE)
Turnover (total income)
Pre-tax profit
Corporation tax paid
Public subsidies received
The Group received no public subsidies during the year.
UK
2,893
£581.4m
£194.4m
£22.1m
£0.0m
Notes to the consolidated financial statements Virgin Money Group Annual Report 2016 I 257
Parent Company balance sheet
For the year ended 31 December
Assets
Loans and advances to banks
Derivative financial instruments
Investment in subsidiary undertakings
Deferred tax assets
Other assets
Total assets
Equity and liabilities
Liabilities
Deposits from banks
Derivative financial instruments
Other liabilities
Total liabilities
Equity
Share capital and share premium
Other equity instruments
Retained earnings1
Total equity
Total equity and liabilities
Notes
2016
£ million
2015
£ million
2
3
4
5
6
7
8
41.0
4.6
103.0
1.5
1,370.4
1,127.6
0.1
17.0
0.1
16.4
1,433.1
1,248.6
2.5
4.3
86.2
93.0
654.6
384.1
301.4
1,340.1
1,433.1
1.6
0.7
164.7
167.0
654.6
156.5
270.5
1,081.6
1,248.6
1 The Company profit for the year was £56.3 million (2015: loss of £3.1 million)
The accompanying notes are an integral part of the parent company financial statements.
The financial statements on pages 257 to 266 were approved and authorised for issue by the Board and were signed on its behalf
on 27 February 2017.
Glen Moreno
Chairman
Jayne-Anne Gadhia CBE
Chief Executive
258 I Virgin Money Group Annual Report 2016
Parent Company statement of changes in equity
For the year ended 31 December
Balance as at 1 January 2016
Profit for the year
Total comprehensive income for the year
Transactions with equity holders
Capital contribution – share based payments
Purchase of own shares
Issue of Additional Tier 1 securities (net of issue costs)
Distribution to Additional Tier 1 noteholders
Group relief attributable to Tier 1 Securities
Dividends paid to ordinary shareholders
Balance as at 31 December 2016
Balance as at 1 January 2015
Loss for the year
Total comprehensive expense for the year
Transactions with equity holders
Capital contribution – share based payments
Purchase of own shares
Distribution to Additional Tier 1 noteholders
Group relief attributable to Tier 1 Securities
Dividends paid to ordinary shareholders
Balance as at 31 December 2015
Share capital
and share
premium
£ million
Other equity
instruments
£ million
Retained
earnings
£ million
Total
equity
£ million
654.6
156.5
270.5
1,081.6
–
–
–
–
–
–
–
–
–
–
–
–
227.6
–
–
–
654.6
384.1
56.3
56.3
12.8
(7.3)
–
(12.6)
2.5
(20.8)
301.4
56.3
56.3
12.8
(7.3)
227.6
(12.6)
2.5
(20.8)
1,340.1
654.6
156.5
274.8
1,085.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(3.1)
(3.1)
20.0
(5.0)
(12.6)
2.6
(6.2)
(3.1)
(3.1)
20.0
(5.0)
(12.6)
2.6
(6.2)
654.6
156.5
270.5
1,081.6
The accompanying notes are an integral part of the parent company financial statements.
Virgin Money Group Annual Report 2016 I 259
Parent Company cash flow statement
For the year ended 31 December
Profit/(loss) before taxation
Adjustments for:
Change in operating assets
Change in operating liabilities
Non-cash and other items
Movement in amounts due to group undertakings
Net cash used in operating activities
Net cash outflow from investing activities
Investment in Additional Tier 1 instruments issued by subsidiary undertaking
Net cash used in investing activities
Net cash inflow/(outflow) from financing activities
Issue of Additional Tier 1 securities (net of issue costs)
Distribution to Additional Tier 1 security holders
Purchase of own shares
Movements in amounts from group undertakings
Dividends paid on ordinary shares
Net cash provided by/(used in) financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The accompanying notes are an integral part of the parent company financial statements.
Notes
11(a)
11(b)
11(c)
11(d)
2016
£ million
55.5
(2.8)
4.5
1.0
(78.5)
(20.3)
(227.7)
(227.7)
227.6
(12.6)
(7.3)
(0.9)
(20.8)
186.0
(62.0)
103.0
41.0
2015
£ million
(3.8)
–
(0.7)
3.4
0.6
(0.5)
–
–
–
(12.6)
(5.0)
(0.5)
(6.2)
(24.3)
(24.8)
127.8
103.0
260 I Virgin Money Group Annual Report 2016
Note 1: Basis of preparation
1.1 Basis of preparation and accounting policies
The financial statements of Virgin Money Holdings (UK)
plc, (the Parent Company, the Company), which should be
read in conjunction with the Group Directors’ Report, have
been prepared on a going concern basis in accordance
with International Financial Reporting Standards (IFRS) as
adopted by the EU and with those parts of the Companies
Act 2006 applicable to companies reporting under IFRS. No
individual statement of comprehensive income is presented
for the Company, as permitted by Section 408(4) of the
Companies Act 2006.
1.2 Basis of measurement
The financial statements have been prepared under the
historical cost convention as modified by the revaluation of
derivative financial instruments and other assets held at fair
value through profit or loss.
The preparation of the financial statements in conformity with
IFRS requires Management to make judgements, estimates
and assumptions that affect the application of accounting
policies and the reported amounts of assets, liabilities, income
and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on
an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimates are revised
and in any future periods affected.
1.3 Accounting policies
The accounting policies of the Company are the same as those
of the Group which are set out in note 1 of the consolidated
financial statements except that the Company has no policy in
respect of consolidation and investments in subsidiaries which
are carried at historical cost, less any provision for impairment.
These accounting policies have been applied consistently to all
years presented in these financial statements.
Note 2: Investment in subsidiary undertakings
At 1 January
Capital contribution – share based payments
Investment in Additional Tier 1 instruments issued by subsidiary undertaking
At 31 December
2016
£m
2015
£m
1,127.6
1,107.6
12.8
230.0
20.0
–
1,370.4
1,127.6
Notes to the Parent Company financial statements Virgin Money Group Annual Report 2016 I 261
Note 2: Investment in subsidiary undertakings (continued)
The following were subsidiaries of the Company or SPVs controlled by the Company during the year in accordance with note 1.5
to the consolidated financial statements:
Name
Direct holdings
Virgin Money plc¹
Virgin Money Personal Financial Service Limited¹
Virgin Money Unit Trust Managers Limited¹
Virgin Money Management Services Limited1
Virgin Money Giving Limited1
Challenger (Norwich) Limited1,2
Indirect holdings
Virgin Card Limited1,2
Eagle Place Covered Bonds LLP1,3
Virgin Money Nominees Limited1,3
Northern Rock Limited1,3
Special purpose vehicles
Gosforth Funding 2011-1 plc4
Gosforth Funding 2012-1 plc4
Gosforth Funding 2012-2 plc4
Gosforth Funding 2014-1 plc⁴
Gosforth Funding 2015-1 plc⁴
Gosforth Funding 2016-1 plc⁴
Gosforth Funding 2016-2 plc⁴
Gosforth Mortgages Trustee 2011-1 Limited⁴
Gosforth Mortgages Trustee 2012-1 Limited⁴
Gosforth Mortgages Trustee 2012-2 Limited⁴
Gosforth Mortgages Trustee 2014-1 Limited⁴
Gosforth Mortgages Trustee 2015-1 Limited⁴
Gosforth Mortgages Trustee 2016-1 Limited⁴
Gosforth Mortgages Trustee 2016-2 Limited4
Gosforth Holdings 2011-1 Limited⁴
Gosforth Holdings 2012-1 Limited⁴
Gosforth Holdings 2012-2 Limited⁴
Gosforth Holdings 2014-1 Limited⁴
Gosforth Holdings 2015-1 Limited⁴
Gosforth Holdings 2016-1 Limited⁴
Gosforth Holdings 2016-2 Limited⁴
1 Registered office: Jubilee House, Gosforth, Newcastle upon Tyne, NE3 4PL.
2 Dissolved 5 April 2016.
3 Dormant companies.
4 Registered office: Fifth Floor, 100 Wood Street, London, EC2V 7EX.
5 The entity does not have share capital.
Class of Share
Holding
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
N/A
Ordinary
Ordinary
100%
100%
100%
100%
100%
100%
100%
N/A5
100%
100%
Nature of business
Issue of securitised notes
Issue of securitised notes
Issue of securitised notes
Issue of securitised notes
Issue of securitised notes
Issue of securitised notes
Issue of securitised notes
Trust
Trust
Trust
Trust
Trust
Trust
Trust
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Notes to the Parent Company financial statements 262 I Virgin Money Group Annual Report 2016
Note 3: Deferred tax
The Directors conclude that net deferred tax assets in relation to a change in accounting basis on adoption of IFRS of £0.1 million
(2015: £0.1 million) should be recognised at the balance sheet date. This is based on their interpretation of the timing and level of
reversal of existing taxable temporary differences, in line with relevant accounting standards.
The Company is expected to generate sufficient taxable profits in future periods to recover these assets. The Company has not
recognised deferred tax assets in respect of gross unused tax losses of £31.1 million (2015: £31.1 million).
Note 4: Other assets
Amounts owed from subsidiary undertakings
Group relief owed from related parties
Other
Total
Note 5: Other liabilities
Amounts owed to subsidiary undertakings
Total
2016
£m
13.7
3.3
–
17.0
2016
£m
86.2
86.2
2015
£m
12.8
3.3
0.3
16.4
2015
£m
164.7
164.7
Note 6: Share capital and share premium
Details of the Company’s share capital and share premium are given in note 28 of the consolidated financial statements.
Note 7: Other equity instruments
Details of the Company’s other equity instruments are given in note 29 of the consolidated financial statements.
Notes to the Parent Company financial statements Virgin Money Group Annual Report 2016 I 263
Subsidiary
contribution
£m
Investment
in own
shares
£m
18.5
(2.1)
–
–
–
–
–
20.0
38.5
–
–
–
–
–
12.8
51.3
–
–
–
(5.0)
4.2
–
(2.9)
–
–
–
(7.3)
3.3
–
(6.9)
Retained
profits
£m
258.4
(3.1)
(6.2)
(10.0)
–
(4.2)
–
234.9
56.3
(20.8)
(10.1)
–
(3.3)
–
257.0
Total
£m
274.8
(3.1)
(6.2)
(10.0)
(5.0)
–
20.0
270.5
56.3
(20.8)
(10.1)
(7.3)
–
12.8
301.4
Note 8: Retained earnings
Retained earnings comprise:
At 1 January 2015
Loss for the year
Dividends paid to ordinary shareholders
Distributions to Additional Tier 1 security holders (net of tax)
Purchase of own shares
Award of shares from own shares
Capital contribution – share based payments
As at 31 December 2015
Profit for the year
Dividends paid to ordinary shareholders
Distributions to Additional Tier 1 security holders (net of tax)
Purchase of own shares
Award of shares from own shares
Capital contribution – share based payments
As at 31 December 2016
Employee benefit trust
The Company established an EBT in 2011 in connection with the operation of the Company’s share plans. For further details refer to
note 31 in the consolidated financial statements.
Notes to the Parent Company financial statements 264 I Virgin Money Group Annual Report 2016
Note 9: Analysis of financial assets and financial liabilities
by measurement basis
2016
Financial assets
Loans and advances to banks
Derivative financial instruments
Amounts owed from subsidiary undertakings
Total financial assets
Non financial assets
Total assets
Financial liabilities
Deposits from banks
Derivative financial instruments
Amounts owed to subsidiary undertakings
Total financial liabilities
Total liabilities
Equity
Total liabilities and equity
2015
Financial assets
Loans and advances to banks
Derivative financial instruments
Amounts owed from subsidiary undertakings
Total financial assets
Non financial assets
Total assets
Financial liabilities
Deposits from banks
Derivative financial instruments
Amounts owed to subsidiary undertakings
Total financial liabilities
Total liabilities
Equity
Total liabilities and equity
Financial liabilities
at amortised cost
£m
Loans and
receivables
£m
Derivatives not in
IAS 39 hedges
£m
–
–
–
–
2.5
–
86.2
88.7
41.0
–
13.7
54.7
–
–
–
–
–
4.6
–
4.6
–
4.3
–
4.3
Financial liabilities
at amortised cost
£m
Loans and
receivables
£m
Derivatives not in
IAS 39 hedges
£m
–
–
–
–
1.6
–
164.7
166.3
103.0
–
12.8
115.8
–
–
–
–
–
1.5
–
1.5
–
0.7
–
0.7
Total
£m
41.0
4.6
13.7
59.3
1,373.8
1,433.1
2.5
4.3
86.2
93.0
93.0
1,340.1
1,433.1
Total
£m
103.0
1.5
12.8
117.3
1,131.3
1,248.6
1.6
0.7
164.7
167.0
167.0
1,081.6
1,248.6
Notes to the Parent Company financial statements Notes to the Parent Company financial statements
Virgin Money Group Annual Report 2016 I 265
Note 10: Fair value of financial assets and financial liabilities
Level 1
£m
Level 2
£m
Level 3
£m
2016
2015
Total
fair value
£m
Total
carrying
value
£m
Total
fair value
£m
Total
carrying
value
£m
–
–
–
–
41.0
13.7
86.2
2.5
–
–
–
–
41.0
13.7
86.2
2.5
41.0
13.7
86.2
2.5
103.0
12.8
103.0
12.8
164.7
164.7
1.6
1.6
Financial assets
Loans and advances to banks
Amounts due from subsidiary
undertakings
Financial liabilities
Amounts owed to subsidiary
undertakings
Deposits from banks
The Company has £0.3 million (2015: £0.8 million) of net derivative financial instruments classified as level 2 in the fair
value hierarchy.
Note 11: Cash flow statements
(a) Change in operating assets
Change in derivative financial assets
Change in other operating assets
Change in operating assets
(b) Change in operating liabilities
Change in derivative financial liabilities
Change in other operating liabilities
Change in operating liabilities
(c) Non-cash and other items
Other non-cash items
Total non-cash and other items
2016
£m
(3.1)
0.3
(2.8)
2016
£m
3.6
0.9
4.5
2016
£m
1.0
1.0
2015
£m
(0.4)
0.4
–
2015
£m
0.5
(1.2)
(0.7)
2015
£m
3.4
3.4
(d) Analysis of cash and cash equivalents as shown in the balance sheet
Cash and cash equivalents consists of loans and advances to banks of £41.0 million at 31 December 2016 (31 December 2015:
£103.0 million)
266 I Virgin Money Group Annual Report 2016
Note 12: Related party transactions
Key Management Personnel
The Key Management personnel of the Company are Key Management personnel of the Group, with relevant disclosures given in
note 36 to the consolidated financial statements. The Company has no employees (2015: nil).
As discussed in note 7 of the consolidated financial statements, the Group provides share based compensation to employees of
subsidiary undertakings through a number of schemes. These awards are all in relation to shares in the Company and the cost of
providing those benefits is not recharged to the subsidiary undertaking, therefore is recognised as a capital contribution.
Other transactions
Recharges and trading balances owed to/(from) subsidiaries
Loans from subsidiaries
Dividend payment to Virgin Group Holdings Limited
Transaction value
Year ended 31 December
Balance outstanding
at 31 December
2016
£m
0.7
2.2
7.3
2015
£m
0.8
3.8
2.2
2016
£m
(0.3)
69.5
–
2015
£m
(2.6)
151.2
–
Notes to the Parent Company financial statements Virgin Money Group Annual Report 2016 I 267
Alternative Performance Measures
The Group analyses its performance on an underlying basis, as described in the basis of preparation of the financial results on
pages 54 and 55, and reconciled to the statutory results in note 2 to the financial statements. These are consistent with the
Board and the Executive’s view of the Group’s underlying performance without the distortions of items and timing differences
which are not reflective of the Group’s ongoing business activities.
The Group also calculates a number of metrics that are commonly used and reported throughout the banking industry on an
underlying basis, as these provide the Board and the Executive with a consistent view of these measures from period to period
and provide relevant information to investors and other external stakeholders.
Descriptions of alternative performance measures used throughout this Report, including their basis of calculation, are
set out below.
Cost of risk
Impairment charges net of debt recoveries divided by simple average gross loans for the period.
Cost:income ratio
Operating expenses divided by total income, calculated on an underlying basis.
JAWS
The difference between the period on period percentage change in total income less the period on period
change in operating expenses calculated on an underlying basis.
e.g. an increase in underlying total income of 5% and an increase in underlying total operating expenses
of 2% corresponds to JAWS of 3%.
Loan-to-deposit ratio
The ratio of loans and advances to customers, net of allowances for impairment, divided by customer
deposits (each excluding adjustments for fair value of portfolio hedging).
Net interest margin (NIM)
Net interest income, calculated on an underlying basis, as a percentage of average interest-earning assets.
Return on assets
Profit attributable to equity owners divided by closing total assets.
Return on tangible equity (RoTE)
Underlying profit after tax, adjusted to evenly spread all distributions to Additional Tier 1 securities holders,
divided by average tangible equity (equity that excludes Additional Tier 1 securities and intangible assets).
Tangible net asset value per share
Net assets excluding intangible assets and Additional Tier 1 securities divided by the closing number of
Ordinary Shares (excluding own shares held).
Underlying basic earnings
per share
Underlying profit after tax adjusted to evenly spread all distributions to Additional Tier 1 securities holders,
divided by the weighted-average number of Ordinary Shares outstanding during the period excluding own
shares held in employee benefit trusts or held for trading.
Underlying net interest income
Statutory net interest income adjusted for a subset of certain items as detailed on pages 54 and 55 and
note 2 to the financial statements.
Underlying profit/(loss) before tax
Statutory profit/(loss) before tax adjusted for certain items as detailed on pages 54 and 55 and note 2 to the
financial statements.
Underlying total income
Statutory total income adjusted for a subset of certain items as detailed on pages 54 and 55 and note 2 to the
financial statements.
The Group also discloses a number of capital and liquidity metrics relevant to its financial position for which calculation is
required under prudential rules issued by the PRA and FCA, in line with requirements of UK/EU legislation and Basel III. The bases
of calculation of those metrics is defined within the relevant legislation (for example CRD IV) and are disclosed in the Glossary.
268 I Virgin Money Group Annual Report 2016
Glossary
Advanced Internal Ratings Based
(AIRB) Approach
A CRD IV approach for measuring exposure to credit risks. The method of calculating credit risk capital
requirements uses internal probability of default (PD), loss given default (LGD) and exposure at default (EAD)
models. AIRB approaches may only be used with Prudential Regulation Authority (PRA) permission.
Basel III
Basis Point (bps)
Capital at Risk (CaR)
CASS
Certificates of Deposit
Charge-Off
Global regulatory standard on Bank Capital Adequacy, Stress Testing and Market and Liquidity proposed by
the Basel Committee on Banking Supervision in 2010. See also CRD IV.
One hundredth of a per cent (0.01%). 100 basis points is 1%. Used when quoting movements in interest
rates or yields.
Approach set out for the quantification of interest rate risk expressed as the impact to the present value of
the Group’s capital under interest rate sensitivity analysis.
Client Assets Sourcebook – included in the FCA Handbook and sets out the requirements with which firms
must comply when holding or controlling client assets.
A certificate issued by a bank to a person depositing money for a specified length of time at a specified
rate of interest.
Charge off occurs on outstanding credit card balances which are deemed irrecoverable. This involves the
removal of the balance and associated provision from the balance sheet with any remaining outstanding
balance recognised as a loss.
Common Equity Tier 1 Capital
(CET1)
The highest quality form of capital under CRD IV that comprises common shares issued and related share
premium, retained earnings and other reserves excluding the cash flow hedging reserve, less specified
regulatory adjustments.
CRD IV
In June 2013, the European Commission published legislation for a Capital Requirements Directive (CRD)
and Capital Requirements Regulation (CRR) which form the CRD IV package. The package implements
the Basel III proposals in addition to the inclusion of new proposals on sanctions for non-compliance with
prudential rules, corporate governance and remuneration. The rules are implemented in the UK via the
PRA policy statement PS7/13 and came into force from 1 January 2014, with certain sections subject to
transitional phase in.
Credit Enhancements
Techniques that improve the credit standing of financial obligations; generally those issued by a structured
entity in a securitisation.
Credit Valuation Adjustments
(CVA)
These are adjustments to the fair values of derivative assets to reflect the creditworthiness of
the counterparty.
Cross-Currency Swaps
Debt Securities
Earnings at Risk (EaR)
Expected Loss (regulatory)
An arrangement in which two parties exchange specific principal amounts in different currencies at inception
and subsequent interest payments on the principal amounts.
Debt securities are assets held by the Group representing certificates of indebtedness of credit institutions,
public bodies or other undertakings, excluding those issued by Central Banks.
Approach set out for the quantification of interest rate risk expressed as the impact to forecast net interest
income under interest rate sensitivity analysis.
Regulatory expected loss represents the anticipated loss, in the event of a default, on a credit risk exposure
modelled under the Advanced Internal Ratings Based approach. Expected loss is determined by multiplying
the associated PD, LGD and EAD.
Exposure at Default (EAD)
An estimate of the amount expected to be owed by a customer at the time of a customer’s default.
Forbearance
Full Time Equivalent (FTE)
Funding for Lending Scheme (FLS)
Funding Risk
Impaired Assets
Impairment Allowance
Forbearance takes place when a concession is made on the contractual terms of a loan in response to
borrowers’ financial difficulties; or for where the contractual terms have been cancelled for credit cards.
Forbearance options are determined by assessing the customer’s personal circumstances.
A full time employee is one that works a standard five day week. The hours worked by part time employees
are measured against this standard and accumulated along with the number of full time employees and
counted as full time equivalents.
The Bank of England launched the Funding for Lending scheme in 2012 to allow banks and building societies
to borrow from the Bank of England at cheaper than market rates for up to four years. This was designed to
increase lending to businesses by lowering interest rates and increasing access to credit.
The inability to raise and maintain sufficient funding in quality and quantity to support the delivery of the
business plan.
Loans that are in arrears or where there is objective evidence of impairment, and where the carrying amount
of the loan exceeds the expected recoverable amount.
Impairment allowances are a provision held on the balance sheet as a result of the raising of a charge against
profit for the incurred loss inherent in the lending book. An impairment allowance may either be individual
or collective.
Virgin Money Group Annual Report 2016 I 269
Impairment Losses
An impairment loss is the reduction in value that arises following an impairment review of an asset that
determined that the asset’s value is lower than its carrying value. For impaired financial assets measured at
amortised cost, impairment losses are the difference between the carrying value and the present value of
estimated future cash flows, discounted at the asset’s original effective interest rate.
Interest Rate Risk
The risk of a reduction in the present value of the current balance sheet or earnings as a result of adverse
movement in interest rates.
Interest Rate Risk in the Banking
Book (IRRBB)
The risk of a reduction in the present value of the current balance sheet or earnings as a result of an adverse
movement in interest rates arising as a consequence of carrying out and supporting core business activities.
Internal Capital Adequacy
Assessment Process (ICAAP)
The part of the Pillar 2 assessment to be undertaken by a bank. The ICAAP allows financial institutions to
assess the level of capital that adequately supports all relevant current and future risks in their business. In
undertaking an ICAAP, a financial institution should be able to ensure that it has appropriate processes in
place to ensure compliance with CRD IV.
Leverage Ratio
Total Tier 1 Capital expressed as a percentage of Total assets (adjusted in accordance with CRD IV).
Liquidity Coverage Ratio (LCR)
Stock of high quality liquid assets as a percentage of expected net cash outflows over the following 30 days
according to CRD IV requirements.
Liquidity Risk
Loan-to-Value Ratio
Loss Emergence Period
Loss Given Default (LGD)
Master Netting Agreement
The inability to accommodate liability maturities and withdrawals, fund asset growth, and otherwise meet the
Group’s contractual obligations to make payments as they fall due.
The amount of a secured loan as a percentage of the appraised value of the security e.g. the outstanding
amount of mortgage loan as a percentage of the property’s value.
Under IAS 39, losses are recognised on an incurred basis. The loss emergence period allows for the
recognition of impairment in respect of losses that have been incurred but not reported. The emergence
period is measured as time between the emergence of impairment triggers and the time at which the
loss is incurred.
The estimated loss that will arise if a customer defaults. LGD comprises the actual loss (the part that is not
expected to be recovered), after taking account of credit risk mitigation, for example, any security held over
collateral and the economic costs associated with the recovery process.
An agreement between two counterparties that have multiple derivative contracts with each other that
provides for the net settlement of all contracts through a single payment, in a single currency, in the event
of default on, or termination of, any one contract.
Net Interest Income
The difference between interest received on assets and interest paid on liabilities.
Net Promoter Score (NPS)
Net Stable Funding Ratio (NSFR)
A measure of satisfaction that ranges between -100 and +100 and represents the likelihood of respondents
recommending Virgin Money, its products or services to others on a scale of between 0 and 10 (where 10
represents the most positive score).
Those scoring 9 to 10 are categorised as Promoters, those scoring 0 to 6 as Detractors and those scoring 7 to
8 as Passives.
The NPS is calculated by subtracting the percentage of respondents who are Detractors from the percentage
of respondents that are Promoters. Passives count towards the total number of respondents and thus
decrease the percentage of Detractors and Promoters.
The ratio of available stable funding to required stable funding over a one year time horizon, assuming a
stressed scenario. The ratio is required to be 100% with effect from 2018. Available stable funding would
include such items as equity capital, preferred stock with a maturity of over 1 year, or liabilities with a
maturity of over 1 year.
Percentage Point (pp)
Unit for measuring the difference of two percentages. A change from 1% to 2% is 1 percentage point.
Pillar 1
Pillar 2
Pillar 3
Probability of Default (PD)
Repurchase Agreements (Repos)
The part of CRD IV that sets out the process by which regulatory Capital requirements should be calculated
for credit, market and operational risk.
The part of CRD IV that ensures financial institutions hold adequate capital to support the relevant risks
in their business. It also encourages financial institutions to develop and use enhanced risk management
techniques in monitoring and managing their risks.
The part of CRD IV that sets out the information banks must disclose in relation to their risks, the amount
of capital required to absorb them, and their approach to risk management. The aim is to strengthen
market discipline.
The probability of a customer defaulting over a defined outcome period. Default occurs where a borrower has
missed 6 months of mortgage repayments or 3 months of credit card repayments, or the borrower is deemed
to be unlikely to repay their loan. The outcome period varies for assessment of capital requirements and for
assessment of provisions.
A form of short-term funding where one party sells a financial asset to another party with an agreement
to repurchase at a specific price and date. From the seller’s perspective such agreements are repurchase
agreements (repos) and from the buyer’s reverse repurchase agreements (reverse repos).
270 I Virgin Money Group Annual Report 2016
Glossary
Risk Appetite
Risk-Weighted Assets
Securitisation
Sovereign Exposures
Standardised Approach
Stress Testing
Tier 1 Capital
The risk appetite sets limits on the amount and type of risk that the Group is willing to take in order to meet
its strategic objectives.
A measure of a bank’s assets adjusted for their associated risks. Risk weightings are established in accordance
with PRA rules and are used to assess capital requirements and adequacy under Pillar 1.
Securitisation is a process by which a group of assets, usually loans, are aggregated into a pool, which is used
to back the issuance of new securities through an SPV.
Exposures to central governments and central government departments, central banks and entities owned or
guaranteed by the aforementioned.
In relation to credit risk, a method for calculating credit risk capital requirements using External Credit
Assessment Institutions (ECAI) ratings of obligors (where available) and supervisory risk weights. In relation
to operational risk, a method of calculating the operational risk capital requirement by the application of a
supervisory defined percentage charge to the gross income of specified business lines.
Techniques where plausible events are considered as vulnerabilities to ascertain how this will impact the
capital or liquidity resources which are required to be held.
A measure of banks financial strength defined by the PRA. It captures Common Equity Tier 1 capital plus
other Tier 1 securities in issue, but is subject to deductions including in respect of material holdings in
financial companies.
Tier 1 Capital Ratio
Tier 1 capital as a percentage of risk-weighted assets.
Tier 2 Capital
A further component of regulatory capital defined by the PRA for the Group. It comprises eligible collective
assessed impairment allowances under CRD IV.
Term Funding Scheme (TFS)
The Bank of England launched the Term Funding Scheme in 2016 to allow banks and building societies to
borrow from the Bank of England at rates close to Bank Base Rate. This is designed to increase lending to
businesses by lowering interest rates and increasing access to credit.
Virgin
Virgin Group Holdings Limited.
Virgin Money Trademark Licence
Agreement
The agreement under which Virgin Enterprises Limited grants perpetual licence to Virgin Money to use the
‘Virgin’ and ‘Virgin Money’ trademarks.
WLR
WLR IV VM LLC and WLR IV VM II LLC, together formerly major shareholders of the Company.
Virgin Money Group Annual Report 2016 I 271
Abbreviations
AGM Annual General Meeting
FRC
Financial Reporting Council
LIBOR London Inter-Bank Offered Rate
AIRB
Advanced Internal Ratings Based
FSCS
Financial Services Compensation Scheme
AT1
BBR
BOE
Additional Tier 1
Bank Base Rate
Bank of England
FTE
FTP
Full Time Equivalent
Funds Transfer Pricing
GHG Greenhouse Gas
LCR
LGD
LTIP
Liquidity Coverage Ratio
Loss Given Default
Long-Term Incentive Plan
NIM Net Interest Margin
CET1
Common Equity Tier 1 Capital
HMRC Her Majesty’s Revenue and Customs
NPS
Net Promoter Score
CML
Council of Mortgage Lenders
HPI
House Pricing Index
NSFR Net Stable Funding Ratio
CONC Consumer Credit Sourcebook
HQLA High Quality Liquid Assets
OTC Over-the-Counter
CRD
CRR
CVA
DTR
Capital Requirements Directive
IAS
International Accounting Standards
PCA
Personal Current Account
Capital Requirements Regulation
IASB
International Accounting Standards Board
PD
Probability of Default
Credit Valuation Adjustment
ICAAP Internal Capital Adequacy
Assessment Process
PRA
Prudential Regulation Authority
Disclosure Guidance and
Transparency Rules
IFDS
International Financial Data Services Limited
RoTE Return on Tangible Equity
EBO
Everyone better off
IFRS
International Financial Reporting Standards
RMBS Residential Mortgage Backed
Securities
EAD
ECA
EPS
FCA
FLS
Exposure At Default
ILAA Individual Liquidity Adequacy Assessment
SME
Small or Medium-sized Enterprise
Essential Current Account
IPO
Initial Public Offering
Earnings per share
IRRBB Interest Rate Risk in the Banking Book
SPV
TFS
Special Purpose Vehicle
Term Funding Scheme
Financial Conduct Authority
ISA
Individual Savings Account
TSYS Total System Services, Inc
Funding for Lending Scheme
ISDA International Swaps and Derivatives
Association
FPC
Financial Policy Committee
272 I Virgin Money Group Annual Report 2016
Shareholder Information
Annual General Meeting
The AGM will be held on 3 May 2017 at the offices of Allen & Overy at One Bishops Square, London, E1 6AD. Further details about
the meeting, including the proposed resolutions, can be found in our Notice of AGM which will be issued to shareholders and
available on our website in due course.
Shareholder concentration
As of 31 December 2016
Individuals
Banks & Nominees
Other companies
Other corporates
Range of shareholdings:
1-1,000
1,001-10,000
10,001-100,000
100,001-1,000,000
1,000,001-10,000,000
>10,000,001
Registrar
Number of
shares –
millions
Shareholdings
0.5
257.2
172.5
14.7
444.9
481
387
84
43
995
Number of
shares –
millions
Shareholdings
0.2
0.6
5.0
52.4
195.0
191.7
444.9
507
149
130
140
65
4
995
%
0.1
57.8
38.8
3.3
100.0
%
0.0
0.1
1.1
11.8
43.8
43.2
100.0
The Virgin Money share register is maintained by Equiniti Limited. Equiniti is responsible for keeping Virgin Money’s register of
members up to date and for administering the payment of dividends.
Enquiries
Please contact Equiniti if you have any enquiries about your Virgin Money shareholding, including the following:
> Change of name or address.
> Change of bank account details.
> Loss of share certificate, dividend warrant or tax voucher.
> To obtain a form for dividends to be paid directly to your bank or building society account (tax vouchers will be sent to your
registered address unless you request otherwise).
> Request for copies of the report and accounts in alternative formats for shareholders with disabilities.
> Lost or out of date dividend payments.
> Share transfers.
> Information regarding the administration of your shareholding.
UK – 0371 384 2937
Textphone – 0371 384 2255
Overseas – +44 (0)121 415 0857
Lines are open 8.30am to 5.30pm Monday to Friday (except UK public holidays).
Equinity operates a web-based enquiry and portfolio management service for shareholders www.shareview.co.uk
Address: Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA.
This report is printed on Cocoon Silk 130, made
from 100% genuine de-inked post-consumer
waste and is FSC® certified.
Merrill Corporation Ltd, London
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6
VIRGIN MONEY
GROUP
ANNUAL REPORT
AND ACCOUNTS
2016
Issued by Virgin Money
Holdings (UK) plc.
Registered office:
Jubilee House, Gosforth,
Newcastle upon Tyne NE3 4PL
Registered in England
and Wales no.03087587