Virgin Money Group
Annual Report and Accounts
2017
There’s Money and
There’s Virgin Money
About us
With our powerful brand, strong balance sheet
and customer-focused culture, we delivered
a strong performance for all of our
stakeholders in 2017.
Virgin Money Group Annual Report 2017 I 01
What’s in this report?
Strategic Report
Five year track record
2017 Company highlights
Financial highlights
Business performance
Chair's statement
Chief Executive’s review
Women in Finance Charter
Market overview
Our business model and strategy
Delivering for stakeholders
Risk overview
Financial Results
Summary of Group results
Business line results
Governance
Letter from the Chair
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
Other information
Alternative Performance Measures
Glossary
Abbreviations
Shareholder information
[]
2
3
4
6
8
10
14
16
18
20
30
41
52
62
64
69
71
95
120
127
129
130
133
134
191
200
251
262
263
266
267
The 2017 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
Chair
26 February 2018
Cover image: Virgin Money Lounge, Manchester
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
02 I Virgin Money Group Annual Report 2017
Five year track record
2017
2016
2015
2014
2013
Growth
Mortgage balances
£bn
33.7
29.7
25.5
21.9
Credit card balances
£bn
3.0
Total assets
Deposit balances
Quality
Cost of risk
Common Equity Tier 1 capital ratio
Total capital ratio
Leverage ratio
Returns
£bn
41.1
£bn
30.8
%
%
%
%
0.13
13.8
18.1
3.9
2.4
35.1
28.1
0.13
15.2
20.4
4.4
1.6
30.2
25.1
0.12
17.5
20.2
4.0
1.1
26.5
22.4
0.07
19.0
22.1
4.1
Statutory total income
£m
662.7
581.4
521.9
438.3
Statutory profit before tax
£m
262.6
194.4
138.0
34.0
2017
highlights
Total customer loan
19.6
0.8
24.6 balances grew by
21.1 +14%
0.15
Low cost of risk
15.5
18.6 0.13%
3.8
383.0
Return on tangible
equity
185.4 14.0%
Underlying profit before tax
£m
273.3
213.3
160.7
104.7
43.6
Net interest margin
Cost:income ratio
Return on tangible equity
Statutory basic earnings
per share
Underlying basic earnings
per share
%
%
%
p
p
1.57
52.3
14.0
1.60
57.2
12.4
1.65
63.5
10.9
1.50
72.5
7.4
1.26 Statutory basic
80.1 earnings per share
2.6 +29%
37.8
29.4
22.9
(0.4)
42.4
39.8
32.7
26.8
18.5
5.6
Alternative performance measures
These results have been prepared in accordance with
International Financial Reporting Standards (IFRS). Aspects
of the results are adjusted for IPO share based payments,
strategic items and fair value (losses)/gains on financial
instruments, to reflect underlying performance. Further
information, including reconciliations of the Group’s statutory
and underlying results, is reported on page 48 and in note 2 to
the consolidated financial statements.
The Group uses a number of alternative performance
measures, including underlying profit, in the analysis and
discussion of its business performance and financial position.
Further information is provided on page 262.
Non-financial reporting
The Group has complied with the new EU non-financial
reporting directive requirements within the strategic report.
The non-financial information provided by the Group
can be found at:
> Description of business model – page 18
> Principal risks – page 36
> Environmental – page 28
> Employees – pages 14 and 22
> Social matters – page 26
> Human Rights and Modern Slavery statement – page 25
> Anti-bribery statement – page 25
Virgin Money Group Annual Report 2017 I 03
2017 Company highlights
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
In 2017 we delivered a strong performance for all of our stakeholders.
Highlights included:
i
F
n
a
n
c
a
i
Company and shareholders
Growth of
37%
in statutory profit after tax
Growth of
28%
in underlying profit before tax
Growth of
9%
in tangible net asset value per share
Final dividend
Recommended final dividend of 4.1 pence per ordinary share. This will result in a total dividend for
2017 of 6.0 pence per share, an increase of 17.6% compared to 2016
l
R
e
s
u
l
t
s
Colleagues
Customers
More than
3,000
colleagues work for
Virgin Money and our
latest engagement score
of 76% compares well
against industry standards
Increased our overall customer
Net Promoter Score (NPS) to
+40
from +29 in 2016, maintaining
our position as one of the
best-rated retail banks in the
UK for customer advocacy
Communities
Corporate Partners
Virgin Money Giving
helped to raise almost
£95 million
for good causes.
Our not-for-profit online
donation service has raised
more than £600 million for
charities since launching
in 2009
Increased our
intermediary NPS to
+61
from +55 in 2016. We also won
‘Best Lender for Partnership’
from Legal & General for the
third consecutive year and ‘Best
Innovative Lender’ from Sesame
Bankhall Group
GovernanceRisk Management ReportFinancial StatementsOther Information
04 I Virgin Money Group Annual Report 2017
Financial highlights
Total customer loan balances
14%
growth
Deposit balances
10%
growth
2017
2016
2015
£36.7bn
£32.1bn
£27.1bn
2017
2016
2015
£30.8bn
£28.1bn
£25.1bn
Positive JAWS
9.8%
13.5% growth in underlying total income
against 3.7% growth in expenses
2017 Income
£666.0m
2017 Expenses
£348.5m
2016 Income
£586.9m
2016 Expenses
£336.0m
2015 Income
£523.5m
2015 Expenses
£332.5m
Cost:income ratio
52.3%
for 2017
2017
2016
2015
52.3%
57.2%
63.5%
Underlying profit
before tax
28%
growth
Statutory profit
after tax
37%
growth
2017
2016
2015
£273.3m
£213.3m
£160.7m
2017
2016
2015
£192.1m
£140.1m
£111.2m
Virgin Money Group Annual Report 2017 I 05
NIM
1.57%
for 2017
2017
2016
2015
CET1 Ratio
13.8%
for 2017
2017
2016
2015
Return on tangible equity
14.0%
for 2017
1.57%
1.60%
1.65%
2017
2016
2015
14.0%
12.4%
10.9%
Tangible net asset value per share
9%
growth
13.8%
15.2%
17.5%
2017
2016
2015
£2.97
£2.73
£2.54
Underlying basic earnings
per share
22%
growth
Statutory basic earnings
per share
29%
growth
2017
2016
2015
39.8 pence
32.7 pence
26.8 pence
2017
2016
2015
37.8 pence
29.4 pence
22.9 pence
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
06 I Virgin Money Group Annual Report 2017
Business performance
Mortgages
Savings
We offer customers a range of residential
and buy-to-let mortgages in the prime
secured lending market. Mortgages are
sold predominantly through our intermediary
partners and supplemented by direct
distribution.
We offer customers a range of competitively-
priced instant access and fixed term savings
products, both also available as ISAs.
Savings are sold primarily through our digital
channels and supplemented by our Stores
and contact centres.
Mortgage balances increased to
£33.7 billion
Growth of 13% was driven by our
award-winning intermediary proposition.
Deposit balances increased to
£30.8 billion
Growth of 10% was underpinned by our
award-winning ISA proposition.
Lending to first time buyers
increased
20% year-on-year. New build completions
increased by almost 50% year-on-year.
Cash ISA balances increased to
£16.6 billion
Growth of 27% year-on-year reflected the
strong appeal of our ISA products.
Mortgage retention supported
balance growth
72% of mortgage customers selected
a new mortgage product with us at the end
of their existing deal, up from 68% in 2016.
Strong retention of savings
customers
89% of fixed rate savings
customers stayed with us at the end
of their product term.
Mortgage completion spread
168 bps from 187 bps in 2016.
Total cost of funds reduced to
59 bps from 80 bps in 2016.
25.5
29.7
33.7
25.1
28.1
30.8
2015
2016
2017
2015
2016
2017
Mortgage balances (£bn)
Deposit balances (£bn)
Virgin Money Group Annual Report 2017 I 07
Credit cards
We offer prime credit quality customers
a range of balance transfer and retail
credit cards. Cards are sold primarily
through our digital channels.
Financial services
We offer customers investment,
insurance and currency services.
We work with specialist partners
to deliver these propositions,
primarily through digital channels.
Credit card balances increased to
£3.0 billion
Growth of 24% was achieved while consistently
targeting low risk customer segments.
Funds under management
£3.7 billion
Growth of 10% including the performance
of the FTSE All-Share Index.
Market share
4.1% share of the £71 billion cards market.
Retail spend per active account
+8% retail spend per active account
supported by increased customer
engagement and ‘Virgin Money Back’,
our new cashback initiative.
Stocks & shares ISA sales
+40% benefitting from the increased
£20,000 ISA savings allowance and strong
partnership sales through Virgin Atlantic Airways.
Travel insurance NPS
+38 from +35 in 2016 demonstrating
the benefit of improvements to the customer
journey in our direct channel.
Cost of risk
1.51% compared to 1.70% in 2016.
reflecting continued low arrears performance.
Life insurance
+4,000 policies. Our new life insurance
proposition performed well in its first year
since launch.
2.4
3.0
3.0
3.4
3.7
1.6
2015
2016
2017
2015
2016
2017
Credit card balances (£bn)
Funds under management (£bn)
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
08 I Virgin Money Group Annual Report 2017
Chair’s statement
Glen Moreno Chair
I am pleased to report that Virgin
Money once again delivered profitable
growth despite a year of economic
uncertainty and increased competition
in the UK banking sector.
Overview and Strategy
2017 was a year of continued strong progress for
Virgin Money. The overall performance of the business
demonstrated delivery against all three elements of our
strategy of growth, quality and returns. We generated market-
beating growth across our core products, maintained a high-
quality balance sheet and continued to improve operating
leverage, resulting in increased profitability.
As a result of this strong financial performance, the Board has
recommended a final dividend of 4.1 pence per ordinary share.
This will result in a total dividend for the year of 6.0 pence per
share, an increase of 17.6 per cent compared to 2016.
The UK banking sector continues to face a number of
near-term challenges. The future performance of the UK
economy is uncertain. The volume and pace of regulatory
change remains high and competitive pressures in our
product markets increased during the year.
Against the backdrop of regulatory change and heightened
competition, the Board took time to review and refresh our
strategy to underpin profitable growth in the long term.
As a result of the significant technological and regulatory
change impacting UK retail banking, the focus of our
refreshed strategy is on broadening our retail customer
proposition and launching a range of products and services
for the Small and Medium Enterprises (SME) banking
market in the UK.
A particular benefit of this strategy is that it will allow us to
diversify our funding sources so that we remain competitively
funded in an environment of lower asset pricing. We plan
to target new sources of funding in the SME deposit market
and through our new digital bank, which aims to increase our
reach into current accounts and additional savings markets.
Broadening our customer proposition in this way represents
a significant strategic step in support of the long-term success
of the business and our ability to deliver sustainable value
to shareholders.
Our purpose and corporate culture
Our corporate ambition is 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 corporate partners and
delivering sustainable profits to our shareholders. Our culture
is based on this ambition and sustains a virtuous circle which
raises awareness of the Virgin Money brand and business as a
force for good in the communities in which we work.
We believe that our culture is unique in the UK banking sector.
It provides the foundation for our strategy and differentiated
approach to banking.
Virgin Money Group Annual Report 2017 I 09
We are dedicated to supporting the communities in which we
work to help them flourish, both socially and economically.
Over 13,900 charities have now registered with Virgin Money
Giving, our not-for-profit online donation platform, and more
than £600 million has been donated to charities through the
service since its launch in 2009, including £95 million in 2017.
Chair succession
After three years as Chair, I confirmed my intention to retire
in 2018 and to return home to the USA. Irene Dorner will join
the Board as Chair Elect on 1 March 2018, becoming Chair on
1 April 2018, following my retirement. Irene brings a wealth of
retail banking experience at an important time for the Group.
Outlook
We enter 2018 with customer advocacy at its highest ever
level and a strongly performing business. Regulatory change
and competitive pressures will bring both challenges and
opportunities. We have refreshed our strategy to address
these issues and to enable the business to continue to grow
profitably in the long term. I am pleased that the strength of
our core business allows us to fund capital investment and
innovation from internal capital resources.
We have made significant progress in my three years as
Chair and I would like to reiterate my thanks to the
Board, the management team and all colleagues across
the business for everything they have done to make Virgin
Money succeed.
Glen Moreno
Chair
26 February 2018
The Virgin Money Foundation, which tackles social and
economic disadvantage, awarded grants of nearly £3 million
in 2017. You can read more about how we benefit our
stakeholders on page 20.
Remuneration
The remuneration structure at Virgin Money is designed
to link reward with the delivery of our strategy of growth,
quality and returns. We believe in fair rewards for colleagues
whose performance is aligned to delivering long-term and
sustainable returns for shareholders.
During the year the business continued to grow strongly
producing increased statutory profits, strong capital
generation and an increased dividend. As a result, the annual
bonus outcome for Executive Directors was set at the upper
end of the range of potential outcomes.
More information on how we ensure our approach to
remuneration supports the business strategy can be found
in our remuneration report on page 95.
Directors
We are committed to ensuring that the Board has the right
balance of skills and experience to meet the challenges
and opportunities ahead. As a result we review the Board’s
composition regularly. A number of changes were announced
during the year as part of the Board’s succession planning to
ensure that the Board is well placed for the next phase of the
Group’s development.
Darren Pope succeeded Norman McLuskie as Chair of the
Audit Committee, with Norman assuming the Chair of the
Remuneration Committee, succeeding Marilyn Spearing.
Additionally, Geeta Gopalan has become Chair of the Risk
Committee, succeeding Colin Keogh, who now chairs Virgin
Money Unit Trust Managers Limited.
I would like to thank Non-Executive Director Gordon
McCallum, who retired from the Board in October 2017,
for his significant contribution to the development of Virgin
Money over the past 20 years. Amy Stirling was nominated
by the Virgin Group to replace Gordon and joined the Board
in December 2017.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
10 I Virgin Money Group Annual Report 2017
Chief Executive’s review
Jayne-Anne Gadhia CBE Chief Executive
We have delivered strong financial
performance in 2017 and made
considerable progress against our
strategic objectives. We met or
exceeded all of our financial targets for
the year and we are confident about the
long term prospects for the company.
The strength of the business, our
customer focused strategy, and our
new strategic initiatives, including SME
and digital, position us well to continue
growing profitably while serving and
growing our customer base with good
value, straightforward products and
outstanding customer service.
Overview
We have delivered strong financial performance in 2017 as
we continued to deliver on our customer focused strategy
of growth, quality and returns. As a result of continuing
operational leverage and our focus on maintaining excellent
asset quality we met or exceeded all of our financial targets
for the year. Underlying profit before tax increased to
£273.3 million and return on tangible equity improved to
14.0 per cent.
On an underlying basis, total income increased by 13.5 per
cent while cost growth was limited to 3.7 per cent. As a result,
our cost:income ratio improved to 52.3 per cent, from 57.2 per
cent in 2016, and we exited 2017 with a ratio of 49.4 per cent
in the fourth quarter.
Statutory profit after tax increased by 37.1 per cent to
£192.1 million, generating 182 basis points of Common Equity
Tier 1 (CET1) capital after distributions to Additional Tier 1
capital holders. This strong capital generation supported
the ongoing growth of our lending portfolios together with
ongoing investment in both our core business and the build of
our digital bank.
As a consequence, our Common Equity Tier 1 ratio was 13.8
per cent at the end of 2017, while our total capital ratio was
18.1 per cent and our leverage ratio was 3.9 per cent. The cost
of risk remained at 13 basis points, demonstrating continued
high asset quality as well as a benign economic environment.
As a result of our performance in 2017 the Board has
recommended a final dividend of 4.1 pence per ordinary
share, bringing the total dividend per share for the year
to 6.0 pence. This represents an increase of 17.6 per cent
compared to 2016.
Over the course of the year, we announced new strategic
developments which will enable us to continue serving and
growing our customer base, while meeting the challenges of
regulatory change and an increasingly competitive market
environment in the key markets in which we operate.
The strength of the business combined with these new
strategic initiatives position us well to continue growing
profitably and we are confident about the long term prospects
for the business.
Customers and distribution
We provide our customers with good value products,
supported by outstanding service with the aim of driving
long lasting relationships and deeper product engagement.
By ensuring that customers are at the heart of our strategy,
the proportion of new product sales to existing customers
increased to 12.2 per cent, compared to 10.7 per cent in 2016.
We also further improved customer advocacy across all areas
of the business, with our overall Net Promoter Score (NPS)
increasing to +40, up from +29 at 2016.
Virgin Money Group Annual Report 2017 I 11
Our customers continue to choose our digital channels.
Our website remains the most popular channel, with over
28 million website visits, up from 22 million in 2016. 78 per
cent of sales were delivered digitally during the year and
the use of mobile devices to access products and services
increased to 52 per cent of all our digital interactions, up from
50 per cent in 2016.
Our Lounges complement our Store network and continue
to be a standout success. They deliver excellent customer
satisfaction with an NPS score of +87 matching best in class
peers in the retail sector. As a result, we will be opening a new
Lounge in Cardiff in 2018. Our Store network continues to play
an important role for customers with a 25 per cent increase
in new accounts opened in-Store year-on-year.
As a result of improving the Virgin Money Giving (VMG)
customer journey we now have 1.4 million registered users
of our not-for-profit online donation service. £95 million was
donated to charities from 2.2 million individual donations in
2017. We will aim to build deeper relationships with our VMG
customer base by engaging them beyond charitable donations
and exploring ways to meet more of their financial needs.
Business performance
We offer good value, straightforward and transparent
products and our multi-channel distribution model supports
cost effective growth in our deposit business. We continue to
offer our savings customers both good value and sustainable
savings rates in the context of the market. Our approach
delivered further improvements to our average cost of retail
funds and supported strong retention levels. We increased
deposit balances by 9.6 per cent year-on-year, while reducing
our cost of funds to 59 basis points from 80 basis points in
2016. In a competitive overall market for retail deposits,
we were delighted that customers continue to recognise the
value of our proposition with 89 per cent retention of fixed
rate maturities.
Our mortgage business remains high quality and performance
continues to benefit from strong retention of maturing
balances and an award-winning intermediary proposition.
Improvements in our intermediary proposition drove a
further increase in our intermediary NPS to +61 from +55
in 2016 and supported mortgage balance growth of 13 per
cent to £33.7 billion in 2017. During the year we extended our
mortgage proposition to help more people onto the housing
ladder and launched custom build and shared ownership
products. Overall we achieved a market share of gross
lending of 3.3 per cent despite lowering volumes towards
the end of the year to manage margins and protect returns
in an increasingly competitive market. Further progress in
our direct channel saw the number of mortgage applications
increase by 12 per cent from 2016 with the value of direct
mortgages exceeding £1 billion for the first time.
In our credit card business our focus has always been on
delivering strong and sustainable risk-adjusted returns
through a first-rate card proposition for customers in the
prime segment of the market. We now have 1.2 million
customers and I am pleased to report that we reached our
target of £3.0 billion high-quality credit card balances by the
end of 2017. As a result of our stringent underwriting criteria
we recruited 98 per cent of new balance transfer customers
from the highest quality customer segment. Customer
engagement increased as we improved our online service for
mobile usage and Virgin Money Back, our customer cashback
platform, supported an 8 per cent increase in average retail
spend per active account.
Our straightforward and transparent investment funds
continue to support growing funds under management of
£3.7 billion. New money inflows increased by 27 per cent
year-on-year and, supported by the increased ISA savings
allowance to £20,000, transfers of ISA balances into stocks
and shares ISAs were strong during the year.
Our new life insurance proposition performed well in its first
year since launch with sales, policies in force and income
all exceeding previous life insurance partnerships. The
contribution from travel insurance and currency services
was flat year-on-year as we focused on higher margin travel
insurance business at lower volumes.
Regulatory developments
From 1 January 2019 UK banks will be required to establish
ring-fenced operations separating retail from wholesale
activities. All of Virgin Money’s activities will be within the
ring-fence and we are on track to meet the relevant
requirements. As the high street banks may seek to deploy
excess ring-fenced deposits into the market, this could
lead to heightened competition. We remain well-placed to
continue competing for mortgage market share despite this
competitive backdrop.
The second Payment Services Directive (PSD2), which took
effect from 13 January 2018, together with Open Banking
allows customers to choose to share data from their banking
products with third parties. This will increase competition
in money transmission by allowing new entrants, including
new financial technology companies, to compete with the
established clearing banks. Although the impact is likely to
be felt most strongly and immediately in the personal current
account (PCA) market, in which we are not currently a material
participant, in the long-term we believe Open Banking and
PSD2 represent an opportunity for us to attract customers
from the high street banks.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
12 I Virgin Money Group Annual Report 2017
Outlook
Our central planning scenario for 2018 assumes a
continuation of relatively benign economic conditions,
modest economic growth and heightened competition as the
market readjusts to a rising interest rate environment and
regulatory changes. The macro and political environment,
including the impact of the UK leaving the European
Union, remains uncertain which adds a degree of caution
to our outlook.
The Bank of England increased interest rates for the first time
in a decade in November 2017 and has indicated that the pace
of interest rate increases is expected to be gradual.
Our natural long term share of the UK mortgage market
remains at 3 to 3.5 per cent. In 2018 we expect to grow our
mortgage and cards lending at a single digit percentage rate
with banking NIM towards the lower end of a 165 to 170 basis
points range. Cost discipline will continue as we invest in our
strategic developments and we expect the 2018 cost:income
ratio to be no higher than 50 per cent.
Our lending discipline will support asset quality and, including
the impact of IFRS 9, we expect our cost of risk to be no higher
than 20 basis points and to maintain a CET1 ratio around
13 per cent at the end of 2018.
We expect to maintain a solid double-digit return on tangible
equity in 2018.
We will continue to make progress with our SME roll-out and
the development of our digital bank over the course of 2018.
Over time, these initiatives will significantly increase the
breadth of our proposition, drive new sources of income and
reduce operating costs. A broader proposition, lower cost to
serve and new sources of funding will drive enhanced returns
and support sustainable value creation for shareholders over
the longer term.
Jayne-Anne Gadhia CBE
Chief Executive
26 February 2018
Refreshed strategy
At IPO we set out a number of ambitious targets to maintain
a high quality balance sheet while growing income and driving
shareholder returns. We have successfully delivered on those
initial targets, and we are confident about the next phase in
Virgin Money’s strategy.
To ensure that we continue to meet the changing needs of
our customers and navigate the wider changes in the market,
we are investing in our digital future and have updated our
customer-focused strategy of growth, quality and returns
to provide a strong platform for us to continue to grow
responsibly and profitably in the years ahead.
As part of this strategy, we are developing a data-driven,
customer-centric digital bank which will allow us to take
advantage of the significant technological and regulatory
changes shaping UK retail banking, broaden our customer
appeal and provide access to a wider pool of UK retail
banking revenues.
The new strategy will also diversify our funding through both
Small and Medium Enterprises (SMEs) deposits and increased
reach into the current accounts and savings markets. We
launched an SME deposit product in January 2018 and plan to
launch a Business Current Account (BCA) by the end of 2018.
The Virgin Money digital bank will be underpinned by next
generation technology and architecture, offering customers
a Universal Account that can be personalised to create a
unique proposition tailored to individual needs. In addition to
our current presence in the mortgage, credit card and retail
deposit markets, the digital bank will allow us to expand into
the current account and linked primary savings markets.
As such, we will provide an attractive proposition for
customers that will enable us to compete against the
incumbent banks for lower cost current account balances.
The operating cost per customer of the digital bank will
also be lower than in our core bank, improving our cost-
efficiency once operating at scale. Overall, we expect that
our strategy will not only result in enhanced returns for
shareholders in the longer term, but also enable us to continue
delivering innovative products and outstanding service to
our customers.
Colleagues
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 are empowered
to thrive in a truly inclusive business. To achieve this we have
extended our use of technology to support flexible working
and invested in the development of our people managers to
make sure they both value and support a diverse workforce.
Our latest colleague survey results showed that we achieved a
strong staff engagement score of 76 per cent, which compares
well against industry standards.
Virgin Money Group Annual Report 2017 I 13
Lounge Hosts, Virgin Money Lounge, Manchester.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
14 I Virgin Money Group Annual Report 2017
Women in Finance Charter
We are passionate about fairness,
equality and inclusion. We are committed
to achieving a 50:50 gender balance
throughout the business by 2020.
Aim
As part of the UK government’s drive to improve economic
productivity, I was asked by HM Treasury to review why
women make less progress in financial services than in other
industries. The ‘Empowering Productivity: Harnessing the
Talents of Women in Financial Services’ report was published
in 2016. We found that there are significant barriers to the
progress of women and breaking down these barriers will
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 these issues at Virgin Money. During 2017 we
continued to make good progress towards achieving our 2020
target of a 50:50 gender-balanced workforce.
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 the end of 2020;
> we publish progress against our 50:50 target annually; and
> we have linked annual performance related pay to
commitments to promote gender diversity for all members of
the Executive Committee.
The last commitment reflects the fact that gender balance
should be addressed as a business issue and rewarded as such.
As the CEO, one of my five personal objectives in 2017 was to
lead the business towards fairness, equality and balance in
relation to gender.
Progress in 2017
I am pleased to report that gender balance improved at all
levels of the company in 2017:
> female representation within senior management grades
increased to 29 per cent, an improvement of 32 per cent; and
> male representation in our entry level roles increased to 27 per
cent, an improvement of 8 per cent.
Whilst progress has been made, these two areas will remain
a focus given the under-representation of women in
senior roles and under-representation of men in customer
service positions.
I am pleased to report that we achieved gender balance in
hiring and promotions into senior management in 2017.
Whilst this represents good progress, the team that reports
to the Executive Committee continues to be dominated by
men. Men account for 68 per cent of the Executive Committee
and their direct reports, and 71 per cent of the wider senior
management team. To address this, all members of the
Executive Committee have an annual objective to improve
gender balance through recruitment, promotion and
development. There is no intention to promote or hire women
over men. Our aim is to create a genuinely level playing field
where both men and women succeed on merit.
Our second area of focus remains gender balance into entry
level roles. Whilst we increased male representation in 2017,
only 27 per cent of colleagues in customer service positions
are men. We are committed to ensuring our Stores and
contact centres are equally attractive to men and women as
places to work and develop careers.
Action in 2017
When researching and writing ‘Empowering Productivity:
Harnessing the Talents of Women in Financial Services’, it
became clear to me there are a number of key issues across
the industry which must be addressed in order to develop a
fully inclusive workforce at all levels. They include the need
to create the right culture, develop supportive line managers
and have the technology to support a flexible working
environment. In 2017, Virgin Money made progress on
these key areas:
Encouraging the right culture
> support to colleagues on maternity leave was enhanced,
including the provision of maternity mentoring to encourage
and enable continued career development;
> during 2017, 56 per cent of new fathers took extended
parental leave at an average of 11 weeks each. Our Shared
Parental Leave policy provides colleagues with the equivalent
of maternity pay when their partner returns to work; and
> we launched a Returners Programme enabling experienced
women and men who may have taken a career break, or are
looking to update their skills and knowledge, to transition into
new roles. The programme runs over a paid three month term
with the possibility of a permanent role on completion.
Investing in supporting people managers
> we delivered ‘unconscious bias’ training to all our current and
aspiring people managers to drive awareness of the issue and
to support them in developing strategies to manage it;
Virgin Money Group Annual Report 2017 I 15
> we required all recruitment agencies to provide us with diverse
lists of candidates and anonymous profiles, ensuring managers
decide who to interview on merit alone. Additionally, we use
mixed gender interview panels which reduce the potential for
gender bias; and
Priorities for 2018
Looking ahead to 2018, we intend to make further progress
by continuing to focus on management capability, a flexible
working culture and identifying and removing barriers to
fairness, equality and inclusion. In particular, we will:
> we continued to use a gender analysis tool in our annual pay
process to help managers understand the impact salary and
bonus outcomes have on the gender pay gap as part of their
decision making process.
Using technology to promote diversity
> we continued to upgrade our technology to make flexible
and home working easier. We have migrated all Stores and
offices to our new IT platform, with over half of our colleagues
receiving laptops;
> we improved colleague access to learning materials via mobile
technology, and enabled colleagues on parental leave to stay
in touch through a new app; and
> we launched the Women in Finance Charter app, in
conjunction with HM Treasury, to showcase best practice
actions companies are taking to improve gender balance.
2017 gender balance
In 2017 we made progress against our target to have a 50:50
gender balanced workforce (within a 10 per cent tolerance)
across all levels of the business by the end of 2020:
Level
Reward
Group
Headcount %
Female
2017
Female
2016
Male
2017
Male
2016
Executive
Management
Non
Management
Exec 1
31%
27%
69%
73%
Exec 2
26%
21%
74%
79%
Band A
29%
22%
71%
78%
Band B
44%
43%
56%
57%
Band C
36%
34%
64%
66%
Band D
53%
52%
47%
48%
Band E
73%
75%
27%
25%
Female representation in senior management (Executive and
Band A) improved to 29 per cent at 31 December 2017, up
from 22 per cent as at 31 December 2016.
As defined by the Hampton Alexander review, 31.8 per cent of
our Executive Committee and their direct reports were female
as of 31 December 2017.
Management capability
> continue to set bonus targets for all Executive Committee
members to improve gender balance;
> continue with the formal requirement for gender balance in
interview panels and candidate shortlists; and
> take specific action to attract and retain men in entry level
and customer-facing roles.
Flexible working culture
> reduce the formalities associated with requesting flexible
working arrangements;
> continue to support parents by promoting shared parental
leave and family friendly working practices; and
> pilot a programme to assess a technology solution for contact
centre home working.
Removing barriers
> profile senior leaders – who have adopted flexible working
arrangements – as role models to encourage wider take-up;
> enhance the skills of our future business leaders through
gender balanced development programmes; and
> develop insight and build confidence through our ‘Gender
Agenda Network’, including events to profile and discuss the
key issues relating to fairness and inclusion.
I believe 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 we will supplement this with disclosures
on our gender pay gap.
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, set challenging targets and
report transparently on progress.
Jayne-Anne Gadhia CBE
Chief Executive
26 February 2018
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
16 I Virgin Money Group Annual Report 2017
Market overview
As a UK retail bank we are focused on
serving domestic customers and continue
to benefit from the resilience of the UK
economy and housing market, although
there is a degree of uncertainty in the
outlook. Important regulatory reforms
which will have an impact on our markets
take effect in 2018, and we look forward
to the longer term opportunities these will
create, notably for our digital bank.
UK economy
Gross domestic product (GDP) growth has picked up in recent
quarters, having slowed at the beginning of 2017. As a result,
UK GDP is estimated to have increased by 1.7 per cent in 2017,
slightly below the 1.9 per cent growth experienced in 2016.
Consumption growth has been subdued reflecting the squeeze
in real incomes following the depreciation of sterling in the
aftermath of the EU referendum. Partially offsetting that, net
trade has picked up supported by sterling’s depreciation and
the strength of global growth.
The level of unemployment in the UK fell to a 42-year low
of 4.3 per cent and was one of the major economic success
stories of 2017. Despite this, real wage growth has remained
subdued, as inflation has increased to its highest level in five
years. CPI inflation remained around 3 per cent for much of
2017, as imports became more expensive as a result of the
lower value of sterling.
In light of the recovery in GDP growth and the reduction in
spare capacity in the economy, the Bank of England increased
interest rates for the first time in a decade in November
2017 in order to bring inflation back towards the 2 per cent
target. Although interest rates are expected to rise gradually
over the coming years, they are expected to remain low by
historical standards.
The HM Treasury consensus for 2018 predicts that the UK
economy will continue to grow, albeit at a somewhat subdued
rate. The strength of the global economy is expected to be
beneficial for the UK and unemployment is expected to remain
at historically low levels. Inflation is likely to fall back gradually
and wage growth is expected to pick up. Nonetheless, the
macro and political environment, including the impact of the
UK leaving the European Union, remains uncertain which adds
a degree of caution to our outlook.
Housing and mortgages
The housing market was resilient in 2017 and is expected
to see modest growth in 2018. Increasing employment and
a gradual pickup in real wages should support the demand
for mortgages. The mortgage market is expected to remain
highly competitive in 2018. As a result of ring-fencing, high
street banks may deploy excess ring-fenced deposits into UK
mortgage lending. We also expect that smaller lenders will
seek to protect their market share.
Overall, the mortgage market is expected to see modest
growth, with UK Finance forecasting that gross lending will
be £260 billion in 2018.
Within specific segments, lending to first time buyers looks
set to increase further, supported by the tax changes to stamp
duty and the £10 billion extension of the Help to Buy scheme.
Re-mortgaging will continue to represent a significant volume
of overall transactions, as customers look to take advantage
of competitive pricing in anticipation of higher interest rates.
In contrast, the buy-to-let market is expected to be flat on
2017 as the recent regulatory and taxation changes weigh on
customer demand.
Savings
The total retail savings market grew by 3.5 per cent in 2017.
This was despite a reduction in the savings ratio in the last
three years from 9.3 per cent in 2015 to 4.8 per cent during Q3
2017. In part, this behaviour can be explained by the prevailing
low interest rate environment, low wage growth and inflation.
Looking forward, the savings ratio is expected to increase
modestly in the coming years to exceed 5 per cent by 2022.
Recent personal tax changes have influenced customer
behaviour with the introduction of the Personal Savings
Allowance reducing the attractiveness of ISA products
for certain customers. However, for those customers who
continue to favour the ISA savings vehicle, typically higher
rate tax payers and customers with historic portfolios, the
higher ISA allowance has encouraged larger average balances.
The savings market is also expected to adjust to a rising
interest rate environment following a decade of historically
low rates. The market for retail savings balances is expected
to grow in 2018 at a similar rate to that recorded in 2017. Set
against that, there may be increased competition from smaller
lenders who have used Bank of England funding schemes, as
those schemes come to an end.
Credit cards
Credit card balances in the UK grew by 5.1 per cent in 2017.
Although the Bank of England has highlighted risks from the
rapid growth in consumer credit, a recent FCA study notes
that this growth has been driven by borrowers with higher
credit scores who may be less likely to suffer financial distress.
Virgin Money Group Annual Report 2017 I 17
A combination of regulatory concern over the pace of
growth in unsecured lending and concerns around consumer
indebtedness in the UK is expected to see this rate of
growth moderating.
The recent Bank of England credit conditions survey has
also highlighted the potential for an increase in impairments
across the sector.
Reflecting a more cautious outlook, we expect the market to
continue to reduce the length of interest-free promotional
periods on new credit cards being issued.
Total outstanding balances on credit cards are expected to
continue growing at a rate below recent trends.
Open Banking, PSD2 and GDPR
There are three major components of current regulatory
reform coming into force in 2018: Open Banking, PSD2 and
GDPR. The common themes through each of these initiatives
are innovation, competition and consumer protection.
Customers will be able to bring together all of their financial
relationships and data in one place, seamlessly instruct
payments and move funds from a single device. The
Key opportunities
Optimising returns in mortgage lending: The breadth
of our customer proposition and our commercial agility
positions us well to serve sections of the mortgage market
which offer stronger than average risk adjusted returns,
such as lending to first time buyers, without compromising
our underwriting discipline.
Changes in technology and regulation: Our refreshed
strategy will allow us to take advantage of the significant
technological and regulatory changes which will shape UK
retail banking in the coming years. PSD2 and Open Banking
allow customers to choose to share data from their banking
products with third parties. PSD2 and Open Banking
represent an opportunity to attract new customers and take
market share from the high street banks. Our entry into SME
banking and the development of our digital bank will enable
us to capitalise on these opportunities, and will diversify our
sources of funding to support sustainable value creation
for shareholders.
Developing our credit card offering: We will offer an
increasingly differentiated range of credit card products
for prime credit quality customers. Continued development
of our cash back loyalty programme and the introduction
of our Virgin Atlantic Airways affinity range of credit
cards will continue to diversify our portfolio and support
profitable growth.
regulations address concerns around security and put a
strong authentication and permission framework around
customer data.
When taken together, these changes could lead to
a fundamental shift in how customers manage both their
money and data over the longer term. As a consequence,
these changes have the potential to change the nature
of competition in UK retail banking.
Ring-fencing
Ring-fencing will require large UK banks to separate their
core retail banking services from their investment and
international banking activities. A side effect of ring-fencing
may be an excess of liquidity for certain large UK
ring-fenced banks, which could in turn, lead to heightened
competition.
Key challenges
Competition: The mortgage market remains highly
competitive. We will continue to deliver outstanding
service to our intermediary partners and target growth
in value-accretive market segments. Competition in the
savings market may increase with the closure of the TFS.
We are diversifying our sources of funding through the
development of SME and digital banking, and further
developing our wholesale funding programmes.
Economic environment: Uncertainty remains over the
future performance of the UK economy with the potential
for risks to crystallise if inflation remains higher than
wage growth, causing a reduction in households' real
earnings. Our lending discipline will continue to support
asset quality and the delivery of sustainable returns
through the cycle.
Regulatory environment: The volume and pace of
regulatory change, including Open Banking, PSD2,
GDPR and ring-fencing, remains high. We will continue
to invest in our business and ensure compliance with
the changing regulatory landscape.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
18 I Virgin Money Group Annual Report 2017
Our business model and strategy
n
utio
rib
dis
t
External
Environment
l
e
n
n
a
h
c
-
i
t
l
u
M
Customers can
interact with
us at their
convenience
r a g e
e
v
a l l e
n
o
e r a i
t
p
O
Operational
leverage and
cost discipline
drives returns
Powerfulbran
d
Recognised as one
of Britain's most
trusted banks
ers
n
y
o
r
Custom
o n e ’s bette
om p a
Ever y
Quality
yone’s b e t t e r of
s
r
e
v
E
t
i
e
f
C
C
o
m
m
u
n
i
C
o
l
l
e
a
g
u
e
s
a rtners
Corpora t e
p
Strong retail
franchise
supplemented
by wholesale
funding
Stable fund i n g
Clear risk appetite,
strong balance
sheet, absence
of legacy issues
L
o
w
ri
s
k
SME and
Digital
Strategic
Priorities
C
u
s
t
o
m
e
r
c
e
n
t
r
i
c
Straightforward
and transparent
product design
Prime asset
portfolios
q
-
h
g
Hi
g
din
en
yl
t
li
au
External environment
Competitive strengths
Developing the business
Strategic priorities
Our business model is evolving to
reflect the external environment
in which we operate
> The economic outlook has been
strengthened by global growth.
Our central planning scenario
assumes a continuation of
relatively benign economic
conditions in 2018 with
modest economic growth,
unemployment remaining low,
a stable UK housing market and
the potential for a modest rise
in the bank base rate
> The introduction of ring-
fencing next year is expected to
increase competitive pressures
in our main product markets,
notably in mortgage pricing
> The volume and pace of
regulatory change remains high
including Open Banking, PSD2
and GDPR
> The opportunity exists to
win customers from the high
street banks through digital
transformation
The core strengths of our business
enable us to compete effectively
in existing markets as well as to
grasp opportunities in digital and
SME banking
> We are recognised as one of
Britain’s most trusted banks
and operate with one of the
most admired brands in the UK
> We offer customers
straightforward and
transparent product design
> We acquire prime customers
and deliver high-quality asset
growth, primarily through
secured lending
> Our stable funding base draws
on our strong retail savings
franchise supplemented by
wholesale funding capability
> A low risk appetite is reflected
in our low cost of risk
> Multi-channel distribution
allows customers to interact
with us at their convenience
> Efficiency and cost discipline
result in operational leverage
and enhanced financial returns
We are focused on:
> Managing lending growth
for value and constantly
broadening our customer
proposition
> Maintaining our high quality
balance sheet at all times
> Accessing lower cost funding
in addition to continued
operational efficiency to
underpin accretive returns
in the long term
> EBO – we will ensure the
sustainability of our strategy
through our focus on providing
value to all of our stakeholders
The development of our strategy
will result in two new business
areas, SME banking and digital
banking. These will broaden our
customer appeal and provide
access to a wider pool of banking
revenues and funding sources
> In SME banking we have
launched a deposit product as
we look to diversify our sources
of funding. We plan to launch a
Business Current Account by
the end of 2018
> The Virgin Money digital bank
will take advantage of changes
in the regulatory environment
and customer behaviour to
extend our market reach within
retail banking services
> We will explore value accretive
opportunities to develop our
investment business
Existing business areas
Lending
Mortgages & credit cards
Deposit taking
Savings & Basic Bank Account
Investment
Investments & pensions
Insurance
Life & travel insurance
Virgin Money Group Annual Report 2017 I 19
2017 key performance
indicators
Creating future value
Growth
Number of customers
3.34 million
Customer loans
£36.7 billion
Deposit balances
£30.8 billion
TNAV per share
£2.97
Quality
Cost of risk
13 bps
CET1 ratio
13.8%
Leverage ratio
3.9%
Returns
Return on Tangible Equity
14.0%
Banking NIM
1.72%
Cost:income ratio
52.3% (exit ratio <50%)
Underlying profit before tax
£273.3 million
EBO
Customer NPS
+40
Colleague engagement score
76%
Virgin Money Giving donations
£95 million
Intermediary NPS
+61
Growth
> We will continue to prioritise returns and operate within a stable risk appetite
as we continue to grow our mortgage and credit card businesses
> Developing our SME and digital bank proposition will significantly increase
our accessible markets, grow customer numbers and drive new sources of
funding and income
> The development of our funding franchise targets £10 billion of deposits
from new sources within five years of launch
Quality
> Asset quality and balance sheet strength will remain at the heart of our
business model and strategy
> Our focus on disciplined credit risk management will support impairment
performance through the economic cycle
> The CET1 ratio will remain above 12 per cent at all times
Returns
> Digital bank operating costs will be approximately 40 per cent lower per account
than our existing business areas
> Diversification of customer deposit base will drive superior cost of funds
> A broader proposition, lower cost to serve and new sources of funding
will drive enhanced returns
EBO
By delivering to our other stakeholders, we reinforce our ability to deliver
sustainable value for shareholders.
> We will continue to deliver excellent customer service across a broader
proposition
> We will invest further in colleagues to develop and attract the talent we need
> We will roll-out the Virgin Money Foundation to operate nationally
> We will develop deeper relationships with our corporate partners
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
20 I Virgin Money Group Annual Report 2017
Delivering for stakeholders
> The number of customers in our insurance lines was lower than
in 2016 as we focused on offering higher quality products at
lower volumes and the brand continued to support retention
of loyal customers at renewal;
> The proportion of new product sales made to existing
customers increased to 12.2 per cent, from 10.7 per cent
in 2016; and
> As a result of improving the Virgin Money Giving (VMG)
customer journey we now have 1.4 million registered users
of our not-for-profit online donation service.
Net Promoter Score (NPS)
Overall customer NPS improved to
+40 in 2017
2017
2016
2015
+29
+19
+40
Increased our customer base to
3.34 million
Increased total registered VMG users to
1.4 million
Customers
We delivered further significant
improvements in customer advocacy in
2017. More customers than ever before
would recommend Virgin Money to
their friends and family, with our overall
Net Promoter Score (NPS) increasing to
+40, up from +29 at 2016.
Aim
We provide our customers with good value products,
supported by outstanding service, with the aim of driving
stronger customer relationships, deeper product engagement
and increased cross-product holdings.
Customer achievements 2017
> We delivered 8.2 per cent growth in mortgage customer
numbers during the year, to more than 350,000. Supported by
investment in our digital capability, we improved retention at
maturity to 72 per cent, from 68 per cent in 2016.
> We now have 1.2 million customers in our credit card
business following another year of strong growth. Customer
engagement increased as we improved our online service
for mobile usage and we now regularly have more than one
million visits per month to our online servicing platform. Virgin
Money Back, our customer cashback platform, supported an
8 per cent increase in average retail spend per active account;
> We continue to offer our 1.3 million savings customers both
good value and sustainable savings rates in the context of the
market. This approach continues to deliver improvements
to our average cost of retail funds whilst supporting strong
retention levels. Average savings accounts per customer
increased to 1.3, average balances per customer rose to
around £24,000, and retention levels on fixed rate maturities
remained strong at 89 per cent;
> Our investment and pensions customers continued to
demonstrate brand loyalty and engagement. While customer
numbers were stable year-on-year, we achieved a 13 per cent
increase in the number of active investment customers;
Virgin Money Lounge, Edinburgh
Customer priorities for 2018
We will:
> Build on our high levels of mortgage retention and continue
to focus on prime segments of the mortgage market. This
will include support for first time buyers and custom build
mortgages. We also expect to enter the specialist buy-to-let
portfolio landlord market during 2018;
> Launch our Virgin Atlantic Airways retail financial services
partnership. The partnership will offer propositions to a
significant number of customers who are already heavily
engaged with the Virgin brand;
> Strengthen the relationship with our savers through good
value products and pricing that rewards customer loyalty;
> Leverage the strength of the Virgin brand as we broaden our
SME savings range in 2018;
> Build significant potential for growth and value through
developing our investment and pensions business;
> Build deeper relationships with our VMG customer base by
looking to meet their financial needs beyond charitable
donations;
> Launch an initial beta model of our digital bank this year, in
advance of full launch in 2019; and
> Continue to recognise issues relating to accessibility, financial
inclusion and responsible lending.
Virgin Money Group Annual Report 2017 I 21
Supported by our national Store
footprint and contact centres, our
digital channels continued to be
a significant factor in growing the
business cost effectively.
Digital engagement in core products
Our digital channels continued to be a significant factor in
growing the business cost efficiently in 2017. Our website
remains the most popular channel, with over 28 million
website visits, up from 22 million in 2016. 78 per cent of sales
were delivered digitally during the year and the use of mobile
devices to access products and services increased to 52 per
cent of all our digital interactions, up from 50 per cent in 2016.
Our aim is to offer our customers access to our products and
services using the device of their choice. We will continue to
improve our digital capability and customer journeys across
current platforms and we are focused on meeting the needs of
our customers in a rapidly evolving digital landscape.
We continue to attract a younger, more affluent and
digitally active customer base and our new digital bank will
make it simpler, faster and more convenient to meet their
financial needs.
28 million 78% 52%
website visits
of our sales are
through digital
channels
use their mobile
to access
products and
services
Stores and Lounges
We continue to value face-to-face interactions with our
customers. Alongside our network of 74 Stores, we aim to
offer our customers a differentiated banking experience
with access to our exclusive customer Lounges. Our seven
Lounges continue to deliver strong customer satisfaction with
an NPS of +87 and Stores co-located with a Lounge broadly
outperform the overall network based on sales performance.
As a result of this success we plan to open our eighth Lounge
in Cardiff in 2018.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
22 I Virgin Money Group Annual Report 2017
Delivering for stakeholders
Colleagues
Virgin Money’s success is built firmly on
the commitment, skill and attitudes of
all our people and our shared purpose
of being a better bank which makes
‘everyone better off’.
Aim
Our colleagues are integral to our success; it is through their
engagement and advocacy that we are able to deliver strong
and sustainable business performance. We aim to provide
an environment which nurtures a high performing, diverse
and committed workforce where colleagues can reach their
full potential.
Colleague achievements 2017
Investing in colleague development
> We launched a digital degree-level apprenticeship as part of
a wider programme to extend our use of apprenticeships;
> We were accredited as a Best Employer for Race by Business
in the Community.
Colleague diversity data
We believe a diverse workforce will drive better business
outcomes and create a workplace that is engaging,
inclusive and accessible. We saw increased minority
representation across all groups in 2017. The table below
details our colleague diversity and the progress made in 2017.
2017
2016
Gender
Board members
Female
4 (40%)
Male
6 (60)%
3 (37%)
5 (63%)
Senior managers
(excluding CEO)
Female
42 (29%)
31 (21%)
Male
105 (71%)
114 (79%)
Colleagues
Female
1,854 (56%)
1,758 (56%)
Male
1,436 (44%)
1,381 (44%)
Percentage of colleagues who identify as LGBT+
LGBT+
3.5%
3.2%
Percentage of colleagues from an ethnic minority
Ethnicity
4.9%
4.4%
> We gave colleagues access to our online learning materials
Percentage of colleagues who disclose they have a disability
through their mobile devices; and
Disability
4.1%
3.0%
> We launched two new development programmes targeting
Colleagues aged 50 or more
colleagues at different stages of their careers, complementing
our award-winning Future Business Leaders programme.
Building colleague engagement
> Colleague engagement remains strong at 76 per cent;
> We launched our new internal mentoring programme,
including maternity and diversity related mentoring; and
> We launched an Aspiring Managers programme, to prepare
future people managers ahead of promotion.
Creating a diverse workforce
> We signed the Time to Change pledge, aimed at making
Virgin Money a better place to work for colleagues who have a
mental health disability and we achieved the highest (3rd tier)
Disability Confident accreditation;
> We signed the Business in the Community pledge to increase
by 12 per cent the number of older people (defined as over 50
years) we employ by 2022;
> We were ranked 95th in Stonewall’s Top 100 companies
workplace index for LGBT+ inclusivity, advancing 244 places
within a year, reflecting our commitment to being an LGBT+
friendly employer; and
Multigenerational
568
546
Note: The LGBT+, ethnicity and disability data is derived from the annual colleague survey,
for which the 2017 response rate was 89 per cent of permanent colleagues.
The appointment of Irene Dorner as Chair from April will result
in a 50:50 gender balanced Board in 2018.
Gender Pay Gap
Virgin Money welcomes the UK government initiative to
improve equality through collecting and reporting gender pay
data. Our mean gender pay gap reduced by 10 per cent, to
32.5 per cent during 2017.
At Virgin Money men and women are paid equally for doing
the same or similar jobs. The Virgin Money gender pay gap is
caused by under-representation of women in senior roles and
under-representation of men in customer service positions.
The under-representation of women in senior roles accounts
for approximately one-third of the gender pay gap.
The under-representation of men in customer service
positions accounts for approximately 50 per cent of our
gender pay gap.
Virgin Money Group Annual Report 2017 I 23
It remains a priority to achieve gender balance throughout the
company, achieving 50:50 balance by the end of 2020 (within
10 per cent) at all levels. As we make further progress towards
a 50:50 balance, our gender pay gap will continue to reduce.
Details of our gender pay gap can be found on our website.
Colleague priorities for 2018
Investing in colleague development
We will continue our investment in colleague
development through:
> expanding our new coaching skills programme to provide
tailored development for colleagues;
> launching an online tool kit to enable personalised career
planning; and
> expanding our development programme for maternity
returners following a successful pilot scheme in 2017.
Building colleague commitment
We will continue to seek increasing levels of engagement
from all colleagues through:
> promoting our enhanced pay approach to shared
parental leave;
> enabling colleagues to make a difference through the
roll out of our work experience programme; and
> obtaining interim feedback more regularly to enable
us to action new priorities quickly.
Creating a diverse workforce
Business decision making and colleague engagement will
be enhanced by providing an inclusive environment.
Our diversity and inclusion activity will continue to be
overseen by the People Director, with executive sponsors
for each minority group.
In 2017 we improved representation across all minority groups
(see table on page 22). To maintain this progress
in 2018, we will:
> continue to promote Virgin Money as an inclusive employer,
setting targets and deploying recruitment strategies to drive a
greater diversity of candidate interest in roles;
> extend our support to enabling flexible working, including the
use of technology to improve working from home; and
> drive greater diversity and inclusion with our corporate
partners, including launching ‘The Accelerator’ with the British
Black Business Awards to enable greater progression of ethnic
minority managers.
Initiatives relating to gender equality are covered in the
Women in Finance update on page 14.
Virgin Money Red Hot Awards 2017
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
24 I Virgin Money Group Annual Report 2017
Corporate Partners
We work with a number of corporate partners to provide mortgages, investments,
insurance and currency services to our customers.
Intermediary partnerships remain a key part of our strategy. Improvements to our award-winning intermediary proposition in
2017 led to new highs in our intermediary NPS, which increased to +61 from +55 in 2016. We also operate strategic partnerships
with established providers to provide a broader range of financial services products.
Corporate Partner achievements 2017
> Won the ‘Best Lender for Partnership with Mortgage Club’
at the L&G Mortgage Club annual awards for the third year
running;
Corporate Partner priorities 2018
> Maintain outstanding levels of service to our network
of professional mortgage intermediary partners in an
increasingly competitive mortgage market;
> Awarded ‘Five Stars’ in the Mortgage category at the Financial
Adviser Service Awards;
> Recognised as the ‘Best Mortgage Lender’ at the Mortgage
Strategy awards; and
> Partnered with BGL Group to relaunch our Life Insurance
> Launch our new strategic partnership with Virgin Atlantic
Airways. The first products will be launched in the first
half of 2018; and
> Build on the strength and success of our partnership
with Manchester United Football Club.
proposition.
Mortgage balance growth to
£33.7 billion up 13% in 2017
2017
2016
2015
Intermediary Net Promoter Score
+61
+55
+40
Mortgages Balances (£bn)
33.7
29.7
25.5
Working with Virgin Money to launch their new
life insurance product is a natural partnering of
two innovative brands which both put the
customer at the very heart of the proposition.
Peter Thompson, Group Director, BGL
We're pleased to be partnering with Virgin Money
on their Custom Build proposition. Together with
our intermediary partners we'll give customers
real choice and put them in control of designing
and building their dream home.
Rachel Pyne, Operations Director, BuildLoan
Virgin Money Group Annual Report 2017 I 25
Human Rights and Modern Slavery
statement
Virgin Money has zero tolerance of slavery, servitude,
forced labour and human trafficking (Modern Slavery).
We are committed to conducting business with honesty
and integrity and treating everyone with dignity and
respect. Aimed at further reducing the risk of slavery
within our supply chain, we have focused on deepening
our understanding of the risks involved and delivered
training to key areas of the business. This has driven
further review and improvements to our sourcing and
procurement processes. We will continue to measure the
effectiveness of our approach and improve the mapping
of our supply chain to identify areas of risk.
The policy applies to both Virgin Money colleagues
and the employees of our partners and suppliers. New
suppliers are required to sign a Code of Conduct stating
our minimum expectations of human rights standards
and labour conditions with which providers are expected
to treat employees. To read our Modern Slavery
statement in full please visit virginmoney.com.
Anti-Bribery statement
We have a comprehensive Anti-Bribery policy in place
which complies with laws and regulations wherever
we operate, and applies to all directors, colleagues,
and anyone else acting on our behalf. All colleagues,
including contractors, complete annual anti-bribery
training and are encouraged to report confidentially any
instances of suspected bribery.
When we engage in business relationships with third
parties, we make sure they have the necessary skills and
experience to provide the services we pay them for. All
our business partners have to be reputable, reliable and
charge a fair market price for their services.
We expect all our existing and potential business
partners to have the same ethical standards as Virgin
Money. They must comply with the UK Bribery Act
and be able to meet our due diligence requirements.
To read our Anti-Bribery statement in full please visit
virginmoney.com.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
26 I Virgin Money Group Annual Report 2017
Community
We are committed to supporting the communities in which we work to help them
flourish, both socially and economically.
Our work covers four key areas – fundraising; investing in education; employability and enterprise; and supporting colleague
engagement in their local communities.
Community achievements 2017
> £95 million was donated to charities through Virgin Money
Community priorities 2018
> Continue to invest in Virgin Money Giving to help charities and
Giving, our not-for-profit online donation service;
fundraisers raise more for good causes in the UK;
> Support our Charity of the Year for 2017/2018 and the official
charity of the 2018 Virgin Money London Marathon, Teenage
Cancer Trust;
> Extend the reach of The Virgin Money Foundation beyond the
North East of England, and launch the Heart of the Community
Fund through Virgin Money Lounges;
> Continue to invest in a range of programmes which support
young people in developing financial, entrepreneurial and
employability skills; and
> Support colleagues engaging in national and local community
projects and use their business skills to help young people and
young businesses flourish.
> Runners in the 2017 Virgin Money London Marathon raised
£62 million for charity, setting a new world record for an
annual, single day charity fundraising event for the eleventh
successive year;
> Our Charity of the Year for 2016/2017 and the official charity
of the 2017 Virgin Money London Marathon was Heads
Together. As well as changing the conversation on mental
health, they raised £1.94 million through the partnership
with Virgin Money, including £250,000 raised by colleagues;
> The Virgin Money Foundation awarded grants of nearly
£3 million in 2017 to organisations working in areas including
housing, employability, youth social action and financial
inclusion;
> Our support for the ‘LifeSavers’ financial education
programme has helped over 14,000 young people learn
more about money, and our Make £5 Grow programme gave
over 24,000 young people the experience of starting a small
business;
> Our ‘Strive to Thrive’ programme has helped 600 young people
aged 14 to 19 increase their chances of finding employment
through improving their confidence and self-awareness and
giving them employability and life skills; and
> Colleagues volunteered 1,555 days to support community
activities.
More than £600 million
raised through Virgin Money Giving,
since launch in October 2009
Make
£5
Grow
Virgin Money Group Annual Report 2017 I 27
Jazmin Sawyers, GBR Olympic Athlete,
congratulates the medalists of the Mini Marathon.
Photo: Virgin Money London Marathon
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
28 I Virgin Money Group Annual Report 2017
Managing and reducing environmental impacts
We are committed to taking positive action to eliminate the impact our activities
have on the broader environment and continue to target Net Zero Greenhouse
Gas (GHG) Emissions by 2030.
Environment achievements 2017
> Secured 100% renewable energy for electricity contracts
within our control;
Environment priorities 2018
> Improve our property efficiency by investing in ways to reduce
our energy and water usage and the way we dispose of waste;
> Increased awareness of environmental initiatives across the
> Build colleague awareness and engagement on the measures
Company, including the provision of new tools such as
‘Skype for business’ which reduces the need for corporate
travel;
> Completed our first Carbon Disclosure Project (CDP)
submission and worked with industry experts to identify
how environmental issues relate to our business; and
> Incorporated environmental assessments into our
procurement process to ensure suppliers understand the part
they can play in reducing their impact on the environment.
that they can take to support and contribute to our
sustainability agenda;
> Build upon the insight we gained from the CDP submission
by analysing and interpreting our emissions data to ensure
we optimise energy usage; and
> Further review our policies and procedures with a focus on
reducing the environmental impact of our corporate travel
and the goods and services we buy.
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.
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.
Emissions
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 CO2e emission factors are
applied, this may lead to a restatement of data.
GHG emissions CO2e tonnes
Scope
2017
2016
Scope 1
1,741.2*
1,753.8
Scope 2
4,619.2*
4,933.0
Scope 3
1,027.2
998.8
Total
7,387.6
7,685.6
Virgin Money Group Annual Report 2017 I 29
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 2017.
Scope
2017
2016
GHG emissions
per average FTE
2.50 tCO2e
2.66 tCO2e
Independent assurance
Although not required by the Regulations, we appointed
PricewaterhouseCoopers LLP (PwC) in 2017 to undertake
a limited assurance engagement using the ISAE 3410
assurance standard over the Scope 1 and 2 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 2017
compared with 2016.
2017
2016
Energy
Stated in Gwh
% from renewable sources
21.8
58%
19.6
56%
Travel
Total miles travelled
5.8m
5.7m
Waste
Tonnes produced
% sent to landfill
508.2
2%
567.6
2%
Water
Cubic metres per FTE
10.8
12.7
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.
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
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
30 I Virgin Money Group Annual Report 2017
Risk management
Effective risk management is a core part of our strategy.
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 131). Our risk-aware culture and strong,
independent Risk function help to ensure adherence to our risk
management framework. An effective governance structure,
rapid escalation of threats and the sharing of information
across the Group results in a timely response to emerging risks.
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 36 to 37.
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, the
competitive environment and new structural and regulatory
changes which will come into force over the next few years.
Our ongoing focus on maintaining a strong retail deposit
franchise and high-quality lending portfolios is supported
by our robust approach to both financial and non-financial
risk management.
Achievements in 2017
Our key achievements during 2017 included continued
rigorous focus on credit quality, the strength of our capital and
funding bases, significant programmes of work addressing key
regulatory initiatives and further strengthening our framework
for the management of cyber-crime and financial crime risks.
Credit
The application of strict affordability requirements, robust
credit decisioning and prudent underwriting standards across
our mortgage and credit card portfolios ensured that asset
quality performance was ahead of our expectations. This is
reflected in our low overall cost of risk of 0.13 per cent (2016:
0.13 per cent). We are responsive to the changing macro-
economic environment and regularly refine our credit risk
management approaches.
Mortgage lending grew by 13.2 per cent to £33.7 billion
during 2017, despite increased competition from incumbent
lenders and new entrants looking to enhance their market
share. The mortgage portfolio represents 91.6 per cent (2016:
92.3 per cent) of gross loans and advances to customers.
Prime residential lending grew to £27.3 billion during 2017,
representing 81.1 per cent (2016: 81.6 per cent) of total
secured loans.
> The high quality of our mortgage business is reflected in our
low arrears levels. Secured 3+ arrears levels were 0.12 per
cent at the end of 2017, compared to 0.15 per cent in 2016,
substantially below the latest UK Finance industry average of
0.82 per cent. Additionally, the proportion of secured assets
classified as neither past due nor impaired remained stable
during 2017 at 99.0 per cent (2016: 99.1 per cent);
> The consistent application of our lending criteria and robust
underwriting gives us confidence that our mortgage book
would be resilient in the event of a downturn. In 2017, we
further strengthened our lending criteria in relation to buy-
to-let properties, which constitute 18.9 per cent (2016: 18.4
per cent) of total secured loans;
> The indexed portfolio LTV remained stable at 55.8 per cent
at the end of 2017 (2016: 55.4 per cent); and
> Our low cost of risk for mortgages has remained stable at
0.01 per cent (2016: 0.01 per cent).
During 2017, our credit card book, net of impairments grew to
£3.0 billion, representing a market share of 4.1 per cent. The
credit card portfolio accounts for 8.4 per cent (2016: 7.7 per
cent) of total loans and advances to customers.
Risk overview
Virgin Money Group Annual Report 2017 I 31
Our funding strategy is retail deposit-led. We hold high-
quality liquid assets (HQLA) to address the liquidity
needs of the business and, in addition to retail deposits,
we diversify our funding through a number of wholesale
funding programmes;
> Retail deposits increased by 9.6 per cent during the year to
£30.8 billion, with a lower cost of funds. This was achieved
through close management of pricing and product mix.
The retail product mix included a higher proportion of
fixed rate products, increasing overall contractual tenor.
Almost nine out of ten fixed rate savings customers opted
to stay with us at maturity, highlighting the strength of our
retention offering;
> Our strong funding position is reflected in a liquidity
coverage ratio of 203 per cent (2016: 154 per cent) as at
31 December 2017;
> Our loan-to-deposit ratio increased to 119.1 per cent
during 2017, from 114.5 per cent at 31 December 2016, in
line with internal limits of up to 120 per cent;
> In September, we successfully completed a further
issuance of Residential Mortgage Backed Securities
(RMBS), raising £745.9 million in both USD and GBP
tranches. Wholesale funding supplements our core retail
deposit base and cost of funding. Wholesale funding also
helps to extend tenor and ensures we have appropriate
diversification in the funding base;
> During the year, we made further drawings from the BoE
Term Funding Scheme (TFS) taking overall drawings at
31 December 2017 to £4.2 billion. In parallel, we repaid
£650.2 million of Funding for Lending Scheme (FLS)
funding. This low-cost funding creates additional lending
capacity and supports our overall funding plan; and
> In July 2017, the Financial Conduct Authority (FCA)
confirmed that our Covered Bonds application had
been approved. We expect to make our inaugural
issuance in 2018.
In February 2017, the Bank of England (BoE) noted that
unsecured lending standards had fallen across the market.
In contrast, the quality of our credit card lending has
remained strong. Average credit card behavioural scores
have improved during the year as we continue to focus on
monitoring customer behaviour and book performance
closely. Application quality is strong and there is a growing
gap between our benchmarked asset quality and market
averages. However, we recognise the potential for economic
headwinds and during the first half of 2017 further tightened
our lending criteria.
> Revised credit card scorecard cut-offs were implemented
in April 2017. Policy restrictions were made in May 2017 to
reinforce our focus on the acquisition of customers with
low levels of indebtedness. Growth in credit card balances
continues to be driven by targeting low risk customer
segments. For instance, in 2017 over 98 per cent of new
balance transfer customers were booked at an expected
loss rate of less than 1 per cent;
> Credit card book quality remained stable with 98.6 per
cent (2016: 98.7 per cent) of the book currently classified
as neither past due nor impaired. Unsecured 2+ arrears
levels remained low at 0.88 per cent (2016: 0.78 per
cent) with the small increase during 2017 primarily
due to expected increases in arrears levels on balances
originated during 2015 and 2016 as these cohorts mature.
Arrears levels remain well within our forecast position and
compare favourably to industry benchmarks; and
> Our low cost of risk for credit cards of 1.51 per cent (2016:
1.70 per cent) reflects a rigorous approach to underwriting,
account management and credit decisioning, supported by
the benign economic environment.
Capital and funding
Maintaining a well-capitalised business supports balance
sheet growth, credit ratings and regulatory requirements.
Our capital base is managed to ensure that the business
is well placed to react to current and forecast economic,
market and regulatory conditions, as well as any material
downturn in the economy.
> As at 31 December 2017, our Common Equity Tier 1 (CET1)
ratio was 13.8 per cent (2016: 15.2 per cent), our total
capital ratio was 18.1 per cent (2016: 20.4 per cent), and
our leverage ratio was 3.9 per cent (2016: 4.4 per cent).
Movements in 2017 reflect the utilisation of capital to
support further lending growth and investment in business
development. All capital ratios remain significantly above
the regulatory minima.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
32 I Virgin Money Group Annual Report 2017
Risk overview
Risk management
Regulatory initiatives
Our work during the year focused on the following
regulatory changes:
> During 2017, the FCA published its approach to
implementing the revised Payment Services Directive
(PSD2), which came into force on 13 January 2018. As well
as promoting innovation, PSD2 aims to improve consumer
protection, increase the security of payments, and reduce
the cost of payment services;
> The General Data Protection Regulation (GDPR) provides
an updated EU data protection framework to replace the
existing 1995 Data Protection Directive (the Directive).
GDPR will come into force in May 2018;
During 2017 we made significant investment in undertaking
the required preparatory work in relation to the above
change programmes.
> On 3 April 2017, the FCA published a consultation paper
setting out proposals for new rules and guidance to
address persistent credit card debt. These proposals
complement the remedies arising from the Credit Card
Market Study published in 2016, which aim to reduce
the number of customers with problem credit card debt.
While we have very limited exposure to such customers,
we are working with the FCA to trial strategies relating
to the identification of and support for customers in
persistent debt; and
> The final report in relation to the FCA Asset Management
Market Study was published in June 2017. The package
of remedies is focused on providing increased investor
protection, driving price transparency and improving
the effectiveness of intermediaries for both retail and
institutional investors. We endorsed these and will
implement the limited changes required to achieve full
compliance with the recommendations.
Cyber-crime and financial crime risk
We have a well-developed Cyber Security Strategy to manage
the increasing risk of cyber-crime. During 2017 we deployed
a security risk framework that enables us to manage
exposures in line with internationally recognised security
standards. We improved our network security controls to
protect us against emerging security threats and improved
security advice to colleagues.
The FCA continues to emphasise the need for firms to ensure
they have adequate and effective systems and controls
to manage financial crime risk. In 2017 we continued to
develop our strategic financial crime programme. This
programme is designed to enhance our systems and
controls and, during the year, delivered improvements to
client screening, transaction monitoring solutions and due
diligence procedures.
In addition, we implemented our approach to the EU’s Fourth
Money Laundering Directive which was transposed into
UK law on 26 June 2017 as the Money Laundering, Terrorist
Financing and Transfer of Funds (Information on the Payer)
Regulations 2017.
Outlook
The macro-economic environment, strong credit
management of our lending portfolios, strength in capital
and funding and proactive engagement with forthcoming
macro-structural and regulatory change will be the key areas
of focus in 2018.
Macro-economic environment
The UK economy and housing market remained resilient
in 2017. We continue to see strong customer demand and
no evidence of material changes in customer behaviour.
However, potential risks could crystallise if inflation remains
higher than wage growth, causing a reduction in households'
real earnings. Lower real earnings could in turn reduce
consumer spending which, combined with a potentially
more uncertain macro environment, leads us to remain
cautious in our outlook. We will continue to monitor key
exposures 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.
The Bank of England increased interest rates from 0.25 per
cent to 0.50 per cent in November 2017. Our expectation is
for gradual further rate increases over the next three years.
Low wage growth, and higher inflation, may put pressure
on some household budgets and we remain alert to signs of
financial strains on our customers. Changes to central bank
rates can represent a risk to future financial performance. We
have an ongoing programme of stress testing to assess our
resilience to changing macro-economic conditions.
Virgin Money Group Annual Report 2017 I 33
Virgin Money Lounge, Sheffield
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
34 I Virgin Money Group Annual Report 2017
Risk management
Maintaining strong credit quality
Our focus on asset quality will continue in 2018. Credit policy
and decision systems are regularly reviewed and tested to
ensure they respond to changes in customer and competitor
behaviours, maintaining the quality of the portfolios.
Management of the mortgage portfolio: Housing market
changes play a crucial part in the development of our
business. During 2017, UK house prices remained resilient.
> Low unemployment and record low mortgage rates support
consumer affordability while supply shortages continue
to support house prices. Although the potential for the
weakening of regional house prices exists, we have well-
established early warning indicators and will continue to
monitor and manage our exposure to regional house price
variations and potential areas of weakness;
> A number of measures relating to the housing market were
announced in the Autumn Budget, including a permanent
stamp duty land tax relief for first-time buyers. We
increased lending to first-time buyers by 20 per cent during
2017 and this will continue to be a focus in 2018;
> The PRA introduced stricter stress testing for landlords with
four or more mortgaged buy-to let properties, effective
from September 2017. We have taken a conservative
approach to applying these minimum standards. Further
information can be found in the Risk Management Report
on page 135; and
> The mortgage market saw heightened competition in
the second half of 2017 and this may continue in 2018.
We will continue to focus on our competitive strengths
and will manage volumes in order to protect asset
quality and returns.
Management of the credit card portfolio: We will continue
to focus on strong credit management of our credit card
exposures. A rise in unemployment or pressure on customer
affordability could lead to increased impairments. We will
continue to monitor this closely in 2018.
> Our new co-branded partnership with Virgin Atlantic
Airways will encourage high-quality credit card growth. It
aims to materially increase retail spend and provide further
diversification of the credit card customer base;
> We will continue to grow our credit card portfolio in a
controlled manner, given our assessment of market
conditions and our view of risk and reward; and
> The commercial performance of our credit card portfolio
is exposed to potential changes in expected consumer
behaviour. We will monitor this closely and take timely
action to respond to any observed or anticipated changes.
Capital and funding
We will continue to build on our core retail deposit base and
develop our SME offering which commenced in January 2018
with the launch of our Business Deposit Account. We will also
target new sources of funding following the launch of our
digital bank which aims to increase our access to the current
account and primary savings markets.
Although we will remain a predominantly retail funded
bank, we do also have a well-established wholesale funding
programme. With the Bank of England funding schemes we
have used coming to an end, we have put in place a carefully
structured funding plan to avoid undue re-financing risk. We
will continue to diversify and build out our funding sources in
the coming year in line with the long term aim of wholesale
funding providing up to 20 per cent of total funding. In July
2017 we received authorisation from the FCA for a regulated
covered bonds programme, and expect that our inaugural
issuance will take place this year. We also expect to access
RMBS markets again during 2018. As we work towards the
full implementation of minimum requirements for own funds
and eligible liabilities (MREL) on 1 January 2022, we will begin
to issue further unsecured funding through our established
Global Medium Term Note programme.
We benefit from AIRB models in calculating Pillar 1 capital for
the mortgage portfolio. Ensuring that these models remain
well calibrated to portfolio performance and aligned to the
most recent regulatory guidance will be key in 2018.
Macro-structural changes
Our strategic planning addresses the new structural and
regulatory changes which come into force in the coming years:
> A capital conservation buffer of 0.625 per cent was
introduced on 1 January 2016, and increased to 1.25 per
cent on 1 January 2017. This will increase each year to a
maximum of 2.5 per cent in 2019. During 2017, the Bank
of England increased the countercyclical buffer from
0 per cent to 0.5 per cent of risk-weighted assets. This will
come into force in June 2018. A further increase of 0.5 per
cent, to 1.0 per cent, will come into force in November 2018,
subject to review in the first half of 2018. These changes are
fully reflected in our capital and funding plans;
Risk overview
Virgin Money Group Annual Report 2017 I 35
> Minimum Requirements for Own Funds and Eligible
Liabilities (MREL) will be fully phased in by 1 January 2022.
The Bank of England provided MREL guidance, including
transitional arrangements, in late 2016. Prior to
31 December 2019 our MREL requirement will be equal
to our minimum regulatory capital requirements. From
1 January 2020 until 31 December 2021, our MREL
requirement will be equal to 18 per cent of our risk-
weighted assets. This guidance has been fully reflected in
our capital and funding plans;
> The Financial Services Banking Reform Act 2013 will
result in the ring-fencing of retail banking operations to
separate them from investment banking activities. We
are in the process of agreeing our detailed ring-fence
compliance plans with the PRA and do not anticipate any
material change to our structure or business model as
a result. We will, however, have to participate directly in
inter-bank payments systems and work is well advanced
to achieve this;
> IFRS 9 will be implemented in 2018 and will result in a
new approach to provisioning and additional disclosure
requirements. We have developed new models and
business practices to meet these requirements. Additional
information regarding IFRS 9 can be found in note 37 to the
financial statements; and
> The Basel Committee published their final Basel III
framework in December 2017. A key objective of the
revisions is to reduce excessive variability of risk-weighted
assets (RWAs) and improve the comparability of banks’
capital ratios. Implementation dates range from 2022 to
2027 and transitional arrangements will be put in place
regarding the new standards. Our initial analysis suggests
that the impact of the new requirements will be broadly
neutral for us from a capital perspective.
Regulatory change
The delivery of the following regulatory change programmes
will be a core focus in 2018:
> Open Banking, General Data Protection Regulation and
Payment Services Directive: PSD2 and Open Banking will
have a material impact on the competitive environment in
which we operate, with non-bank firms likely to enter the
market by leveraging new payments regulation and data
sharing protocols. Although this may intensify competition
in the mortgage, credit card and savings markets over
time, the impact will be most significant for the personal
current account market, in which we are not currently a
material participant;
> FCA Strategic Review of Retail Banking Business Models:
The FCA are reviewing the business models used in the retail
banking sector and evaluating the impact of changes on
competition and conduct. The FCA engaged with relevant
financial service providers during 2017 and will provide an
update in the first half of 2018;
> FCA Mortgage Market Study: In December 2016, the FCA
published the terms of reference of their Mortgage Market
Study. We responded to an information request in March
2017 and await the findings of the interim report which is
due to be published in March 2018; and
> FCA Interest Only Thematic Review: In January 2018 the
FCA published the findings of their Thematic Review into
Interest Only customers. Their response acknowledged
the progress that lenders had made and emphasised the
need for customers to contact lenders for further support.
We were aware of all points raised by the FCA and are
addressing them within existing programmes of work.
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 the external threat
landscape and develop our capability to protect against
cyber-crime through ongoing enhancement of our control
environment and protections. We will continue to develop
our strategic financial crime programme in 2018 and further
enhance our anti-money laundering capabilities.
Third party administration
Outsourced relationships with parties which support the
credit card, investment and insurance business lines, such
as DST (formerly 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 on-boarding process, and robust
ongoing oversight, are key to managing these outsourced
relationships.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
36 I Virgin Money Group Annual Report 2017
Principal risks
Key mitigating actions
Credit risk
Credit risk is the risk of loss resulting from a borrower or
counterparty failing to pay amounts due.
> credit risk is managed through risk
appetite and risk limits reflected in
approved credit policy;
> credit risk metrics are benchmarked
against competitors and industry
averages;
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.
> 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;
> customer behaviour is closely
monitored with timely action taken in
response to any adverse change; 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 remains a key focus for
Virgin Money.
> risk appetite is focused on maturing
> we will continue to invest in and
the control environment and therefore
managing operational risk;
> an ongoing programme of investment
in security infrastructure is in place to
mitigate threats including cyber-
attack;
develop risk management frameworks,
systems and processes which
strengthen operational resilience; and
> we monitor external events 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;
> we continue to invest in and develop
risk management frameworks,
systems and processes; and
> we focus on training to ensure
> the customer is placed at the heart
of decision-making by ensuring fair
outcomes through comprehensive risk
assessment and testing;
colleague performance is aligned with
the regulatory responsibilities and to
enable an awareness of good customer
outcomes.
Risk overview
Virgin Money Group Annual Report 2017 I 37
Key risk indicators
Commentary
Future focus
0.4%
0.3%
1.4%
1.3%
2017
2016
Impaired as a % of total
secured balances
2017
2016
Impaired as a % of total
unsecured balances
33.5%
40.0%
100.0% 97.0%
2017
2016
Provisions as a % of
impaired balances
2017
2016
Debt securities %
AA or above
£52.2
£34.2
(
2017
2016
IRRBB – Capital at Risk
(£m)
£3.9
£3.4
2017
2016
Total operating losses
(£m)
4.91
3.65
2017
2016
Total complaints
(per 1,000 accounts)
Impaired loans as a percentage
of overall balances increased but
remained at a low level in 2017.
Wholesale credit quality remains
strong with 100.0% of debt
security counterparties rated AA
or above.
We will continue to deliver
strong asset quality aligned to
growth of the mortgage and
credit card books.
We will maintain our ‘no loss’
position for the wholesale
credit portfolio.
Provisions as a percentage
of impaired loans reduced
reflecting growth in secured
loans with expired terms
which do not require increased
impairment provisions given the
high level of collateral cover on
these loans. Expired term loans
which are more than six months
past their maturity date have an
average LTV of 25.8 per cent.
As a consequence of the
increase in the size of the
balance sheet, Capital at Risk
has increased in a positive rate
shock scenario. 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.
The absolute amount of
losses has developed in line
with business growth, but has
remained low.
We will continue to invest in
cyber-crime defense, fraud
and anti-money laundering
infrastructure.
Complaints per 1,000 accounts
remained low at 4.91, compared
to 3.65 in 2016.
We will focus on our
Complaints Transformation
project to continue to improve
the volume of complaints
resolved at first point of
contact.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
38 I Virgin Money Group Annual Report 2017
Principal risks
Key mitigating actions
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.
Increased competition in our key lending markets
is leading to a reduction in asset spreads, creating
additional financial risk. There is also the potential for
increased competition in the deposit taking market as
Bank of England funding schemes come to an end.
Financial performance can be impacted by adverse
changes in customer behaviour.
> 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;
> we continually monitor customer
behaviour metrics to identify adverse
trends;
and portfolio management to manage
margins and eliminate inappropriate
concentration risk;
> we will maintain pricing discipline
across our product range, ensuring
that risk is appropriately rewarded
within our Board approved risk
appetite; and
> regular validation and review of
models is performed.
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.
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 and
> a prudent mix of funding sources is
funding and liquidity policies define a
limit structure;
maintained with a maturity profile set
in risk appetite and policy limits; and
> liquid resources are maintained in
adequate quantity and quality to meet
stressed outflows;
> stress and scenario testing considers
threats to funding plans and changes
in consumer behaviour.
> Board-approved risk appetite ensures
we are holding sufficient capital within
regulatory requirements;
> the capital management policy sets
out minimum standards for the
management of capital;
> capital procedures are subject to
independent oversight; and
> stress and scenario testing assesses
capital adequacy under a range of
severe market wide stress scenarios
and idiosyncratic stress events.
Risk overview
Virgin Money Group Annual Report 2017 I 39
Key risk indicators
Commentary
Future focus
33%
28%
33%
28%
Greater London
South East
Scotland
South West
8%
6%
25%
8%
6%
25%
Other Regions
Mortgage concentration Mortgage concentration
Funding mix 2016
Funding mix 2015
2016
2017
1.72% 1.75%
2016
2017
Banking NIM
Focus will be on the
development of the digital
bank and SME propositions,
in addition to the ongoing
development of wider
customer propositions and
digital capability.
The development of the digital
bank and SME propositions
will ensure we provide services
that meet the future needs of
customers and further diversify
our business and funding
franchises.
In order to manage
concentration risk we seek to
spread the risk in the areas
in which we operate. This is
done through the controlled
management of LTVs and
the implementation of strict
counterparty limits to minimise
wholesale industry exposures.
Our pricing discipline and
management of the cost of
funds enabled us to mitigate
pressure on asset spreads, as
the Banking NIM reduced to 172
basis points compared to 175
basis points for the prior year.
4%
10%
10%
5%
10%
4%
76%
81%
Funding mix
2017
Funding mix
2016
Customer accounts
Wholesale – TFS
Wholesale – Other
Total equity
Improved diversity of funding
has been achieved through our
registration as a covered bonds
issuer, and our entrance into the
SME market.
We will continue to improve
balance sheet efficiency and
resilience through measured
diversification of wholesale
funding and building of the
SME deposit base.
Capital metrics
CET1
Total capital ratio
Leverage ratio
2017
13.8%
18.1%
3.9%
2016
15.2%
20.4%
4.4%
Our total capital and leverage
ratios have remained in line with
expectation and well in excess of
regulatory requirements.
We will continue to maintain a
high-quality capital base with
ratios in excess of regulatory
requirements.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
40 I Virgin Money Group Annual Report 2017
Financial results
41 Summary of Group results
52 Business line results
Daniel Wanjiru KEN,
with Kenenisa Bekele ETH
and Bedan Karoki Muchiri KEN
stand on the podium after the
Elite Men’s Race.
Photo: Virgin Money
London Marathon
Virgin Money Group Annual Report 2017 I 41
Summary of Group results
Our 2017 financial performance demonstrated continued
progression across the three pillars of our strategy – Growth,
Quality and Returns:
> Growth – our market share of new lending continued to
outstrip our share of stock resulting in continued growth in
balances, with loans and advances to customers increasing
by 13.5 per cent. This growth was funded predominantly by
the continued strength of the retail deposit franchise with
customer deposits growing 9.6 per cent;
> Quality – we maintained a disciplined approach to managing
balance sheet growth with consistently high underwriting
standards leading to our low and stable cost of risk. Growth
in retail deposits was supported by further diversification of
our long-term wholesale funding, including additional RMBS
and drawings from the Term Funding Scheme (TFS). Capital
resources grew through retained earnings and enabled us to
absorb additional investment in the build of our new digital
bank; and
> Returns – higher balances drove income growth which,
combined with disciplined cost control, resulted in strong
operational leverage. As a consequence our cost:income
ratio improved by 4.9 percentage points to 52.3 per cent
for the year. Combined with our growth and low cost of risk,
this resulted in a 28.1 per cent increase in underlying profit
before tax with return on tangible equity (RoTE) increasing
to 14.0 per cent, compared to 12.4 per cent in the prior year.
Statutory profit after tax was £192.1 million, a 37.1 per cent
increase on 2016.
Gross mortgage lending of £8.4 billion was combined with
strong retention performance to deliver mortgage balances
of £33.7 billion at year end. Lending was carefully managed
to optimise returns in an increasingly competitive mortgage
market. New business mortgage spreads were 19 basis points
lower than 2016 at 168 basis points.
Credit card balances increased by 23.6 per cent to
£3.0 billion. This was in line with our expected growth and
continued to demonstrate the strength of the franchise. We
continued to closely monitor the performance of our credit
card book, with the latest observed customer behaviour
reflected in the assumptions underlying the effective interest
rate (EIR) accounting.
The growth in mortgage and credit card balances was funded
predominantly through growth in deposits as our retail
savings franchise performed well, with balances reaching
£30.8 billion at year end.
Our operating platforms continued to support increasing
scale of customer activity which, in turn, enhanced Group
operational leverage. Underlying income growth of 13.5
per cent significantly exceeded the 3.7 per cent growth in
underlying costs, resulting in favourable JAWS of 9.8 per cent.
This continued improvement in operational leverage also
reflected our disciplined cost management and helped to
create the capacity for increased investment in the business.
Total investment in the core business was £52.8 million,
of which £41.8 million was capital expenditure. A further
£38.3 million of capital expenditure was invested in the
development of our new digital banking platform.
The quality of our lending continued to be underpinned by the
consistent application of our risk appetite. This was reflected
in a cost of risk of 13 basis points which was in line with the
prior year, despite a slightly greater proportion of credit card
balances. Whilst our low cost of risk benefits in part from
the benign economic environment in the UK, it undoubtedly
reflects the consistent application of our risk appetite and
our disciplined approach to credit risk management across
both our mortgage and credit card portfolios. The application
of strict affordability requirements, robust credit decisioning
and prudent underwriting standards across our portfolios
ensured that asset quality performance was ahead of our
expectations. Balance growth has therefore been achieved
without any deterioration in the quality of new lending or
the credit characteristics of the portfolios as a whole. Across
both portfolios all key credit metrics remain strong and this is
reflected in low arrears experience.
Leverage and total capital ratios remained above regulatory
requirements with higher retained earnings supporting
lending growth and investment. The Common Equity Tier
1 (CET1) ratio remained well above our internal minimum
required CET1 ratio of 12.0 per cent at 13.8 per cent,
with average mortgage risk weight density at 17.2 per
cent. The liquidity and funding profile benefitted from
another successful issuance from our established Gosforth
Residential Mortgage Backed Security (RMBS) programme
and we continued to access the TFS. Additionally, we have
received approval for a regulated covered bonds programme,
and expect our inaugural issuance to follow in 2018.
Our commercial agility during a year which saw strong
competition on both sides of the balance sheet allowed us to
manage asset pricing and the cost of funds, which reduced
to 59 basis points (2016: 80 basis points). This resulted in
a Banking NIM of 172 basis points compared to 175 basis
points for the prior year, in line with our expectations.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther information
42 I Virgin Money Group Annual Report 2017
Financial results
Summary of Group results
The combination of strong lending growth, improved
operational leverage and our low cost of risk delivered a
28.1 per cent increase in underlying profit before tax, to
£273.3 million.
As a consequence of this continued progression, measures
of shareholder returns were materially improved. Return on
tangible equity increased to 14.0 per cent and underlying
basic earnings per share rose by 21.7 per cent to 39.8 pence.
Unburdened by legacy issues, growth in underlying profit
before tax flowed to statutory profit before tax, which
increased by 35.1 per cent to £262.6 million.
Our effective tax rate in 2017 was 26.8 per cent. The overall
tax rate for UK banks increased by 8 percentage points in 2016
as a result of the bank tax surcharge, adding £18.9 million
to the Group’s tax charge in 2017. The Group recognised a
corporation tax charge of £70.5 million for the year. Statutory
profit after tax was therefore £192.1 million, a 37.1 per cent
increase on 2016. After distributions to AT1 holders, the profit
attributable to equity shareholders increased by 28.7 per cent
to £167.3 million.
As a result of this strong financial performance, the Board has
recommended a final dividend that takes the total dividend in
2017 to 6.0 pence per ordinary share, an increase of 17.6 per
cent compared to 2016.
Summary income statement
Net interest income
Other income
Total income
Costs
Impairment
Underlying profit before tax
Reconciling items between underlying and statutory profit before tax (see page 48)
Statutory profit before tax
Taxation
Statutory profit after tax
Distributions to Additional Tier 1 security holders (net of tax)
Profit attributable to equity shareholders
Basic earnings per share – statutory (pence)
2017
£m
594.6
71.4
666.0
2016
£m
519.0
67.9
586.9
(348.5)
(336.0)
(44.2)
273.3
(10.7)
262.6
(70.5)
192.1
(24.8)
167.3
37.8
(37.6)
213.3
(18.9)
194.4
(54.3)
140.1
(10.1)
130.0
29.4
Change
14.6%
5.2%
13.5%
3.7%
17.6%
28.1%
(43.4)%
35.1%
29.8%
37.1%
145.5%
28.7%
28.6%
666.0
586.9
523.5
438.1
365.1
273.3
213.3
160.7
104.7
43.6
(cid:19)(cid:17)(cid:18)(cid:20)
(cid:19)(cid:17)(cid:18)(cid:21)
(cid:19)(cid:17)(cid:18)(cid:22)
(cid:19)(cid:17)(cid:18)(cid:23)
(cid:19)(cid:17)(cid:18)(cid:24)
(cid:19)(cid:17)(cid:18)(cid:20)
(cid:19)(cid:17)(cid:18)(cid:21)
(cid:19)(cid:17)(cid:18)(cid:22)
(cid:19)(cid:17)(cid:18)(cid:23)
(cid:19)(cid:17)(cid:18)(cid:24)
Underlying total income (£m)
Underlying proÿt before tax (£m)
Virgin Money Group Annual Report 2017 I 43
2017
£m
2016
£m
Change
2,579.0
786.3
228.0%
37,099.9
33,003.4
1,051.8
377.1
858.8
407.1
41,107.8
35,055.6
12.4%
22.5%
(7.4)%
17.3%
5,379.0
2,132.5
152.2%
30,808.4
28,106.3
2,736.9
2,600.0
9.6%
5.3%
358.6
546.3
(34.4)%
39,282.9
33,385.1
1,824.9
1,670.5
41,107.8
35,055.6
17.7%
9.2%
17.3%
2017
2016
Change
%
%
%
%
p
£
%
%
%
%
1.72
1.57
52.3
0.13
37.8
2.97
18.1
13.8
3.9
14.0
1.75
1.60
57.2
0.13
29.4
2.73
20.4
15.2
4.4
12.4
(3)bps
(3)bps
(4.9)pp
–
8.4 pence
24 pence
(2.3)pp
(1.4)pp
(0.5)pp
1.6pp
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
Total liabilities
Total equity
Total liabilities and equity
Key metrics
Banking net interest margin
Net interest margin
Cost:income ratio
Cost of risk
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
Key ratios are presented on an underlying basis except where stated. Definitions, including bases of calculation, are set out on page 262.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther information
44 I Virgin Money Group Annual Report 2017
Summary of Group results
36.7
32.4
27.1
23.1
20.3
39.8
32.7
26.8
18.5
5.6
(cid:19)(cid:17)(cid:18)(cid:20)
(cid:19)(cid:17)(cid:18)(cid:21)
(cid:19)(cid:17)(cid:18)(cid:22)
(cid:19)(cid:17)(cid:18)(cid:23)
(cid:19)(cid:17)(cid:18)(cid:24)
(cid:19)(cid:17)(cid:18)(cid:20)
(cid:19)(cid:17)(cid:18)(cid:21)
(cid:19)(cid:17)(cid:18)(cid:22)
(cid:19)(cid:17)(cid:18)(cid:23)
(cid:19)(cid:17)(cid:18)(cid:24)
Loans and advances to customers (£bn)
Underlying basic earnings per share (pence)
Balance sheet growth
Loans and advances to customers
Customer deposits
Wholesale funding (including government funding)
Wholesale funding <1 year maturity
Loan-to-deposit ratio
High Quality Liquid Assets1
At 31 Dec
2017
£m
At 31 Dec
2016
£m
36,740.2
32,367.1
30,808.4
28,106.3
8,102.9
4,718.0
855.0
119.1%
5,264.4
575.0
114.5%
4,222.6
Change
13.5%
9.6%
71.7%
48.7%
4.6pp
24.7%
1 These include Funding for Lending Scheme drawings of £1.9 billion (2016: £2.7 billion) which are held off balance sheet but are available for repo and hence count towards liquidity resources.
The continuing strength of our lending franchise
delivered 13.5 per cent growth in loans and advances to
customers in 2017.
This lending was funded by continued growth in our retail
and wholesale funding franchises, as well as further drawings
from the TFS. Total customer deposits grew by 9.6 per cent
to £30.8 billion at 31 December 2017, in excess of market
growth of 3.5 per cent. We repriced four tranches of existing
deposits of approximately £15 billion during 2017, and all were
completed with lower than expected attrition.
In September 2017 we completed a successful issuance of
RMBS through our established ‘Gosforth’ franchise. This
included dollar and sterling tranches and raised sterling
equivalent funding of approximately £750 million. The
issuance was significantly oversubscribed, delivering long-
dated term funding whilst also diversifying our investor
base in the US.
We will continue to diversify and build out our funding sources
in the coming year in line with the long term aim of wholesale
funding providing up to 20 per cent of total funding. In July
2017 we received authorisation from the FCA for a regulated
covered bonds programme, and expect that our inaugural
issuance will take place this year. We also expect to access
RMBS markets again during 2018.
As we work towards the full implementation of minimum
requirements for own funds and eligible liabilities (MREL) on
1 January 2022, during 2018 we will issue further unsecured
funding through our established Global Medium Term Note
programme. The Bank of England provided MREL guidance,
including transitional arrangements, in late 2016. This set
an interim MREL requirement of 18 per cent of risk-weighted
assets from 1 January 2020 until 31 December 2021. The
BoE will advise the Group on its ultimate MREL requirement
in 2020. We therefore expect to issue further senior debt
gradually over the next four years to ensure compliance with
MREL requirements.
The balance sheet structure is managed within a clearly
defined risk appetite. The loan-to-deposit ratio increased to
119.1 per cent at the end of 2017 from 114.5 per cent at the
end of 2016, in line with guidance of towards 120 per cent
while we are participating in the TFS.
Financial results
Virgin Money Group Annual Report 2017 I 45
We continued to make use of the TFS in 2017, with total
drawings at 31 December 2017 of £4.2 billion. The scheme
provides the Group with a cost effective source of funding,
supporting lending growth and further strengthening our
liquidity position.
2.9
(0.7)
27.1
1.3
2.7
4.2
2.0
The Group’s liquidity position remained strong throughout
the period, with high quality liquid assets at £5.3 billion at
31 December 2017. This reflects an increase in cash and
balances held at the central bank. The Group held increased
levels of liquidity at 31 December 2017, reflected in an
increase in balances held at the central bank in part due to the
repayment of £650.2 million of Funding for Lending Scheme
(FLS) drawings which have been replaced by on balance sheet
liquidity. As a result our liquidity coverage ratio (LCR) of 203
per cent was significantly above the regulatory minimum of
90 per cent. From 1 January 2018 the regulatory minimum
has increased to 100 per cent. The high quality liquid asset
portfolio represented more than six times our wholesale
funding with a maturity of less than one year.
(cid:19)(cid:17)(cid:18)(cid:23)
(cid:46)(cid:80)(cid:87)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:3)(cid:74)(cid:79)(cid:3)(cid:53)(cid:39)(cid:52) (cid:46)(cid:80)(cid:87)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:3)(cid:74)(cid:79)(cid:3)(cid:39)(cid:45)(cid:52)
(cid:81)(cid:3) (cid:53)(cid:39)(cid:52)(cid:3)(cid:69)(cid:83)(cid:66)(cid:88)(cid:74)(cid:79)(cid:72)(cid:84)(cid:3)(cid:9)(cid:98)(cid:67)(cid:79)(cid:10)(cid:3)(cid:3)(cid:3)(cid:81)(cid:3) (cid:39)(cid:45)(cid:52)(cid:3)(cid:69)(cid:83)(cid:66)(cid:88)(cid:74)(cid:79)(cid:72)(cid:84)(cid:3)(cid:9)(cid:98)(cid:67)(cid:79)(cid:10)
(cid:19)(cid:17)(cid:18)(cid:24)
Income benefitted from growth in asset balances
Net interest income
Other income
Total income
Banking net interest margin
Average interest earning banking assets
Net interest margin
Average interest earning assets
2017
£m
594.6
71.4
666.0
1.72%
34,536
1.57%
37,991
2016
£m
519.0
67.9
586.9
1.75%
29,691
1.60%
32,521
Change
14.6%
5.2%
13.5%
(3)bps
16.3%
(3)bps
16.8%
Net interest income increased by 14.6 per cent to £594.6 million, driven by balance growth across the mortgage and credit card
books and a Banking net interest margin (NIM) of 172 basis points.
Mortgage spreads were at lower levels than 2016, driven by competition as well as lower funding costs, in part as a result of
the TFS. As a result, new mortgage lending in 2017 was priced at an average spread of 168 basis points, compared to 187 basis
points in 2016.
However, further optimisation of our funding base continued to support Banking NIM in a competitive environment. We
successfully repriced four tranches of deposits and this, along with drawings from the TFS, contributed to a reduction in the cost
of funds from 80 basis points in 2016 to 59 basis points in 2017.
Taken together, these factors reduced Banking NIM to 172 basis points in 2017 from 175 basis points in 2016. Total NIM also
reduced by 3 basis points to 157 basis points.
Credit card income has benefitted from further growth in the cards book, resulting in an increasing contribution to total net
interest income (NII) in the year. Credit card NII in the year includes an accrual of £78.0 million (2016: £61.5 million) arising from
the credit card effective interest rate (EIR) method. Credit card EIR is calculated over the expected card life, up to a maximum
of seven years. Historical evidence and data continue to support our modelling assumptions and the use of a seven year
modelling life.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther information
46 I Virgin Money Group Annual Report 2017
Summary of Group results
Other income increased by 5.2 per cent to £71.4 million reflecting stable income from our Investments and Pensions business
together with small increases in credit card interchange and foreign exchange income and sales of investment assets.
Other income included a gain of £6.1 million from the sale of the investment in Vocalink in the first half of 2017. Excluding the
gain from the sale of Vocalink and the gain of £5.3 million on the investment held in Visa Europe during the first half of 2016,
other income increased by 4.3 per cent.
Costs remained tightly controlled
Costs
Cost:income ratio
2017
£m
348.5
52.3%
2016
£m
336.0
57.2%
Change
3.7%
(4.9)pp
Cost growth in 2017 was constrained to just 3.7 per cent. Set against income growth of 13.5 per cent, this produced positive
JAWS of 9.8 per cent and reduced the cost:income ratio by 4.9 percentage points to 52.3 per cent. This performance meant that
we successfully achieved our stated target of exiting 2017 with a cost:income ratio of less than 50 per cent, delivering a ratio of
49.4 per cent for the fourth quarter.
This controlled growth in costs was achieved despite higher depreciation and amortisation during the year. Efficiency
improvements continued across the business with our ongoing programme of operational effectiveness and the ability to
leverage our central functions being key drivers.
Our strong cost performance helped to create the capacity for increased investment in the business. Total investment in the core
business was £52.8 million, of which £41.8 million was capital expenditure. A further £38.3 million of capital expenditure was
invested in the development of our new digital banking platform.
80.1%
72.5%
63.5%
57.2%
52.3%
666.0
586.9
Underlying
income (£m)
Underlying
costs (£m)
336.0
348.5
700
600
500
400
300
200
100
0
(cid:19)(cid:17)(cid:18)(cid:20)
(cid:19)(cid:17)(cid:18)(cid:21)
(cid:19)(cid:17)(cid:18)(cid:22)
Cost:income ratio
(cid:19)(cid:17)(cid:18)(cid:23)
(cid:19)(cid:17)(cid:18)(cid:24)
(cid:19)(cid:17)(cid:18)(cid:23)
(cid:19)(cid:17)(cid:18)(cid:24)
Operating JAWS
Financial results
Virgin Money Group Annual Report 2017 I 47
Impairments reflected a resilient economy and rigorous credit risk management
Mortgages
Impairment charge
Cost of risk
Credit Cards
Impairment charge
Cost of risk
Group
Impairment charge
Cost of risk
Provisions as a % of arrears balances1
Impaired loans as a % of loans and advances
Provisions as a % of impaired loans
1 Arrears are defined in the risk report on page 140.
2017
£m
2016
£m
Change
2.2
0.01%
42.0
1.51%
44.2
0.13%
32.9%
0.5%
33.5%
2.8
(21.4)%
0.01%
–
34.8
1.70%
37.6
0.13%
29.4%
0.4%
40.0%
20.7%
(19)bps
17.6%
–
3.5pp
0.1pp
(6.5)pp
We maintained a low cost of risk in 2017 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 2016 and 2017 at 0.01 per cent and the impairment charge reduced by
£0.6 million compared to the prior year. This performance reflected the high quality of the mortgage portfolio combined with the
benign economic environment, leading to a continuing low level of defaults. The percentage of mortgages over three months in
arrears was 0.12 per cent at the end of 2017 (2016: 0.15 per cent).
In credit cards, set against growth of 23.6 per cent in balances, the impairment charge for the portfolio increased by only 20.7
per cent to £42.0 million. The resulting cost of risk for credit cards decreased by 19 basis points to 1.51 per cent in 2017. This
underlines the high credit quality of new and existing cards which continue to have a low rate of default. Performance of new
cohorts of cards remained strong with all cohorts showing a cost of risk lower than or in line with previous vintages. When
accounts under 18 months old are excluded the cost of risk remains low at 1.66 per cent.
Provisions as a percentage of balances in arrears increased to 32.9 per cent (2016: 29.4 per cent) as we retained appropriate
coverage of balances at risk of loss.
Impaired loans as a percentage of loans and advances for the Group increased marginally to 0.5 per cent in 2017 compared
to 0.4 per cent in 2016. This was due to an increase in secured balances with qualitative impairment indicators, such as
interest only expired terms or fraud cases, which we prudently categorise as impaired regardless of arrears status or expected
recoverable amount.
Expired term loans which are more than six months past their maturity date have an average LTV of 25.8 per cent, and therefore
do not require increased impairment provisions given the high level of collateral cover. The growth in these balances within the
impaired loans category is therefore reflected in the reduced provision coverage of impaired loans.
Further information on the performance of our loan portfolios is provided in the Risk Management Report, on pages 134 to 152.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther information
48 I Virgin Money Group Annual Report 2017
Summary of Group results
Underlying profit before tax to statutory profit before tax reconciliation
Underlying profit before tax
IPO share based payments
Strategic items
Simplification costs
Fair value losses on financial instruments
Reconciling items between underlying and statutory profit before tax
Statutory profit before tax
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. These reconciling items were 43.4 per cent lower in
2017, as the absence of simplification costs, lower fair value
losses on financial instruments and a reduction in share based
payments related to the IPO more than offset the increased
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 are
recognised 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. 2017 is the last year in which such charges
will be incurred.
> Strategic items
We incurred strategic investment costs of £6.5 million
in 2017, entirely due to the development of our digital
banking platform which is not, at this stage, considered
part of our underlying results. Included within this amount
is a non-cash impairment charge of £4.8 million in respect
of previous software development on an earlier digital
project which has been discontinued in light of the strategic
decision taken in May 2017 to consolidate activities within
the digital bank programme.
2017
£m
273.3
(0.9)
(6.5)
–
(3.3)
(10.7)
262.6
2016
£m
213.3
(2.0)
(2.4)
(5.6)
(8.9)
(18.9)
194.4
Change
28.1%
(43.4)%
35.1%
> Simplification costs
In 2016 we took the opportunity to focus on simplification
activity, including de-layering our organisation structure.
This led to one-off costs incurred in 2016 including those
in relation to a number of senior leavers, which included
accelerated share based payment charges. These were
not considered part of the underlying results and were not
repeated in 2017.
> 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 and therefore excluding these
from underlying profit better represents the underlying
performance of the Group. Where derivatives are
terminated prior to maturity, this may give rise to fair value
movements that do not reverse.
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 262.
Financial results
Virgin Money Group Annual Report 2017 I 49
Continued strong progression in returns
Return on tangible equity
Return on assets
Tangible net asset value per share
2017
14.0
0.46
297
2016
Change
12.4
0.44
273
1.6pp
2bp
24p
%
%
p
The strength of income growth and improved operational leverage, combined with our asset quality, has driven material
enhancement to returns in 2017.
Return on tangible equity increased by 1.6 percentage points to 14.0 per cent in 2017, from the 12.4 per cent achieved in 2016.
At the same time, the return on assets grew by 2 basis points to 0.46 per cent in 2017, from 0.44 per cent in 2016. On a statutory
basis, return on assets increased to 0.47 per cent from 0.40 per cent in 2016. This statutory measure excludes AT1 coupons and
benefitted from lower reconciling items in 2017.
Tangible net asset value per share also increased, by 24 pence to 297 pence, as improving profitability flowed through to
retained earnings.
10.9%
12.4%
273
254
14.0%
297
(cid:19)(cid:17)(cid:18)(cid:22)
(cid:19)(cid:17)(cid:18)(cid:23)
(cid:19)(cid:17)(cid:18)(cid:24)
(cid:19)(cid:17)(cid:18)(cid:22)
(cid:19)(cid:17)(cid:18)(cid:23)
(cid:19)(cid:17)(cid:18)(cid:24)
Return on tangible equity
Tangible net asset value per share (pence)
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther information
50 I Virgin Money Group Annual Report 2017
Summary of Group results
Capital strength whilst investing in the future
Common Equity Tier 1 capital (CET1)
Risk-weighted assets (RWAs)
> of which mortgage credit risk RWAs
> of which credit card credit risk RWAs
> of which all other RWAs
Common Equity Tier 1 ratio
Tier 1 ratio
Total capital ratio
Leverage ratio
2017
1,264.2
9,178.6
5,790.5
2,282.9
1,105.2
13.8
18.0
18.1
3.9
£m
£m
£m
£m
£m
%
%
%
%
2016
Change
1,172.7
7,694.8
4,764.5
1,847.4
1,082.9
15.2
20.2
20.4
4.4
7.8%
19.3%
21.5%
23.6%
2.1%
(1.4)pp
(2.2)pp
(2.3)pp
(0.5)pp
During the year we generated capital, after distributions
to AT1 holders and before investment and dividends, of
£167.3 million, which was equivalent to 182 basis points of
CET1 capital.
This was used to invest in the business, provide dividends
for shareholders and increase capital resources. The net
investment in intangible assets, including capital investment
in our digital banking platform, was £47.8 million. Accrued
dividends for equity shareholders amounted to £26.5 million.
After further small balancing items, this resulted in an
increase in CET1 capital of £91.5 million which was in turn
used to support customer lending.
Lending growth resulted in a 19.3 per cent increase in RWAs to
£9.2 billion. In mortgages, growth in credit risk RWAs of 21.5
per cent was higher than balance growth of 13.2 per cent as
the average mortgage risk weight density, as a percentage
of balance sheet assets, increased to 17.2 per cent from
16.0 per cent, in line with expectations.
In credit cards, credit risk RWA growth was in line with asset
growth as our credit card RWAs are calculated using the
standardised approach.
Other RWAs increased by 2.1 per cent. This reflected growth in
operational risk RWAs in line with the standardised approach,
where the growth in average income over the past three
years is recognised in a higher level of operational RWAs.
This was largely offset by a reduction in exposure to higher
risk-weighted instruments and counterparties in our liquid
asset portfolio.
As a result of the above movements, the CET1 ratio reduced
to 13.8 per cent at 31 December 2017 compared with 15.2
per cent at the end of 2016. This was in line with the expected
development of our business and is in excess of our internal
minimum CET1 ratio of 12 per cent.
The total capital ratio of 18.1 per cent also reduced in line with
the movements described above, and remains significantly in
excess of our total regulatory requirements of 15.0 per cent:
£14.3
£384.1
18.1%
£1,264.2
£114.7
15.0%
£524.3
£734.3
Resources
(cid:81)(cid:3)(cid:3)(cid:36)(cid:38)(cid:53)(cid:18)(cid:3)(cid:3)(cid:3)(cid:81)(cid:3)(cid:3)(cid:34)(cid:53)(cid:18)(cid:3)(cid:3)(cid:3)(cid:81)(cid:3)(cid:3)(cid:53)(cid:74)(cid:70)(cid:83)(cid:19)
Requirements
(cid:81)(cid:3)(cid:3)(cid:49)(cid:74)(cid:77)(cid:77)(cid:66)(cid:83)(cid:3)(cid:18)(cid:3)(cid:3)(cid:3)(cid:81)(cid:3)(cid:3)(cid:49)(cid:74)(cid:77)(cid:77)(cid:66)(cid:83)(cid:3)(cid:19)(cid:34)(cid:3)(cid:3)(cid:3)(cid:81)(cid:3)(cid:3)(cid:36)(cid:36)(cid:80)(cid:35)
Capital Resources and Requirements – 31 Dec 2017 (£m)
The capital requirement of 15.0 per cent at 31 December 2017
comprised Pillar 1, Pillar 2A and the capital conservation
buffer. At 31 December 2017, as per our Individual Capital
Guidance (ICG), the Basel I floor was our binding constraint
and equivalent to a Pillar 2A capital add-on requirement
of 5.71 per cent. Any PRA buffer, if applicable, is a matter
between the PRA and Virgin Money. The PRA buffer also takes
account of the capital conservation buffer.
Financial results
Virgin Money Group Annual Report 2017 I 51
The leverage ratio was 3.9 per cent at the end of the year
compared to 4.4 per cent at the end of 2016. The reduction
reflected higher growth in leverage ratio eligible assets than
in capital resources. Growth in eligible assets was due to
increased customer balances and higher levels of on balance
sheet liquidity as FLS was repaid.
We manage our capital resources to support shareholder
returns and ensure that the bank is well capitalised to meet
our current and future business plans and our assessment of
regulatory risks and requirements.
Dividend
The strength of our profitability and our capital base
continues to give the Board confidence to recommend the
payment of a final dividend. In addition to the interim dividend
for 2017 of 1.9 pence per ordinary share, paid to shareholders
in September 2017, the Board has recommended a final
dividend of 4.1 pence per ordinary share in respect of 2017
which will be paid, subject to approval at our AGM in May
2018. The total dividend per share for 2017 will therefore be
6.0 pence, an increase of 17.6 per cent compared to 2016. Our
intention is to maintain a progressive approach to dividends
and to pay an interim and final dividend for 2018, subject
to performance.
IFRS 9
We are well placed for the transition to the new accounting
requirements of IFRS 9. We estimate the transition to IFRS 9
will reduce shareholders’ equity by approximately £35 million
after deferred tax as at 1 January 2018. The most significant
impact on the Group arises from the changes to loan loss
impairment with the introduction of an expected credit loss
approach. Given the low LTV and high credit quality of the
mortgage portfolio and high credit ratings of the wholesale
book, the main impact will arise from the Group’s credit
card portfolio.
This impact would reduce the Group’s CET 1 ratio by
approximately 1 basis point as at 1 January 2018 taking
into account the recently published capital transitional
arrangements. Excluding the transitional arrangements the
reduction to the CET 1 ratio would be approximately 36 bps.
These impacts remain within expectation and are included
within the Group’s capital plans. We continue to refine,
monitor and validate certain elements of the impairment
models and related controls ahead of full reporting of IFRS 9
impacts later in 2018.
Conclusion
2017 represented a further year of significant financial
progress for Virgin Money. High-quality lending growth
combined with further operational leverage has driven
improved returns for our shareholders across RoTE, earnings
per share and tangible net asset value. 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 the business has become increasingly capital generative
we have been able to invest in the next stage of our strategic
development with our initiatives to develop the digital bank
and our proposition for the SME market.
Peter Bole
Chief Financial Officer
26 February 2018
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther information
52 I Virgin Money Group Annual Report 2017
Business line results
2017
Net interest income
Other income
Total income
Total costs
Impairment charge
Net interest margin
Cost of risk
Key balance sheet items at 31 December 2017
Loans and advances to customers1
33,672.4
3,024.1
Customer deposits
Total customer balances
Risk-weighted assets
30,808.4
64,480.8
6,308.1
–
3,024.1
2,467.6
Mortgages &
Savings
£m
Credit Cards
£m
Financial
Services
£m
Central
Functions
£m
430.2
3.1
433.3
164.4
19.4
183.8
–
37.2
37.2
(2.2)
(42.0)
1.35%
0.01%
5.95%
1.51%
–
11.7
11.7
(348.5)
–
–
–
–
–
–
–
–
–
–
–
–
53.4
349.5
9,178.6
Mortgages &
Savings
£m
Credit Cards
£m
Financial
Services
£m
Central
Functions
£m
Group
£m
594.6
71.4
666.0
(348.5)
(44.2)
1.57%
0.13%
36,696.5
30,808.4
67,504.9
Group
£m
519.0
67.9
586.9
(336.0)
(37.6)
1.60%
0.13%
32,187.9
28,106.3
60,294.2
2016
Net interest income
Other income
Total income
Total costs
Impairment charge
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
383.0
2.0
385.0
(2.8)
1.38%
0.01%
29,740.8
28,106.3
57,847.1
5,204.5
136.0
17.7
153.7
(34.8)
6.69%
1.70%
2,447.1
–
2,447.1
2,012.3
–
37.5
37.5
–
–
–
–
–
–
–
10.7
10.7
(336.0)
–
–
–
–
–
–
50.4
427.6
7,694.8
The Group allocates interest expense arising from retail and wholesale funding activities between the Mortgage and Savings and Credit cards business lines.
Financial results
Virgin Money Group Annual Report 2017 I 53
Mortgages and Savings
We provide mortgages, savings and current accounts to
almost 1.8 million customers. Mortgages are sold primarily
through our intermediary partners and retail deposits are
largely originated through our digital channel. Our Mortgages
and Savings business line is an important revenue driver for
the Group, contributing 65.1 per cent of total income in 2017.
Mortgage Strategy
Our approach to mortgages is very straightforward. We
offer a wide range of mortgage products to prime credit
quality customers. Distribution is principally through our
intermediary partners, supplemented by direct distribution
and supported by excellent service.
We have continued to develop our mortgage proposition to
broaden our presence across segments of the market where
we are under-represented. These have been delivered within
our existing risk appetite.
We continued to strengthen our intermediary proposition to
enrich existing intermediary relationships, which have been a
driver of value for us during 2017. Additionally, we continue to
invest in the retention of our existing customers.
Key developments – Mortgages
We delivered gross lending of £8.4 billion in the year to
31 December 2017. This was achieved with a consistent risk
profile, with the average loan-to-value of new lending stable
at 68 per cent.
In an increasingly competitive environment and with the gross
lending market growing by 4 per cent to £257 billion, our
performance was in line with the prior year and represented a
3.3 per cent market share of gross lending.
Mortgage retention rates at product maturity remained
strong with 72 per cent of customers with maturing fixed rate
or tracker products being successfully retained during 2017,
compared with 68 per cent in 2016.
The combined effect of new business and retention
performance resulted in net lending of £3.9 billion. This
represented an 8.9 per cent market share of net lending. This
steady progression continued to bring our share of stock
towards our share of flow, within a stable credit risk appetite.
In 2017 our share of stock increased to 2.45 per cent from
2.23 per cent in 2016 as mortgage balances increased by 13.2
per cent to £33.7 billion in 2017.
Prime residential balances grew by 12.5 per cent to
£27.3 billion, representing 81.1 per cent of the overall
mortgage book and 81.7 per cent of new lending in 2017.
Buy-to-let balances of £6.4 billion represented 18.9 per cent
of the overall mortgage book at year end. The private rental
sector remains a key component of meeting UK housing
demand and we retained a strong presence in the buy-to-let
market, particularly in the remortgaging segment.
Completion spreads across the market trended downwards in
2017 as a result of competitive pressures. Both incumbents
and new entrants looked to build market share and the market
was impacted by lower funding costs, in part as a result of the
TFS. Our dynamic approach to adjusting pricing in response to
competitor movements, expanded reach into new customer
segments, and strong intermediary relationships enabled us
to offset these pressures to a degree. We ended 2017 with a
completion spread of 168 basis points, down from 187 basis
points in 2016.
Geographically our lending is broadly consistent with
the general distribution of balances across the UK. We
retain a consistent presence in more affluent areas such
as London and the South East where arrears are lower and
our underwriting ensures a lower loan-to-value of new
business. This affords us protection should house prices fall
in the future.
We remain committed to helping customers to achieve
their home ownership aspirations and continue to develop
our mortgage franchise to this end. We launched a Shared
Ownership proposition to enhance customers’ options and
we became the first mainstream bank to enter the Custom
Build sector. The number of customers using Virgin Money
to buy a New Build property increased by 41 per cent year on
year. These developments enabled us to increase the value
of gross lending to First Time Buyers by 20 per cent. Lending
at a loan-to-value over 90 per cent remained low however,
and represented under 4 per cent of our new business loans.
Customer demographics were stable and performance
remained robust.
We continued to deliver enhancements for mortgage brokers.
Our partnerships with key national intermediaries continued
to develop as we strengthened the intermediary proposition
by expanding access to our New Build offering and through
entering new market segments such as Shared Ownership.
These initiatives, together with our strong service levels, were
recognised by our partners as our intermediary NPS increased
to +61 from +55 in 2016.
Thanks to developments in our innovative Mortgage Lab, we
also made progress on our proposition for customers who
wish to use our direct channel. As a result, the proportion of
new mortgage applications from direct customers increased
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther information
54 I Virgin Money Group Annual Report 2017
Business line results
to 12 per cent in 2017 from 10 per cent in 2016, and exceeded
£1 billion for the first time.
opening run rate at the level experienced through 2016,
opening 12,000 new accounts in 2017.
The quality of our mortgage franchise was recognised with
several industry awards over the course of the year: Legal &
General Best Lender for Partnership (for the third consecutive
year); Yourmoney Best Online Mortgage Provider; Mortgage
Strategy Awards Best Mortgage Lender and Sesame Bankhall
Group Best Innovative Lender.
Savings Strategy
We offer customers a range of instant access and fixed term
savings products, also making these available as ISAs. We also
offer a basic bank account. Savings products are sold primarily
through our digital channels supplemented by our Stores
and contact centres. We attract and retain customers with
enduring, good value offers and excellent service.
Key developments – Savings
We opened more than 370,000 new savings accounts in the
year. At the end of 2017 we had more than 1.3 million savings
customers and balances had grown to £30.8 billion, up from
£28.1 billion at 31 December 2016.
This balance growth of 9.6 per cent compared to market
growth of 3.5 per cent over the course of 2017. Our market
share of savings stock was 1.7 per cent at 31 December 2017.
Performance was underpinned by strong customer retention.
We retained 89 per cent of customers with maturing fixed rate
balances and successfully repriced £15 billion of funds on our
existing book across four phases of repricing. Attrition rates
on each reprice were consistently better than expectations.
Cash ISA performance was particularly strong in 2017
with balances increasing by 27 per cent compared to a flat
market, reflecting the strong appeal of our proposition to ISA
customers. We had a market share of Cash ISA balances of 6.1
per cent at the end of December 2017, up from 4.8 per cent at
the end of 2016.
We continued to develop new propositions to broaden
our access to savings customers with differing needs. Our
regular saver product helps attract customers who are
new to saving and had attracted over 45,000 customers by
the end of 2017. We were also pleased to grow our savings
products partnership with Manchester United to reach 10,000
customer accounts during the year.
Our Essential Current Account continues to attract customers
looking for a straightforward transparent product, and is
endorsed as one of the best basic bank accounts in the market
by Money Saving Expert. We have maintained our account
We continue to focus on providing best in class customer
service. Improvements to the customer proposition and
journey are reflected in our strong retention rates and
continued growth in customer advocacy, with Savings NPS
increasing to +37 in 2017 from +16 in 2016.
Ongoing active management of retail funding costs in the
context of competitive market conditions contributed to a
reduction in the total cost of funds from 80 basis points in
2016 to 59 basis points in 2017.
2017 financial highlights – Mortgages and Savings
> mortgage balances grew by 13.2 per cent to £33.7 billion,
driven by gross lending of £8.4 billion, and strong customer
retention. In a competitive marketplace, spreads on new
business reduced 19 basis points to 168 basis points;
> deposit balances grew by 9.6 per cent to £30.8 billion. With
TFS helping to reduce market funding costs, our active
management of pricing enabled us to reduce spreads and
partially offset downward pressure on asset pricing;
> NIM for the full year 2017 was 1.35 per cent in the mortgage
and savings business. The 3 basis point reduction in NIM
relative to 2016 reflects the dilutive effect of new lending
and competitive market conditions, partially mitigated by our
active management of pricing and mix in both the mortgage
and savings markets;
> net interest income increased by 12.3 per cent to £430.2
million, driven by growth in mortgage balances. Combined
with a £1.1 million increase in other income, total income in
this business line rose by 12.5 per cent to £433.3 million;
> the high quality of our mortgage business continued to be
reflected in the cost of risk which remained stable at 1 basis
point for the year. Our already low arrears levels reduced
further in 2017. The percentage of loans over three months
in arrears was 0.12 per cent at the end of 2017, compared to
0.15 per cent at the end of 2016;
> at £2.2 million, the impairment charge in 2017 was below
the £2.8 million incurred in 2016, reflecting our strong credit
management and resulting high-quality mortgage book, as
well as benign economic conditions; and
> risk-weighted assets in this business line increased by 21.2
per cent to £6.3 billion, reflecting lending growth with new
business coming onto the book at risk weights higher than
more seasoned stock.
Financial results
Virgin Money Group Annual Report 2017 I 55
Performance summary – Mortgages and Savings
Net interest income
Other income
Total underlying income
Impairment charge
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 deposits
Total customer balances
Risk-weighted assets
2017
£m
430.2
3.1
433.3
2016
£m
383.0
2.0
385.0
Change
12.3%
55.0%
12.5%
(2.2)
(2.8)
(21.4)%
1.35%
0.01%
2017
£m
1.38%
0.01%
2016
£m
33,672.4
29,740.8
27,306.4
24,273.6
6,366.0
5,467.2
30,808.4
28,106.3
64,480.8
57,847.1
6,308.1
5,204.5
(3)bps
–
Change
13.2%
12.5%
16.4%
9.6%
11.5%
21.2%
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther information
56 I Virgin Money Group Annual Report 2017
Business line results
Credit Cards
We provide credit card products, predominantly online,
to 1.2 million customers. Our portfolio is a mix of balance
transfer and retail credit cards, and our offering continues to
develop with the launch of our Virgin Atlantic Airways affinity
products in the first half of 2018. Our credit card business
contributed 27.6 per cent of total income in 2017.
Strategy
Our Credit Card business has continued to build on the
foundations laid by the successful migration of the book
purchased from MBNA onto our own platform in early 2015.
The functionality of our 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.
Key developments
Balances grew by 23.6 per cent during 2017 as we achieved
our target of £3.0 billion of balances by the end of 2017, with a
stable customer profile and improving credit quality.
In 2017 we launched new customer initiatives such as ‘Virgin
Money Back’ offering cashback on purchases, together with
promotions to encourage contactless transactions. These
supported an 8 per cent increase in average retail spend per
active account. These initiatives, together with improvements
in customer service resulting from an upgrade to our
online service platform, led to credit card NPS improving to
+46 (2016: +42).
We opened close to 300,000 customer accounts during
2017, in line with the prior year. We continued to move the
focus of customer acquisition towards retail-led cards,
which represented over 40 per cent of new accounts in 2017
compared to 30 per cent in 2016. As a result of the ongoing
diversification of our portfolio, retail spend on our cards was
41 per cent higher than in 2016.
Our customer indebtedness scores remained significantly
below the market average, driven by strong affordability
established at the point of underwriting. The profile of newly
acquired customers remained broadly stable following
additional tightening of criteria for all customers.
In 2017 over 98 per cent of new balance transfer customers
were booked at an expected loss rate of less than 1 per cent.
This compared with 74 per cent of new balance transfer
customers booked at an expected loss rate of less than 1 per
cent in the overall market. We do not book customers outside
our credit risk appetite, and do not downsell to applicants who
do not pass our initial credit score assessment.
This all ensured that our early arrears continued to
outperform the industry, as did portfolio arrears levels.
We maintained our in-depth monthly review of customer
spending, borrowing and repayment behaviour. This
demonstrated stable usage and a highly consistent
pattern of activity.
During the year, the first cohorts of business underwritten
on our own platform in 2015 reached the end of promotional
terms. These cohorts represented a relatively low volume
of balances. In 2018 greater volumes of balances will reach
the end of promotional terms. In line with this, we will see a
natural increase in balance attrition which will result in lower
levels of overall portfolio balance growth. Our co-branded
partnership with Virgin Atlantic Airways (VAA) will help us
to diversify the mix in our portfolio further with a higher
proportion of borrowing from retail spend and reward based
cards complementing our balance transfer offers. The first
VAA products will be launched in the first half of 2018.
The strength of our customer proposition and experience was
recognised by winning the British Bank Awards Best Credit
Card Provider and the Your Money Awards Best Online Credit
Card Provider for 2017.
Financial results
Virgin Money Group Annual Report 2017 I 57
2017 financial highlights – Credit Cards
> credit card balances increased by 23.6 per cent to £3.0 billion
at year end;
> net interest income grew by 20.9 per cent to £164.4 million
> other income increased by 9.6 per cent. This increase was
driven by higher interchange and foreign exchange income
reflecting an increase in retail volumes and a higher mix of
retail accounts;
reflecting growth in balances;
> as a result of the above factors, total income increased by
> the performance of the book continued to be closely
monitored with the latest observed customer behaviour
reflected in the assumptions underlying our effective interest
rate (EIR) accounting. Historical evidence and data continue to
support our use of a seven year modelling life;
> net interest margin decreased by 74 basis points to 5.95 per
cent reflecting book growth and the relatively lower yield on
more recent cohorts of lending;
Performance summary – Credit Cards
19.6 per cent;
> the impairment charge for credit cards increased by 20.7 per
cent to £42.0 million reflecting balance growth. The high
credit quality of new and existing cohorts, which continue to
have a low rate of default, meant the cost of risk for credit
cards reduced by 19 basis points to 1.51 per cent in 2017, from
1.70 per cent in 2016; and
> risk-weighted assets in the business line increased by 22.6 per
cent from 2016, driven by the growth in balances.
Net interest income
Other income
Total income
Impairment charge
Credit cards net interest margin
Cost of risk
Key balance sheet items at 31 December
Loans and advances to customers
Total customer balances
Risk-weighted assets
2017
£m
164.4
19.4
183.8
(42.0)
5.95%
1.51%
2017
£m
2016
£m
136.0
17.7
153.7
(34.8)
6.69%
1.70%
2016
£m
3,024.1
3,024.1
2,467.6
2,447.1
2,447.1
2,012.3
Change
20.9%
9.6%
19.6%
20.7%
(74)bps
(19)bps
Change
23.6%
23.6%
22.6%
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther information
58 I Virgin Money Group Annual Report 2017
Business line results
Financial Services
The Financial Services business line offers customers
investment, insurance and currency products and services. We
work in partnership with a number of specialist organisations
to deliver these products, which generate attractive returns
and consume low levels of capital. This business line
contributed 5.6 per cent of total income in 2017.
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 investment business performed well in 2017 as inflows
increased by 27 per cent compared to 2016. Stocks and Shares
ISA sales and transfers were a particular highlight, with annual
growth of 40 per cent and 160 per cent respectively. These
were driven by the increased ISA threshold in combination
with strong Virgin Atlantic Airways partnership sales and
continued improvements to the customer journey.
In the insurance business, we successfully re-launched
our life insurance product with our new partner BGL. This
features a straightforward proposition with a simple and
Performance summary – Financial Services
Investments and pensions
Insurance and other
Total income
Key balance sheet items at 31 December
Risk-weighted assets
transparent quotation process, and has already delivered
4,000 policy sales.
The travel insurance market continues to be competitive. In
order to adapt to this environment we focused on attracting
higher volumes of direct customers. We achieved this by
enhancing the customer journey, including a new ‘quick quote’
facility. This narrower focus resulted in lower volumes overall
but increased income per policy. We also saw the NPS of Travel
Insurance customers improve to +38 from +35 in 2016.
2017 financial highlights – Financial Services
> income in the Financial Services business line continued to be
driven by our investment funds business, where income was up
0.9 per cent compared with 2016;
> funds under management stood at £3.7 billion at
31 December 2017, an increase of 9.6 per cent from 2016
driven by increases in the FTSE, and sales of stocks and shares
ISAs. The Group mitigated the risk associated with stock
market movements and their impact on earnings through the
use of a FTSE hedge, and as a consequence income growth did
not fully benefit from the rise in the FTSE;
> insurance and other income in 2017 decreased by 10.3 per
cent, reflecting continued competitive pressure in the travel
insurance market; and
> as a result, total income from the Financial Services business
fell by 0.8 per cent year-on-year.
2017
£m
32.0
5.2
37.2
2017
£m
2016
£m
31.7
5.8
37.5
2016
£m
Change
0.9%
(10.3%)
(0.8%)
Change
53.4
50.4
6.0%
Financial results
Virgin Money Group Annual Report 2017 I 59
2017 financial highlights – Central Functions
> interest income and expense incurred from Treasury funding
and liquidity operations is allocated to the Mortgage, Savings
and Credit Cards businesses;
> other income is primarily driven by gains from the sale of
available-for-sale assets and debt securities. In 2017 this
included a gain of £6.1 million arising from the sale of our
investment in Vocalink. 2016 other income included a gain of
£5.3 million on the investment held in Visa Europe;
> operating costs remained tightly controlled with continuous
improvement across the organisation. In our savings operation
the implementation of additional automation led to a 21 per
cent improvement in new accounts opened per FTE.
> an £8.5 million increase in depreciation and amortisation
arose from capital expenditure in prior years, as we continued
to invest in the future of the bank; and
> an 18.3 per cent reduction in risk-weighted assets primarily
due to the reduction in higher risk-weighted instruments in
the liquidity portfolio.
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 operating costs to
each business line, as we manage operating costs across the
business as a whole. This has the benefit of more effective
cost management.
This part of our business contributed 1.8 per cent of total
income in 2017 from the sale of available-for-sale assets and
debt securities by our Treasury function.
Key developments
Management of operating expenses is a key discipline for
the business. We have continued to invest in our people
and in developing the long term future of the bank through
digital investment whilst stringently managing costs through
further simplification and efficiency activity. This approach
has driven continued improvements in operational leverage,
delivering a Cost:Income ratio of less than 50 per cent for the
fourth quarter.
Fixed costs were held broadly flat as the benefit of
simplification undertaken in 2016 and other operational
efficiencies offset inflationary and volume driven
cost increases.
Property and IT costs were tightly managed, whilst we worked
closely with strategic partners to create efficiencies.
We continued to optimise and prioritise our project delivery
in 2017, investing £52.8 million effectively to deliver a wide
range of initiatives that helped grow and protect our business,
as well as meet key regulatory requirements. These included
the delivery of operational and customer efficiencies from
our Mortgage and Savings Lab, an upgrade of colleague IT
equipment, investment in Cyber-crime and Financial crime
prevention as well as the build of our IFRS 9 capability.
To support the evolution of our strategy, we have also
invested £38.3 million in the development of our new digital
banking platform.
During 2017 we actively managed the mix of our liquid asset
portfolio to reduce our exposure to higher risk-weighted
instruments and counterparties.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther information
60 I Virgin Money Group Annual Report 2017
Business line results
Performance summary – Central Functions
Other income
Total income
Total costs
Key balance sheet items at 31 December
Risk-weighted assets
Operating Costs
Staff costs
Premises and equipment
Other expenses
Depreciation, amortisation and impairment
Total costs
2017
£m
11.7
11.7
2016
£m
10.7
10.7
(348.5)
(336.0)
Change
9.3%
9.3%
3.7%
2017
£m
2016
£m
Change
349.5
427.6
(18.3)%
2017
£m
190.7
30.0
97.4
30.4
2016
£m
188.9
28.5
96.7
21.9
348.5
336.0
Change
1.0%
5.3%
0.7%
38.8%
3.7%
Financial results
Virgin Money Group Annual Report 2017 I 61
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Governance
62 Letter from the Chair
64 Board of Directors
69 Virgin Money Executive
71 Corporate Governance Report
95 Directors’ Remuneration Report
120 Directors’ Report
Virgin Money London Marathon.
Photo: Virgin Money London Marathon
Virgin Money Lounge, Sheffield
Financial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
62 I Virgin Money Group Annual Report 2017
Letter from the Chair
“Effective and transparent
corporate governance is a priority
of the Board, facilitating the
delivery of our strategy and
creating sustainable value.”
Dear Shareholders
I am pleased to present our Corporate Governance Report
for 2017. This report sets out our approach to governance in
practice, the work of the Board in 2017 and includes reports
from the Nomination Committee, the Audit Committee and
the Board Risk Committee. The report from the Remuneration
Committee is included in the Directors’ Remuneration Report.
The Board’s approach is to ensure that the Group applies the
highest principles of corporate governance and that such
principles are embedded into the culture and operations of
the business. Our commitment to good governance underpins
our strategy and ensures we continually challenge our
assumptions and risks.
Board composition and succession
After three years as Chair, I confirmed my intention to
retire from the Board in 2018 and return home to the USA.
I am grateful to Norman McLuskie, our Senior Independent
Director, for leading a rigorous process for the Nomination
Committee to appoint my successor. The Board have
unanimously chosen Irene Dorner as Virgin Money’s next
Chair. We were impressed with her character and integrity,
her extensive business experience in the UK and abroad, and
her detailed knowledge of retail banking. As announced on
15 February 2018, Irene will join the Board as Chair Elect
on 1 March 2018 and will take over as Chair on 1 April 2018
following my retirement. I look forward to working with Irene
to ensure a smooth handover. An overview of the recruitment
process undertaken by the Nomination Committee is
included on page 83.
Succession planning and the composition of the Board
remained a key focus. During 2017, Darren Pope, Eva
Eisenschimmel, Peter Bole and Amy Stirling joined the Board
and Marilyn Spearing and Gordon McCallum retired from the
Board. Further detail on Board and Committee changes in the
year can be found at page 82.
We remain committed to increasing the diversity of the
Board in the broadest sense while maintaining the necessary
levels of skills and experience required to oversee a business
operating in a heavily regulated industry. We are pleased
to report we will achieve our stated goal of a balanced
Board during 2018.
Strategic planning
A key focus for the Board this year has been the development
of our refreshed strategic plan. The Board has a significant
role to play in determining the purpose of the Group and
ensuring that the Group’s values, strategy and business
model are all aligned so as to create sustainable value for
our shareholders, customers, colleagues, corporate partners
and the communities in which we operate. A summary of our
strategy is outlined on page 18.
Against an increasingly competitive landscape, the Board
has spent time discussing the risks arising from the current
macro-economic environment and forthcoming structural
and regulatory changes.
Culture
Virgin Money’s culture is defined through our mission to make
‘everyone better off’ (EBO). Strong governance underpins
a strong culture and it is important that the Board leads
by example and ensures that good standards of behaviour
permeate throughout all levels of the organisation. Virgin
Money’s culture provides the foundation for our strategy and
the most recent results of the colleague engagement survey
show that 90 per cent of our colleagues understand how the
EBO culture applies to their role.
Board effectiveness
As Chair, my responsibility is to provide leadership and to
ensure that the Board environment allows for effective
challenge resulting in high quality decision-making. The
annual Board effectiveness review continues to provide
a valuable opportunity for the Board to reflect on how it
operates and to propose any improvements. In line with the
UK Corporate Governance Code (Code) requirements, we will
undertake an external Board effectiveness review in 2018.
This year I led an internal review with the assistance of the
Company Secretary. Information on the process and outcomes
can be found on pages 78 and 79.
Regulatory framework
Regulatory change remains a key focus of the Board. Details
of our plans for the implementation of projects such as
PSD2, GDPR, ring-fencing and MiFID II are set out on pages
32 and 130. In addition, we have participated in the FRC’s
consultation on changes to the Code and look forward to
reviewing the outcome during 2018.
Looking ahead
Looking forward to 2018, our corporate governance priorities
will be to ensure we are ready to comply with the provisions
of the new Code and implement the actions from the 2017
internal Board effectiveness review.
It has been an honour to chair the Virgin Money Board over
the past three years. I would like to thank each of the Directors
for their continuous support and commitment throughout
my time as Chair. I believe Virgin Money is very well placed to
make the most of the many opportunities that exist, and offer
all colleagues my best wishes for success in the years ahead.
Glen Moreno
Chair
26 February 2018
Virgin Money Group Annual Report 2017 I 63
Relaxing in the Virgin Money Lounge, Manchester
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
64 I Virgin Money Group Annual Report 2017
Board of Directors
1
5
9
2
6
10
Company
Secretary
Chair Elect
to join the Board
1 March 2018
11
12
3
7
4
8
Virgin Money Group Annual Report 2017 I 65
This information is provided as at 31 December 2017
(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: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:17)(cid:14)(cid:19)(cid:3)(cid:90)(cid:70)(cid:66)(cid:83)(cid:84)(cid:3)(cid:9)(cid:21)(cid:17)(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:19)(cid:17)(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:17)(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:20)(cid:17)(cid:6)(cid:10)(cid:3)
(cid:21)
(cid:21)
(cid:81)(cid:3) (cid:46)(cid:70)(cid:79)(cid:3)(cid:9)(cid:23)(cid:17)(cid:6)(cid:10)
(cid:81)(cid:3) (cid:56)(cid:80)(cid:78)(cid:70)(cid:79)(cid:3)(cid:9)(cid:21)(cid:17)(cid:6)(cid:10)
(cid:49)(cid:83)(cid:80)(cid:71)(cid:80)(cid:83)(cid:78)(cid:66)(cid:3)(cid:19)(cid:17)(cid:18)(cid:25)(cid:3)(cid:81)(cid:80)(cid:84)(cid:74)(cid:85)(cid:74)(cid:80)(cid:79)
(cid:23)
(cid:81)(cid:3) (cid:46)(cid:70)(cid:79)(cid:3)(cid:9)(cid:22)(cid:17)(cid:6)(cid:10)
(cid:81)(cid:3) (cid:56)(cid:80)(cid:78)(cid:70)(cid:79)(cid:3)(cid:9)(cid:22)(cid:17)(cid:6)(cid:10)
(cid:20)
(cid:18)
(cid:19)
(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: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:66)(cid:72)(cid:70)
(cid:22)
(cid:19)
(cid:19)
(cid:18)
Skills and experience
(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:19)(cid:17)(cid:6)(cid:10)
(cid:81)(cid:3) (cid:36)(cid:73)(cid:66)(cid:74)(cid:83)(cid:3)(cid:9)(cid:74)(cid:79)(cid:69)(cid:70)(cid:81)(cid:70)(cid:79)(cid:69)(cid:70)(cid:79)(cid:85)(cid:3)(cid:80)(cid:79)
(cid:3) (cid:66)(cid:81)(cid:81)(cid:80)(cid:74)(cid:79)(cid:85)(cid:78)(cid:70)(cid:79)(cid:85)(cid:10)(cid:3)(cid:9)(cid:18)(cid:17)(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:10)(cid:3)
(cid:3)(cid:9) (cid:79)(cid:80)(cid:79)(cid:14)(cid:74)(cid:79)(cid:69)(cid:70)(cid:81)(cid:70)(cid:79)(cid:69)(cid:70)(cid:79)(cid:85)(cid:10)(cid:3)(cid:9)(cid:19)(cid:17)(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:22)(cid:17)(cid:6)(cid:10)(cid:3)
(cid:19)
(cid:20)
(cid:81)(cid:3) (cid:21)(cid:22)(cid:14)(cid:22)(cid:22)(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:81)(cid:3) (cid:22)(cid:23)(cid:14)(cid:23)(cid:22)(cid:3)(cid:90)(cid:70)(cid:66)(cid:83)(cid:84)(cid:3)(cid:9)(cid:20)(cid:17)(cid:6)(cid:10)
(cid:81)(cid:3) (cid:23)(cid:23)(cid:14)(cid:24)(cid:22)(cid:3)(cid:90)(cid:70)(cid:66)(cid:83)(cid:84)(cid:3)(cid:9)(cid:19)(cid:17)(cid:6)(cid:10)
(cid:22)
Retail banking
Finance
Investments and pensions
Consumer, marketing & distribution
Core technology, operations & digital impact
0
10
20
30
40
50
60
70
80
90
100
Percentage of the Board
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
66 I Virgin Money Group Annual Report 2017
Board of Directors
Directors
1 Glen Moreno
Chair
N
3 Colin Keogh
Independent Non-Executive Director
Appointed:
January 2010
Skills and experience:
Colin has over 30 years of experience 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, New World Resources plc and Emerald Plantation
Holdings Limited.
External appointments:
Senior Independent Director and Chair of the Remuneration
Committee of Hiscox Limited, Chair of Premium Credit Limited
and Non-Executive Director of M&G Group Limited.
4 Geeta Gopalan
Independent Non-Executive Director
Ri
Re
Appointed:
June 2015
Skills and experience:
Geeta has over 25 years of experience of financial services and
retail banking, particularly 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:
Non-Executive Director of Ultra Electronic Holdings plc and
Wizink Bank SA, of which she is Chair of the Audit and Risk
Committee. Geeta is also a Non-Executive Member and Vice
Chair of the England Committee of the Big Lottery Fund.
Appointed:
January 2015 (Board), May 2015 (Chair). Glen will retire from
the Board on 31 March 2018.
Skills and experience:
Glen has almost 50 years of experience in business and finance.
He spent his early career at Citigroup where he held senior
positions in Europe and Asia and was a member of the Policy
Committee. He was subsequently Chief Executive of Fidelity
International Limited. Glen previously held Non-Executive
Director roles as Chair of Pearson plc, Senior Independent
Director at Man Group, Senior Independent Director and
Deputy Chair at Lloyds Banking Group plc and Deputy Chair
of the Financial Reporting Council. Glen has also served as a
Non-Executive Director and Chair of the Audit Committee of
Promotora de Informaciones SA.
External appointments:
Non-Executive Director and Chair of the Capital Committee of
Fidelity International Limited.
2 Norman McLuskie
Senior Independent Director
Re
Appointed:
January 2010
Skills and experience:
Norman has over 35 years of experience in financial services.
He previously held a number of board positions at the Royal
Bank of Scotland Group (RBS), including Deputy Chief
Executive and a Non-Executive Director of RBS Insurance.
He was also Chair of Mastercard Europe. He is a chartered
accountant and a fellow of the Chartered Institute of Bankers
in Scotland.
External appointments:
None.
KEY
Member of Audit
Committee
Member of
Board Risk
Committee
Member of
Nomination
Committee
Member of
Remuneration
Committee
Committee
Chair
Virgin Money Group Annual Report 2017 I 67
5 Eva Eisenschimmel
Independent Non-Executive Director
Re
Appointed:
January 2017
Skills and experience:
Eva has 30 years of 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 positions
at Allied Domecq and British Airways.
External appointments:
Chief of Staff at Lowell.
6 Darren Pope
Independent Non-Executive Director
A
Re
Appointed:
March 2017
Skills and experience:
Darren has over 30 years of experience in retail banking and
financial services. Darren held the post of Chief Financial
Officer of TSB Bank plc, having taken a lead role in the design
and divestment of the TSB business from Lloyds Bank plc and
its subsequent IPO and takeover. He previously held a number
of executive and senior roles at Lloyds Banking Group plc
including Retail Bank Commercial Director. He is a fellow of the
Chartered Institute of Certified Accountants.
External appointments:
Independent Non-Executive Director and Chair of Audit
Committee of Equiniti Group plc.
7 Patrick McCall1
Non-Executive Director/VEL Nominee Director
Appointed:
June 2012
Skills and experience:
Patrick is a senior executive in the Virgin Group. He 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 of Virgin Active and Virgin Trains East Coast,
Co-Chair of Virgin Rail Group and Chair of Virgin Galactic and
Virgin Orbit.
1 Appointed as the representative director of Virgin Enterprises Limited (VEL) pursuant to
8 Amy Stirling2
Non-Executive Director/
Virgin Nominee Director
Appointed:
December 2017
Skills and experience:
Amy is Chief Financial Officer of the Virgin Group. She has
extensive board, financial and management experience
from senior and board roles in a range of sectors including
telecommunications, financial services and commerce. She
was previously Non-Executive Director at Pets at Home and the
UK Cabinet Office. Amy is a chartered accountant.
External appointments:
Chief Financial Officer of the Virgin Group and Non-Executive
Director and member of the Audit and Risk Committee and the
Valuation Committee at RIT Capital Partners plc.
9 Jayne-Anne Gadhia CBE
Executive Director and Chief Executive
Appointed:
March 2007
Skills and experience:
Jayne-Anne has 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, Jayne-Anne 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.
External appointments:
Trustee of Tate (Government appointment) and Chair of The
Great Steward of Scotland’s Dumfries House Trust3. Jayne-
Anne has a number of advisory roles including as a director of
UK Finance and on Mastercard Europe’s Advisory Board. Jayne-
Anne is the Government’s Women in Finance Champion.
2 Appointed pursuant to the terms of the Relationship Agreement with Virgin Group
Holdings Limited, as described on page 80.
the terms of the Virgin Money Trade Mark Licence Agreement.
3 Bodies not for commercial purpose.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
68 I Virgin Money Group Annual Report 2017
Board of Directors
10 Peter Bole
Executive Director and Chief Financial Officer
Appointed:
July 2017
Skills and experience:
Peter has over 25 years of experience in financial services.
Following roles with Deloitte and Standard Life, Peter joined
RBS in 2001 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 as Chief Financial Officer
and played a key role in the leadership of the business as it was
migrated from RBS infrastructure. Peter joined Virgin Money in
2016. Peter became Chief Financial Officer in January 2017 and
joined the Board in July 2017. He is a chartered accountant.
External appointments:
None.
Company Secretary
11 Katie Marshall
Company Secretary
Appointed:
September 2013
Skills and experience:
Katie joined Northern Rock in 2009, following ten years as a
corporate lawyer at Eversheds LLP, and subsequently joined
Virgin Money in January 2012. Katie was appointed Company
Secretary in September 2013. She is a qualified solicitor.
Chair Elect
12 Irene Dorner
Chair Elect
Appointed:
To join the Board 1 March 2018. Will take over Chair on
1 April 2018.
Skills and experience:
Irene has over 30 years of experience in financial services. Irene
was Group Managing Director of HSBC Group and CEO and
President of HSBC USA, with responsibility for all of HSBC’s
operations in the USA, until December 2014. During a 29 year
career at HSBC she held a number of senior roles including
Deputy Chair and CEO, Malaysia and General Manager of
Premier and Wealth Management in the UK.
External appointments:
Non-Executive Director and Chair of Control Risks
International Limited and Non-Executive Director and
member of the Audit Committee of AXA SA. Irene is also a
Non-Executive Director and a member of the Nominations and
Governance Committee, Safety and Ethics Committee and
Audit Committee of Rolls-Royce Holdings plc. Irene is also a
Trustee of SEARRP (the South-East Asia Rainforest Research
Partnership) (Malaysia).
Virgin Money Group Annual Report 2017 I 69
Virgin Money Executive
2
4
6
8
Board members
1 Jayne-Anne Gadhia CBE
Chief Executive
Jayne-Anne joined the Board in March 2007 as Chief Executive.
Jayne-Anne is also an Executive Director of Virgin Money plc.
Further details can be found on page 67.
2 Peter Bole
Chief Financial Officer
Peter joined the Board in July 2017 as Chief Financial Officer.
Peter is also an Executive Director of Virgin Money plc.
Further details can be found on page 68.
Non Board members
3 Marian Martin
Chief Risk Officer
Marian is a chartered accountant and qualified with Ernst &
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. Marian is an
Executive Director of Virgin Money plc.
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.
10
5 Michele Greene
Managing Director – Virgin Money digital bank
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.
1
3
5
7
9
11
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
70 I Virgin Money Group Annual Report 2017
Virgin Money Executive
6 Hugh Chater
Managing Director – Core Bank
9 Caroline Marsh
Social Enterprise Director
Hugh has over 25 years of 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.
Caroline has over 30 years of 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 led the cultural agenda for the Virgin
Money business from the acquisition of Northern Rock in 2012
until the end of 2017.
7 Mark Parker
Chief Operating Officer
10 Tim Arthur
Creative Director
Mark’s first IT Director role was at British Sugar. In 2001,
Mark joined the HBOS 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 over 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.
Prior to joining Virgin Money, Tim was Global Chief Executive
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 that, 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.
11 Ken Donald
Corporate Development Director
Ken is a chartered accountant and has over 10 years of
experience in financial services. Ken started his career at RBS
where he latterly worked in the Investment Banking Division,
advising UK and Irish Banks, Building Societies and Insurance
companies. He also held a number of roles across the retail,
business services, group strategy and corporate finance areas
of RBS. Ken joined Virgin Money in 2014. Prior to his current
role he ran the Chief Executive’s Office.
Virgin Money Group Annual Report 2017 I 71
Corporate Governance Report
This report sets out Virgin Money’s approach to governance in practice, the work of the Board and its Committees and explains
how the Group applied the principles of the Code during 2017.
Leadership
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, 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 and Company Secretary
Set out below are the key roles and responsibilities of the Chair, other Board members and the Company Secretary. There is a
clear division of responsibility at the head of the Group. The Chair has overall responsibility for the leadership of the Board while
the Chief Executive leads the business.
Chair
Chief Executive
The Chair has overall responsibility for the leadership of the Board and
promotion of the highest standards of corporate governance. The Chair
sets the Board’s agenda to ensure focus on the right matters. The Chair
plans Board and Executive succession and appointments in conjunction
with the Nomination Committee and ensures effective communication
with shareholders. The Chair leads the development of the Group’s
culture by the Board as a whole.
The Chief Executive leads the Group on a day-to-day basis in all areas
affecting the operations, performance and strategy of the Group’s
business (with the exception of those matters reserved to the Board).
The Chief Executive provides leadership and direction to senior
management and co-ordinates all activities to implement the Group’s
strategy and to manage the business in accordance with risk appetite.
The Chief Executive 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 help to develop and set the Group’s
strategy. They provide constructive challenge, participate actively
in the decision-making process and scrutinise the performance of
management. The Non-Executive Directors 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 Directors via the Remuneration
Committee.
The Senior Independent Director (SID) acts as a sounding board for the
Chair and Executive Directors on Board and shareholder matters and
is a conduit, as required, for the views of the other Directors. The SID
conducts the Chair’s annual performance review and is available to
shareholders as required.
Chief Financial Officer
Company Secretary
The Chief Financial Officer (CFO) is responsible for the financial
management of the Group and the day-to-day management of the
balance sheet including ensuring the business remains well capitalised.
The CFO ensures that the Group delivers statutory reporting obligations,
meets regulatory capital and liquidity requirements and identifies
opportunities to improve the commercial performance of the business
within the agreed risk appetite.
The Company Secretary provides practical support to the Directors
with particular emphasis on supporting the Non-Executive Directors in
maintaining appropriate standards of probity and corporate governance
and providing advice to Directors on the discharge of their duties. The
Company Secretary is responsible for facilitating communications with
shareholders as appropriate.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
72 I Virgin Money Group Annual Report 2017
Board and governance structure
(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)
(cid:34)(cid:86)(cid:69)(cid:74)(cid:85)(cid:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)(cid:3)
(cid:49)(cid:77)(cid:70)(cid:66)(cid:84)(cid:70)(cid:3)(cid:84)(cid:70)(cid:70)(cid:3)(cid:81)(cid:66)(cid:72)(cid:70)(cid:3)(cid:25)(cid:23)
(cid:47)(cid:80)(cid:78)(cid:74)(cid:79)(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:3)
(cid:49)(cid:77)(cid:70)(cid:66)(cid:84)(cid:70)(cid:3)(cid:84)(cid:70)(cid:70)(cid:3)(cid:81)(cid:66)(cid:72)(cid:70)(cid:3)(cid:25)(cid:19)
(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:3)
(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)(cid:3)(cid:51)(cid:74)(cid:84)(cid:76)
(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)(cid:3)
(cid:49)(cid:77)(cid:70)(cid:66)(cid:84)(cid:70)(cid:3)(cid:84)(cid:70)(cid:70)(cid:3)(cid:81)(cid:66)(cid:72)(cid:70)(cid:3)(cid:26)(cid:22)
(cid:49)(cid:77)(cid:70)(cid:66)(cid:84)(cid:70)(cid:3)(cid:84)(cid:70)(cid:70)(cid:3)(cid:81)(cid:66)(cid:72)(cid:70)(cid:3)(cid:26)(cid:19)
(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:3)(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:3)
(cid:46)(cid:66)(cid:79)(cid:66)(cid:72)(cid:70)(cid:84)(cid:3)(cid:85)(cid:73)(cid:70)(cid:3)(cid:67)(cid:86)(cid:84)(cid:74)(cid:79)(cid:70)(cid:84)(cid:84)(cid:3)(cid:80)(cid:71)(cid:3)(cid:85)(cid:73)(cid:70)(cid:3)(cid:40)(cid:83)(cid:80)(cid:86)(cid:81)(cid:3)(cid:74)(cid:79)(cid:3)(cid:66)(cid:68)(cid:68)(cid:80)(cid:83)(cid:69)(cid:66)(cid:79)(cid:68)(cid:70)(cid:3)(cid:88)(cid:74)(cid:85)(cid:73)(cid:3)(cid:85)(cid:73)(cid:70)(cid:3)(cid:84)(cid:85)(cid:83)(cid:66)(cid:85)(cid:70)(cid:72)(cid:90)(cid:3)
(cid:66)(cid:79)(cid:69)(cid:3)(cid:77)(cid:80)(cid:79)(cid:72)(cid:14)(cid:85)(cid:70)(cid:83)(cid:78)(cid:3)(cid:80)(cid:67)(cid:75)(cid:70)(cid:68)(cid:85)(cid:74)(cid:87)(cid:70)(cid:84)(cid:3)(cid:66)(cid:81)(cid:81)(cid:83)(cid:80)(cid:87)(cid:70)(cid:69)(cid:3)(cid:67)(cid:90)(cid:3)(cid:85)(cid:73)(cid:70)(cid:3)(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)
(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)
(cid:49)(cid:77)(cid:70)(cid:66)(cid:84)(cid:70)(cid:3)(cid:84)(cid:70)(cid:70)(cid:3)(cid:81)(cid:66)(cid:72)(cid:70)(cid:84)(cid:3)(cid:23)(cid:26)(cid:3)(cid:66)(cid:79)(cid:69)(cid:3)(cid:24)(cid:17)(cid:3)(cid:71)(cid:80)(cid:83)(cid:3)(cid:66)(cid:3)(cid:77)(cid:74)(cid:84)(cid:85)(cid:3)(cid:80)(cid:71)(cid:3)(cid:85)(cid:73)(cid:70)(cid:3)(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:18)(cid:19)(cid:25)(cid:3)(cid:71)(cid:80)(cid:83)(cid:3)(cid:85)(cid:73)(cid:70)(cid:3)(cid:76)(cid:70)(cid:90)(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)(cid:3)
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 Board authority
delegates responsibility for day-to-day leadership of the
business to the Chief Executive and sets out the basis
for delegation of authorities from the Board to Board
Committees. The Chief Executive delegates aspects of their
own authority, as permitted under the corporate governance
framework, to members of the Executive and the Executive
Committees. 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.
Details of Board reserved matters can be found at
virginmoney.com/virgin/investor-relations.
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 above.
Each Board Committee comprises Independent Non-
Executive Directors. The Nomination Committee also
comprises the Board Chair and the Virgin Nominee Director.
Each Committee Chair reports to the Board on the activities
of the Committee. The Terms of Reference for each Board
Committee can be found at virginmoney.com/virgin/
investor-relations.
Group entity governance
The Group’s banking business of residential mortgages,
savings and credit cards is conducted through Virgin Money
plc (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 for the following: the Virgin Nominee
Director and the VEL Nominee Director are not members of
the board of the Bank and the Chief Risk Officer (CRO) is an
additional Executive Director.
The Group has two FCA regulated subsidiaries, Virgin Money
Unit Trust Managers Limited (VMUTM) and Virgin Money
Personal Financial Service Limited (VMPFS) which carry
out the Group’s financial services business of investments,
insurance and other ancillary financial services. Two of the
Company’s Non-Executive Directors and each of the Bank’s
Executive Directors are on the VMUTM board. The VMPFS
board is made up of the Bank’s Executive Directors.
Corporate Governance Report
Virgin Money Group Annual Report 2017 I 73
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, one of
whom is Chair.
The Virgin Money Foundation (The Foundation) is an
independent charity which awards grants aimed at tackling
social and economic disadvantage and the sustainable
regeneration of deprived communities. The Foundation is
managed and controlled by a board of independent Trustees.
The Board
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 2017, the Board comprised two
Executive Directors, seven Non-Executive Directors (five of
whom are considered to be independent) and the Chair, who
was independent on appointment. Details on Board changes
in the year and up to the date of this report are included in the
Directors’ Report.
Further details on independence, succession planning and
the appointment process are set out in the Nomination
Committee Report.
Executive Director service agreements and Non-Executive
Director terms of appointment
The Chair is appointed for an initial three year term which may
be terminated on six months’ notice by either the Chair or the
Company. The Non-Executive Directors are appointed for a
twelve month term and each of the Non-Executive Directors
may have their appointment terminated in accordance with
the Articles of Association of the Company, their letters of
appointment or statute at any time without compensation.
The service agreements of the Chief Executive and CFO are
terminable by either the Company or the individual giving
twelve months’ notice.
All Directors are subject to annual re-election by shareholders.
The service agreements and letters of appointment of all
Directors are available for inspection by shareholders at the
Company’s registered office.
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. The Chair is committed to
this being their primary role, limiting their other commitments
to ensure they can spend as much time as the role requires.
The time devoted to the Group’s business by the Non-
Executive Directors is in reality significantly more than the
minimum requirements. In 2017 the SID devoted additional
time to their role in leading the Chair succession process.
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 2017, the
Executive Directors were compliant with this requirement and
continue to be at the date of this report.
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 Chair and the
Company Secretary as soon as they become aware of any
potential or actual conflicts.
In addition, changes to the commitments of all Directors
are reported to the Board and a register of conflicts is
regularly reviewed by the Chair to ensure the authorisation
remains appropriate.
If any potential conflict arises, the relevant Director will
excuse themselves 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.
The Group’s conflict procedures will be revisited in early 2018
in light of the forthcoming Financial Services Banking Reform
Act 2013 (ring-fencing).
At one Board meeting the VEL Nominee Director excused
himself from discussions in relation to the Virgin Money
Trademark Licence Agreement due to a potential conflict
of interest as a result of Virgin Enterprises Limited
(VEL) being a related party as detailed in note 35 to the
Financial Statements.
O
t
h
e
r
I
n
f
o
r
m
a
t
i
o
n
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial Statements
74 I Virgin Money Group Annual Report 2017
Diversity policy
Diversity and inclusion are strategic priorities for the Group.
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 page 85 and
the Strategic Report on pages 14 to 15 and 22 to 23.
Key Board focus in 2017
The following table provides an overview of the key matters considered by the Board in 2017:
Financial
Strategy and customer focus
Culture and value
> Approval of 2018 budget
> Review of progress against the Group’s
> Enhanced monitoring of conduct (including
> Approval of financial results and
presentations
> Approval of dividends
> Approval of the Internal Liquidity Adequacy
Assessment Process (ILAAP)
> Oversight of the capital base
> Approval of funding issuances
> Oversight of implementation of IFRS 9
> Review of credit risk and customer behaviour
metrics
strategy
customer outcomes)
> Approval of four-year strategic and funding
> Monitoring of culture and values, including
plans
oversight of staff survey results
> Oversight of Capital Markets Update
> Oversight of the social enterprise agenda
> Consideration of potential acquisition
opportunities and strategic initiatives
> Oversight of the Virgin Money digital bank
strategy
and community priorities
Risk management
Governance and shareholders
Regulatory
> Approval of risk appetite and risk
> Review of Board and Committee structure
management framework
and composition
Overseeing the implementation of measures to
ensure compliance with:
> Approval of the Internal Capital Adequacy
> Review of the corporate governance
> Ring-fencing/structural reform
Assessment Process (ICAAP)
framework
> Recovery and resolution
> Review of aggregate risk exposures, risk/
return and emerging risks
> Overseeing Board and Executive succession > Senior Managers and Certification Regime
planning and appointment
> GDPR, PSD2 (open banking)
> MREL and other regulatory changes
> Review of internal control systems
> Overseeing Board effectiveness and Chair
> Approval of stress test results
> Oversight of operational resilience including > Receiving Investor Relations updates
performance reviews
including oversight of investor reporting
monitoring cyber resilience
> Oversight of key partnership relationships
> Approval of AGM Notice of Meeting
Corporate Governance Report
Virgin Money Group Annual Report 2017 I 75
How does the Board consider stakeholder views?
The Board understands the importance of its stakeholders to the business.
The Board:
> Monitored customer satisfaction, retention,
outcome (including complaints) metrics
> Oversaw the broadening of the customer
proposition (e.g. SME and digital bank plans)
> Oversaw the rigorous programme of customer
listening and operational improvements
> Further detail on how Virgin Money delivered
for its customers is included on page 20
The Board:
> Monitored colleague engagement
> Monitored progress against the diversity and inclusion
strategy to create a diverse Board and workforce
> Reviewed talent, capabilty, succession and
>
>
development programmes
Listened to colleagues through office and store visits
and attended annual colleague awards ceremony
Further detail on how Virgin Money delivered
for its colleagues is included on page 22
The Board:
> Received regular reports on the performance
of mortgage intermediary partnerships
including the optimisation of operational
improvements
> Monitored strategic and outsourcing
partnerships, including the new partnership
with Virgin Atlantic
> Oversaw the development of the Group’s
policies and approach to anti-bribery, human
rights and modern slavery
> Further detail on how Virgin Money delivered
for its corporate partners is included on
page 24
Customers
Colleagues
Corporate
Partners
Virgin
Money
EBO
Community
Company
& Shareholders
The Board:
>
Oversaw the delivery of the Group’s
Community strategy
Monitored progress against the Group’s
environmental strategy to manage and reduce
environmental impacts
Further detail on how Virgin Money delivered
for the Community is included on page 26
>
>
Oversaw the delivery of the strategy
The Board:
>
> Engaged with the shareholders on a regular
and ad hoc basis, through results briefings,
the Capital Markets Update, individual investor
meetings, roadshows and its Annual General
Meeting (AGM)
> Further detail on how Virgin Money delivered
for the Company and its shareholders is included
on page 80
O
t
h
e
r
I
n
f
o
r
m
a
t
i
o
n
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial Statements
76 I Virgin Money Group Annual Report 2017
Board agenda and attendance
Setting the Board agenda
The Chair is responsible for setting the Board agenda. Prior to
each Board meeting, the Chair 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 and any other matters which
the Non-Executive Directors wish to raise.
Board meetings and activity in 2017
The following timeline provides an overview of the Board
meetings and activity in 2017:
(cid:35)
(cid:35)
(cid:51)(cid:35)
(cid:35)
(cid:35)(cid:52)
(cid:51)(cid:35)
(cid:35)
(cid:36)(cid:35)
(cid:35)(cid:37)
(cid:35)
(cid:51)(cid:35)
(cid:35)(cid:52)
(cid:35)(cid:52)
(cid:51)(cid:35)
(cid:35)(cid:52)
(cid:35)(cid:37)
(cid:35)(cid:52)
(cid:35)(cid:37)
(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:23)(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:50)(cid:18)(cid:3)(cid:83)(cid:70)(cid:84)(cid:86)(cid:77)(cid:85)(cid:84)(cid:3)
(cid:69)(cid:74)(cid:87)(cid:74)(cid:69)(cid:70)(cid:79)(cid:69)
(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:83)(cid:70)(cid:84)(cid:86)(cid:77)(cid:85)(cid:84)(cid:3)(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 (including site visits)
Board meeting and deep dive
Board meeting and strategy discussion
Results Board Meeting
CEO Briefing Call
B
BD
BS
RB
CB
Deep dives included:
> Credit cards
Site visits
> Mortgage Lab
> Treasury
> Mortgage Operations
> Virgin Money digital bank
> Contact Centre
> Colleague Survey results
> Security Operations
> IFRS 9
> ILAAP
> ICAAP
> Colleague Awards Ceremony
> Gosforth Office
> Edinburgh Office
Board Strategy Review
During 2017, the Board spent considerable time discussing the
Group’s strategy. The strategic review included the external
environment, 2018 budget and the four year financial plans. Further
detail on the Group’s strategy is set out on pages 18 to 19.
The Board assessed the opportunities and challenges presented by
the macro-economic, market and regulatory developments. These
included risk appetite to ensure Virgin Money’s lending discipline
continues to support asset quality and delivery of sustainable returns
through the cycle; funding plans; assessment of the impact of
regulatory change of Open Banking, PSD2 and ring-fencing; and the
investment required for the core business and the new initiatives.
Further detail can be found on pages 30 to 39.
The Board also spent time considering updates received from the
Board Committees on the Group’s strategy (including funding and
capital plans and organisational design changes to align to the future
strategy).
The Board’s key focus during these discussions was to ensure the
refreshed strategy provides a strong platform for long-term success
of business whilst also enabling the continued delivery of innovative
products and outstanding service to customers.
Corporate Governance Report
Virgin Money Group Annual Report 2017 I 77
Cyber resilience
It remains Virgin Money’s goal to be consistently one of
the safest banks in the UK. The Board continues to play an
important role in overseeing the Group’s cyber resilience
approach and the level of investment in cyber security.
Geeta Gopalan is the Board’s accountable Non-Executive
Director responsible for leading focus 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. Virgin Money’s cyber resilience strategy
is reviewed by the Board on an annual basis with specific
detailed reporting on progress provided regularly.
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.
Attendance at meetings
In 2017, a total of 17 Board meetings were held consisting of:
13 that were scheduled (including four which approved release
of the financial results) and four ad hoc meetings which were
project and strategy related. Where a Director is unable
to attend a meeting, they have the opportunity to review
any papers and provide comments to the Chair, 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 Chair attends all Committee meetings
at the invitation of the Committee Chairs.
Virgin Money Holdings (UK) plc
Directors who served during 2017
Glen Moreno
Norman McLuskie
Colin Keogh1
Marilyn Spearing2
Geeta Gopalan
Eva Eisenschimmel3
Darren Pope4
Gordon McCallum5
Patrick McCall
Jayne-Anne Gadhia CBE
Peter Bole6
Amy Stirling7
Board
meetings
Remuneration
Committee
Nomination
Committee
Board
Risk
Committee
Audit
Committee
17(17)
17(17)
15(17)
5(6)
17(17)
17(17)
13(13)
10(13)
17(17)
17(17)
7(7)
0(0)
–
4(4)
–
2(2)
4(4)
3(3)
2(2)
–
–
–
–
–
9(9)
9(9)
7(9)
1(2)
9(9)
9(9)
8(8)
6(8)
–
–
–
–
–
5(5)
5(5)
2(2)
5(5)
5(5)
3(3)
–
–
–
–
–
–
7(7)
7(7)
2(2)
7(7)
7(7)
5(5)
–
–
–
–
–
1 Colin Keogh was unable to attend two ad hoc Board and Nomination Committee meetings held on short notice due to a conflict with external appointments.
2 Marilyn Spearing retired from the Board on 3 May 2017 and was unable to attend the final Board and Nomination Committee meetings of her tenure due to a conflict with external
appointments.
3 Eva Eisenschimmel was appointed to the Board on 25 January 2017.
4 Darren Pope was appointed to the Board on 1 March 2017.
5 Gordon McCallum resigned from the Board on 31 October 2017 and was unable to attend three Board and two Nomination Committee meetings held on short notice.
6 Peter Bole was appointed to the Board on 25 July 2017.
7 Amy Stirling was appointed to the Board on 20 December 2017.
O
t
h
e
r
I
n
f
o
r
m
a
t
i
o
n
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial Statements
78 I Virgin Money Group Annual Report 2017
Board effectiveness
Skills and experience of the Board
As illustrated by the Board biographies on pages 66 to 68,
the Non-Executive Directors have a broad range of skills and
experience. During 2017, the skills of the Board were enhanced
by the appointment of Eva Eisenschimmel who brings
extensive experience as a brand and marketing professional
and Darren Pope who provides significant financial and retail
banking experience (as well as transformational project
experience). Additionally, Amy Stirling adds financial and
management experience from a range of sectors and brings
specific expertise in accounting, tax and treasury matters.
Annual effectiveness reviews
The 2017 internal Board effectiveness review, led by the Chair
with support from the Company Secretary, took the form of
interviews with each Board member and key stakeholders
from across the business in December 2017 and January 2018.
The review sought the Directors’ views on a range of topics
including the mix of skills, experience, independence and
knowledge on the Board and Committees, Board culture and
dynamics, the quality of information provided to the Board,
the effectiveness of Committees (including composition and
member contribution) and how they are connected with the
Board and the quality of discussion (including areas of depth
of engagement) and clarity of the decision-making process.
The review also assessed and sought views on the progress
against the key recommendations and priorities identified in
the 2016 effectiveness review.
The review of Committee performance also included an
assessment of whether each Committee had met its required
responsibilities.
The Chair met with each Non-Executive Director in early 2018
to discuss their contributions and effectiveness, and reported
to the Nomination Committee on the output. The Chair
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 2018 AGM. In
parallel, the SID assessed the Chair’s performance, seeking
input from the other Directors.
Key themes were then collated together with the output
from the Directors’ individual performance reviews and
presented to the Nomination Committee in February 2018 and
discussed separately at the respective Committee meetings
as appropriate. This was followed by a full discussion by the
Board, reviewing what had worked well within the year and
focus areas for 2018.
In line with best practice, the Group will undertake its next
externally facilitated review of Board effectiveness in 2018.
This exercise will serve as an invaluable tool for the new
Chair providing independent insight on the Board and its
effectiveness as well as informing and supporting future
succession planning.
Corporate Governance Report
Virgin Money Group Annual Report 2017 I 79
A summary of the key findings and recommendations are set out below:
Key conclusions from 2017 Board Effectiveness Review
Board composition, Board culture, dynamics and contribution
> A well balanced and diverse Board in terms of skills, experience
and independence; strengthened further by the 4 new Board
appointments;
> Board succession planning will remain a key focus for 2018 and
beyond, led by the new Chair; and
> Comprehensive review of Executive talent, capability and
succession plans to ensure aligned to current and future strategy.
> Board culture of mutual trust and respect, open communication,
commitment, improved challenge and support by all members;
and
Board basics: Board support, forward agenda and quality of
information
> Continued high quality of Board information, with transparent
> Use of a variety of Board forums continues to work well.
information flow;
Board focus and depth of engagement
> Good balance between strategic, operational and governance
matters achieved in 2017, although will this remain an area of
ongoing focus;
> Significant Board interaction and engagement on strategy,
threats and opportunities and risk appetite;
>
Increased focus on external landscape (market environment,
competition, regulatory agenda), concluding a series of Board
briefings (further detail on page 76);
> Significant focus in 2017 on funding, capital and liquidity as part
of strategic planning, ICAAP and ILAAP processes with the risk
agenda to remain a key focus for 2018 and beyond; and
>
Increased ‘line one’ reporting and representation at Committees
planned for 2018 to enhance the Board’s assessment of risk and
prioritisation of critical issues.
Board succession and leadership to ensure that talent
development and succession planning are aligned with the
current and future strategy
> Significant focus and progress focus in 2017 on Board leadership
and succession matters. Highlights included four Directors joining
the Board, together with a rigorous Chair search process leading
to the appointment of Irene Dorner as Chair Elect;
Board induction
The Chair, facilitated by the Company Secretary, ensures that all
Directors receive a full induction tailored to their individual needs
with regard to their specific role and experience. This ensures that
Directors are able to make an informed contribution based on an
understanding of the Group’s business model and the challenges it
faces.
During 2017 and up to the date of this report Darren Pope, Eva
Eisenschimmel and Amy Stirling’s induction processes comprised:
> a business introduction including a strategy overview containing
business risks and opportunities;
> an introduction to operations, products, the customer and the
competitive environment, along with a view of future product
strategy;
> an overview of the Group’s approach to governance, including
training on the responsibilities of a Director in a listed company
and the impact of the Senior Managers Regime on Non-Executive
Directors;
>
Increased efficiency in Board processes and meetings;
> Continued focus required on the forward agendas; and
> 2018 Board schedule to accommodate increased time for Board
discussion.
Board Committees
> Effective and well-balanced Board Committees, with a good mix
of skills and experience; strengthened by the new Non-Executive
Director appointments;
> Open and constructive contribution, engagement and challenge;
> Successful transition of new Committee Chairs; and
> Continued focus in 2018 required on Committee forward
agendas, and opportunities for improved Committee reporting.
> a detailed programme across Risk and Finance focusing on:
risk appetite and profile, culture and framework, compliance
and conduct risk, financial analysis and controls, capital, stress
testing, liquidity, recovery and resolution planning and regulatory
developments;
> an overview of the Legal and People functions, including the
people and remuneration strategies and Remuneration Code
requirements; and
meet and greet sessions with the Board, Executive and senior
management to understand the Group’s culture along with visits
to the Group’s various sites including some stores and lounges.
>
O
t
h
e
r
I
n
f
o
r
m
a
t
i
o
n
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial Statements
80 I Virgin Money Group Annual Report 2017
Training
Professional development and training
The Chair is responsible for the training and professional
development of Board members. The training programme,
delivered throughout the year, comprises both formal and
informal sessions on current or emerging issues. Tailored
sessions on specific business topics are a key component of
the programme. The Company Secretary maintains a training
and development log for each Director.
Site visits also play an important role by helping to connect
Directors with the business, colleagues and customers’ needs.
Directors are also invited to attend courses, management
meetings and one-to-one meetings with Executives.
Shareholder/Stakeholder engagement and
relationships
Details of how Virgin Money considers stakeholder views are
included on page 75.
In respect of shareholders, the Board recognises the need for
a programme of engagement which offers all shareholders
opportunities to receive information directly and to enable
them to share their views with the Board.
Controlling shareholder
During 2017 the Group’s ‘controlling shareholder’ for the
purposes of the Listing Rules was Virgin. Details of Virgin’s
shareholding can be found on page 123. The Company is
party to a Relationship Agreement with Virgin. 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
2017 Shareholder engagement
January to March
> Publication of the ARA
> Analyst briefings
> Publication of AGM Notice and voting materials
> Ad hoc proactive and reactive shareholder engagement
via Chief Executive, CFO, and Remuneration Committee Chair
July to September
> Half year results
> Analyst briefings
> Dividend (interim)
> Corporate governance meetings with
institutional shareholders
> Ad hoc proactive and reactive shareholder engagement
via Chief Executive, CFO and Chair
through whom the Chair and other Non-Executive Directors
are kept up to date during the year with the views of Virgin.
The Chair and Chief Executive have an ongoing dialogue with
the Virgin Nominee Director throughout the course of the
year. Gordon McCallum retired as the Virgin Nominee Director
in October 2017 and the Group welcomed Amy Stirling in his
place in December 2017.
The Company has complied with the terms of the Relationship
Agreement and, so far as the Company is aware, the
independence provisions contained in the Relationship
Agreement have been complied with by Virgin (and
its associates).
Investor relations and contact
The Investor Relations Director has primary responsibility for
managing and developing the Group’s external relationships
with 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 Board receives reports from the Investor Relations
Director. This ensures that the Board are informed of
significant market developments, share price performance
and changes in the shareholder base.
In 2017, the Group engaged with corporate shareholders and
potential investors on an individual basis through investor
presentations and attendance at investor conferences.
Additionally, the Chair hosted meetings with some of the
Group’s largest institutional shareholders focused on the
April to June
> Q1 trading statement
> AGM held
> Dividend (final)
> Ad hoc proactive and reactive shareholder
engagement via Chief Executive, CFO and Chair
October to December
> Q3 statement
> Capital Markets Update
> Ad hoc proactive and reactive shareholder
engagement via Chief Executive, CFO and Chair
Corporate Governance Report
Virgin Money Group Annual Report 2017 I 81
Group’s corporate governance arrangements. The meetings
were structured to allow for an open dialogue and discussion
on the matters of importance to institutional shareholders
including strategy, Board composition and succession.
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 2018.
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.
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 127.
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 a review covering internal audit
reports, risk assurance reports and an overall analysis of the
risk management framework during the year.
In 2017, the Group completed its action plan to address all
recommendations from the Deloitte LLP External Quality
Assurance Review of the Group’s Internal Audit function
produced in 2015 and referred to in the 2016 Corporate
Governance Report. In line with the Chartered Institute of
Internal Auditors’ Guidance on Effective Internal Audit in the
Financial Services Sector, it is the intention that the function
will be subject to an independent external assessment
every five years.
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.
The policies supporting the Group’s risk management
framework define minimum standards for controls for all
material risk classes.
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.
Statement of compliance
UK Corporate Governance Code
The 2016 version of the Code, which can be accessed at
www.frc.org.uk, applied to the Group’s 2017 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 Group looks forward to the publication of the outcome of
the FRC’s consultation on changes to the Code.
Committee reports
The following pages contain reports from each of the
Board’s Committees with the report from the Remuneration
Committee included in the Directors’ Remuneration Report.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
82 I Virgin Money Group Annual Report 2017
Nomination Committee Report
“We continue to focus on the composition, skills and
experience of the Board. Chair succession has been a key
focus for the Committee during 2017.”
Glen Moreno
Chair, Nomination Committee
Membership and meetings
Meetings
attended
(held) in
20171
9(9)2
9(9)
7(9)
1(2)
9(9)
6(8)
9(9)
8(8)
0(0)
Independent
Yes (on
appointment)
Yes
Yes
Yes
Yes
No
Yes
Yes
No
Committee Chair
Glen Moreno
Committee members
Norman McLuskie
Colin Keogh3
Marilyn Spearing4
Geeta Gopalan
Gordon McCallum5
Eva Eisenschimmel
Darren Pope6
Amy Stirling7
1 Number of meetings held during the period the member held office.
2 Norman McLuskie acted as Chair for all discussions in relation to Chair succession.
3 Colin Keogh was unable to attend two ad hoc meetings held on short notice due to a
conflict with external appointments.
4 Marilyn Spearing retired from the Committee on 3 May 2017 and was unable to attend the
final Committee meeting of her tenure due to a conflict with an external appointment.
5 Gordon McCallum retired from the Committee on 31 October 2017 and was unable to
attend two prior meetings held on short notice.
6 Darren Pope joined the Committee on 1 March 2017.
7 Amy Stirling joined the Committee on 20 December 2017.
Chair’s overview
Succession planning and the composition of the Board and its Committees were a key focus during 2017.
In July 2017, I confirmed my retirement from the Board in 2018 to return home to the USA. I considered it the right time, with the completion
of my three year term due in January 2018, for the business to appoint a new Chair to oversee delivery of the next phase of Virgin Money’s
strategy. As announced on 15 February 2018, I will be retiring from the Board on 31 March 2018 and Irene Dorner will succeed me as Chair on
1 April 2018.
I am grateful to Norman McLuskie, our Senior Independent Director (SID), for leading such a rigorous process for the Nomination Committee to
appoint my successor. An overview of the recruitment process undertaken by the Committee is provided on page 83.
As highlighted in my Chair’s Statement, there have been a number of changes to the Board in 2017. Eva Eisenschimmel and Darren Pope joined
the Board as Independent Non-Executive Directors in January and March 2017 respectively, and Marilyn Spearing retired from the Board in May
2017. Peter Bole joined the Board as Executive Director in July 2017 and Amy Stirling joined the Board in December 2017 as the Virgin Nominee
Director, replacing Gordon McCallum following his retirement from the Board in October 2017.
As part of our medium-term Committee succession planning, a number of Committee Chair changes have also been made. On the Committee’s
recommendation, Norman McLuskie became Chair of the Remuneration Committee in May 2017; Darren Pope succeeded Norman as Chair of
the Audit Committee in July 2017 and Geeta Gopalan succeeded Colin Keogh as Chair of the Board Risk Committee in January 2018 and Colin
Keogh became Chair of VMUTM in June 2017. The Committee will continue to keep under review the structure, size and composition of the
Board and its Committees and to make appropriate recommendations to the Board.
Corporate Governance Report
Virgin Money Group Annual Report 2017 I 83
During 2018, the Committee will commission an externally-facilitated evaluation of the Board and Committees’ effectiveness, led by the new
Chair. This will offer an independent view of the Board’s effectiveness building upon the progress made against the recommendations and
priorities from the 2017 internal Board effectiveness review.
Glen Moreno
Chair, Nomination Committee
26 February 2018
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 summarised below. Full details of the Committee’s
responsibilities are set out in the Committee terms of
reference which were updated during the year in accordance
with best practice 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. More details on the Committee
evaluation can be found on pages 78 to 79.
Chair recruitment
In 2017, Glen Moreno indicated his intention to retire from the Board in 2018. A process to recruit and appoint a new Chair commenced. The
search was undertaken by the Committee and led by myself as the SID. The Chief Executive was fully involved in the process although the
decision rested with the Committee.
Heidrick & Struggles JCA Group (JCA) was appointed to support the search on the basis of their strength and depth of experience in Chair and
Chief Executive searches and their overall market reputation. Aside from assisting with recruitment, JCA has no other connection with the
Group.
The specification for the role was agreed by myself, in conjunction with the Chief Executive and Committee members. The Committee and
individual Committee representatives had a number of discussions with JCA to scope out the key skills, experience, characteristics and
requirements for the role. Key attributes for the position included retail banking or financial services experience, strong corporate governance
and/or chair experience, cultural fit and strong stakeholder skills.
A structured timetable was adopted for the process and regular Committee discussions and updates held throughout. From a detailed
understanding of our requirements and specification for the role, JCA conducted extensive research analysing the market and put together an
extensive range of potential candidates for the Committee to consider. After much debate this was narrowed down to a shortlist for interview.
These candidates were interviewed by JCA and further due diligence carried out. Shortlisted candidates then met initially with myself and the
Chief Executive and also, to ensure consistency, the same Committee members as those involved in the initial discussions with JCA. The Chair’s
involvement in the search was limited to meeting the shortlisted candidates, as part of their due diligence.
On 25 October 2017, in response to media speculation, we announced that we were in advanced discussions with Irene Dorner. On 15 February
2018, following receipt of regulatory approval, we were delighted to announce Irene’s appointment as Chair Elect with effect from 1 March
2018. Irene will become Chair and Chair of the Nomination Committee on 1 April 2018.
Irene was an ideal match to our requirements with strong and extensive retail banking experience, gathered over 30 years with HSBC. Further
detail is included in Irene’s biography on page 68. We believe Irene is an excellent cultural fit for Virgin Money and we are confident she has the
attributes to lead the Board and support the Chief Executive and the Executive as they deliver the next phase of Virgin Money’s strategy.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
84 I Virgin Money Group Annual Report 2017
Nomination Committee Report
A comprehensive and structured induction process is under way to ensure Irene has a thorough understanding of our business, the market
environment and our stakeholders prior to taking up her appointment as Chair. Further detail on her induction will be provided in our 2018
Annual Report and Accounts.
Norman McLuskie
Senior Independent Director
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 Board Chair, all
Independent Non-Executive Directors and the Virgin Nominee
Director. The Chief Executive, the Virgin Nominee Director
and, if required, the People Director attend meetings by
invitation as appropriate.
How the Committee spent its time in 2017
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 leadership programmes
allow 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 Chair 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 review undertaken by the Chair in 2016 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, the Committee oversaw the Board and Committee
Chair changes that were approved in 2016, and set out on
page 121. Further information on the process for appointing
Eva Eisenschimmel and Darren Pope can be found on page 95
of the 2016 Annual Report and Accounts. The changes take
into account the need to refresh the intake of Non-Executive
Directors to bring new and diverse perspectives to the Board
and decision-making and ensure appropriate succession
planning for the Committees. Robust and comprehensive
handover processes, as required by the Senior Managers and
Certification Regime, were undertaken for each Committee
Chair transition.
The Chair 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.
To support the continued development of the business,
the Executive was strengthened by the appointment of
Ken Donald to the role of Corporate Development Director
on 1 July 2017.
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.
Effectiveness
Details of the 2017 Board Effectiveness Review, overseen
by the Committee, and key recommendations are set out
on pages 78 to 79. The Committee will monitor the Board’s
progress against the agreed roadmap in 2018.
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. As in 2016, a rigorous
independence review was undertaken in respect of Norman
McLuskie and Colin Keogh, given that both have just
completed the eighth year of their tenure.
Corporate Governance Report
Virgin Money Group Annual Report 2017 I 85
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 judgement. Based on its assessment for 2017,
the Committee is satisfied that, throughout the year, Colin
Keogh, Norman McLuskie, Geeta Gopalan, Eva Eisenschimmel
and Darren Pope remained independent as to both character
and judgement.
In respect of gender diversity, the Committee approved a
revised 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. Female
representation on the Board was 40% at 31 December 2017;
this will increase to 50% representation on the appointment
of Irene Dorner to, and Glen Moreno’s retirement from,
the Board.
The Group supports the Women in Finance Charter and the
Parker Review ‘Beyond One by ‘21’ recommendation that
FTSE 100 and 250 company boards should have at least
one director which makes the Board composition ethnically
diverse by 2021 and 2024 respectively. The Board currently
meets this minimum recommendation.
Please see pages 14 to 15 and 22 to 23 of the Strategic
Report for details of the Group’s approach to diversity and
inclusion initiatives which includes statistics on Board and
Executive diversity.
Amy Stirling is not considered to be independent due to her
relationship with Virgin. Patrick McCall is also not considered
to be independent since he was appointed to the Board as the
representative director of VEL pursuant to the Virgin Money
Trade Mark Licence Agreement.
The Committee reviewed the roles, including capabilities and
time commitments, of the Chair, SID, Non-Executive Directors,
Chief Executive and CFO, 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 2017 and who wish to continue
to serve, together with the election of Peter Bole, Amy Stirling
and Irene Dorner to shareholders at the 2018 AGM.
Diversity
The Board places great emphasis on ensuring that its
members reflect diversity in its broadest sense. As set out in
the Board approved Diversity Policy (available at virginmoney.
com/virgin/investor-relations) the Group’s aim is to nurture
a skilled, committed and diverse workforce where every
individual, regardless of background, can share the Group’s
purpose, reach their potential and be rewarded appropriately
for their contribution to the Group’s success. Whilst all Board
appointments are made on merit, a diverse combination
of demographics, skills, experience, knowledge and
background on the Board is important in providing a range of
perspectives, insights and challenge needed to support good
decision-making.
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. Information on Board composition as
at 31 December 2017 is included on page 65.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
86 I Virgin Money Group Annual Report 2017
Audit Committee Report
“It is the Audit Committee’s role to review the integrity of the
financial statements. A key focus for the Committee during
2017 has been oversight of key accounting judgements and
the preparations for IFRS 9 implementation”.
Darren Pope
Chair, Audit Committee
Membership and meetings
Meetings
attended
(held) in
20171
Independent
Committee Chair
Norman McLuskie2 (to July 2017)
Darren Pope3 (from July 2017)
Committee members
Colin Keogh
Geeta Gopalan
Eva Eisenschimmel
Marilyn Spearing4
Yes
Yes
Yes
Yes
Yes
Yes
7(7)
5(5)
7(7)
7(7)
7(7)
2(2)
1 Number of meetings held during the period the member held office.
2 Norman McLuskie remains a member of the Committee following handover of the Chair
to Darren Pope.
3 Darren Pope joined the Committee on 1 March 2017 and was appointed as Chair of the
Committee on 21 July 2017.
4 Marilyn Spearing retired from the Committee on 3 May 2017, on her retirement from the
Board.
Chair’s overview
Having succeeded Norman McLuskie as Chair of the Committee in July 2017, I would like to take this opportunity to thank him for his strong
leadership as Chair, his consideration and insight in achieving a smooth transition process and his continuing contribution as a Committee
member. I would also like to thank the other Committee members for their contribution and challenge throughout the year.
I am pleased to report that, throughout 2017, the Committee continued to focus on its key objectives: overseeing financial reporting, internal
controls, whistleblowing, and internal and external audit, as well as specific attention on IFRS 9.
Oversight of financial reporting requires an assessment of key accounting judgements and related disclosures. Effective Interest Rate (EIR)
accounting methodology and the underlying assumptions, including expected customer behaviour, have remained a key area of focus. The
Committee has carefully reviewed and challenged all accounting judgements, as well as ensuring appropriate disclosures have been made that
reflect the underlying potential volatility of the EIR method.
The Committee also oversaw the IFRS 9 programme delivery, approving the methodology, policies and assumptions that drive the final
calculations.
Oversight of the Internal Audit function is also a key aspect of the Committee’s role. This has included monitoring of the control framework
with particular focus on the Information Technology (IT) control framework and completion of all final recommendations arising from the
External Quality Assurance Review (EQAR) undertaken in late 2015. The Committee also oversaw the appointment of a transitional Internal
Audit Director and is progressing the recruitment of a permanent replacement.
During the year a team from the Financial Reporting Council (FRC) undertook an Audit Quality Review (AQR) inspection of PwC’s audit of the
Group’s 2016 financial statements. The Committee satisfied itself that all improvements identified have now been actioned.
Darren Pope
Chair, Audit Committee
26 February 2018
Corporate Governance Report
Virgin Money Group Annual Report 2017 I 87
Relevant members of the Executive, the Internal Audit
Director and external auditors attend Committee meetings by
invitation. During the year, the Committee held a number of
private Committee sessions, including with the external audit
team (without Executives present) and with each of the Chief
Executive, CFO and the Internal Audit Director.
Committee purpose and responsibilities
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 at
virginmoney.com/virgin/investor-relations. The Committee
refreshed its terms of reference in November 2017 to reflect
industry guidance on best practice. In 2017, the Committee
met its objectives and carried out its responsibilities
effectively, as confirmed by the annual effectiveness review
detailed on pages 78 to 79.
Committee composition, skills and
experience
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. Eva Eisenschimmel became a member of
the Committee on 25 January 2017. Darren Pope joined the
Committee on 1 March 2017 and, on 21 July 2017, as part of
the medium term succession plan, took over as Committee
Chair from Norman McLuskie who is currently in his ninth
year as a Non-Executive Director. Mr McLuskie remains a
member of the Committee. Marilyn Spearing retired from
the Committee on 3 May 2017, following her retirement
from the Board.
Each Committee member has extensive experience of
banking and financial services, and therefore, as a whole,
the Committee has recent and relevant competence in
the financial sector. The Chair is a fellow of the Chartered
Institute of Certified Accountants and has significant financial
experience in the UK listed environment, including formerly as
a CFO of a listed bank, enabling him to fulfil the role of Audit
Committee Chair for the purposes of the Code.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
88 I Virgin Money Group Annual Report 2017
Audit Committee Report
How the Committee spent its time in 2017
Financial reporting
During 2017, 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
Effective interest rate (EIR)
Interest earned on loans and receivables is recognised using the EIR
method.
The Committee had a number of detailed sessions to review EIR
methodology and understand the judgements applied by management,
including expected future customer behaviours.
The application of the EIR method of accounting is judgemental and
requires management to make a number of assumptions.
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.
EIR accounting for unsecured lending remains an area of significant
judgement. During the year, the Committee reviewed management’s
view of the current and future expected cash flows and the appropriate
modelling period. This was supported by an independent external
assessment and report.
The Committee concluded that the accounting approach remains
appropriate and will be monitored on an ongoing basis. Given the
potential future volatility that may be driven by the accounting
approach, particular attention has been given to the disclosures
relating to EIR which are set out in the Financial Results section and in
note 1.10 to the financial statements.
The Committee considered and challenged the provisioning
methodology applied by management and the level of provisions. 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, which reflect
management’s view of the risks in the portfolio not adequately covered
by the models due to historically benign macro-economic factors.
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 2017 a wide range of change projects was delivered
including a number with significant capital spend, in particular in
relation to digital development, fraud and cyber-crime.
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 considered management’s reviews for indicators
of impairment and oversaw the impairment of a previous software
development in light of the strategic decision to consolidate activity
within the digital banking programme.
No assets were identified as impaired through reviews for indicators of
impairment.
The disclosures relating to the movement in intangible asset balances
during the year are set out in note 1.10 to the financial statements.
Corporate Governance Report
Virgin Money Group Annual Report 2017 I 89
Key issues/judgements in financial reporting
Audit Committee review and conclusions
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.
IFRS 9 – Implementation and disclosure
IFRS 9 is a significant accounting development which came into effect
on 1 January 2018. The standard introduces new accounting policies
and judgements with the key changes relating to the calculation of the
impairment of financial assets on an expected credit loss basis.
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.
Fair, balanced and understandable
The Group must ensure that the Annual Report and Accounts are fair,
balanced and understandable and provide the information necessary
for shareholders to assess the Company’s position and performance,
business model and strategy.
Internal control and risk management
Details of the internal control and risk management systems
in relation to the financial reporting processes are given within
the Corporate Governance Report on page 81 and the Risk
Management Report on pages 126 to 188. Specific matters
that the Committee considered during the year included:
> the effectiveness of systems for internal control, financial
reporting and risk management, including a review of all
material financial, operational and compliance controls;
> the major findings of internal reviews into control weaknesses,
fraud or misconduct and management’s response alongside
any control deficiencies identified; and
The Committee spent time understanding and assessing judgements
applied (including the use of appropriate market rates) and, following
review, agreed with management’s judgement regarding the
calculation of fair values.
The Committee also reviewed the accounting treatment for the gains
on disposal of assets, including treasury instruments and the sale of
Vocalink shares. The Committee was satisfied that the accounting
treatment was appropriate.
The disclosures relating to fair value are set out in note 1.10 to the
financial statements.
The Committee had a number of detailed briefing sessions to
understand the requirements of this new standard. An impact
analysis was conducted to ascertain the changes required and to aid
development of the implementation plan which was reviewed and
agreed with the Committee. The Committee also considered the
model methodology, accounting assumptions and financial reporting
and approved the accounting policies which will be adopted on
implementation of IFRS 9. The disclosures relating to the impact of
adoption of IFRS 9 are set out in note 37(a) to the financial statements.
The Committee reviewed and challenged the going concern and
viability assessment undertaken by management. The assessment was
based on the Group’s capital, funding and strategic plans and included
consideration of the principal and emerging risks set out on pages 36 to
39, which could impact the performance of the Group and the liquidity
and capital projections over the period.
Based on a combination of strong capital and liquidity forecasts, 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 120 and 129.
The Committee reviewed the Annual Report and Accounts and
challenged management on the presentation of financial and non-
financial information.
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 provided by management
and in its judgement, the Annual Report and Accounts, when taken as a
whole, were fair, balanced and understandable.
> continued focus on the IT control environment in light of the
increased threat from cyber-crime, incorporating an interim
audit of the IT control environment by PwC which identified
potential improvements in certain areas.
The Committee is satisfied that internal controls over financial
reporting and risk management systems were appropriately
designed and operating effectively.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
90 I Virgin Money Group Annual Report 2017
Audit Committee Report
Internal audit
In monitoring the activity, role and effectiveness of
the Internal Audit function and its audit programme,
the Committee:
> oversaw the ongoing process of succession for the Internal
Audit Director following the departure of the previous role
holder during the year. This resulted in the appointment of
an Interim Internal Audit Director in January 2018, pending
recruitment of a permanent Internal Audit Director. The
Interim Internal Audit Director has been seconded from
Deloitte, where he is Head of the Financial Services Internal
Audit Practice;
> oversaw completion of the action plan to address observations
from the EQAR of the Internal Audit function carried out in
2015 by Deloitte;
> approved the annual audit plan and budget and monitored
progress against the plan throughout the year, 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;
> refreshed the Internal Audit Charter; and
> considered the major findings of Internal Audit and
management’s responses.
Whistleblowing
The Committee continued to receive and consider 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 reviewed the Whistleblowing Policy and
concluded that the policy and procedures in place comply with
the PRA and FCA policy statements on whistleblowing. During
2018 the Committee will oversee further enhancements to the
Group’s whistleblowing arrangements including improving
profile and ease of access.
External auditors
The Committee oversaw the relationship with the external
auditors. It approved the interim and annual audit plan and
negotiated and agreed the scope of the auditors’ engagement
(including remuneration), reviewed their audit findings and
considered management’s responses to such findings and
recommendations.
The Committee concluded that it was satisfied with
the auditors’ performance and recommends their re-
appointment by shareholders at the 2018 AGM for the year
ending 31 December 2018. The Committee believes the
independence and objectivity of the external auditors and the
effectiveness of the audit process remain strong.
The Committee also considered the continued effectiveness
of the audit process and the external auditors’ performance
during the period by means of a questionnaire seeking
feedback from Committee members and senior management
on technical competence, strategic knowledge, quality
control, communication, independence and objectivity.
This found the external auditors and the audit process to be
both robust and effective. Areas for development included
provision of greater benchmarking against peer approaches
and industry best practice.
During the year a team from the FRC undertook an AQR
inspection of PwC’s audit of the Group’s 2016 financial
statements. On completion of its review in January 2018, the
FRC wrote to the Committee Chair and provided a copy of its
final report. The Committee discussed the contents of the
report and the actions arising from the review findings with
PwC at the January 2018 Committee meeting. The Committee
was satisfied that PwC has taken all necessary actions to
address the FRC review findings as part of its audit of the 2017
financial statements. The Chair will meet with the FRC in 2018
to discuss the AQR findings.
Corporate Governance Report
Virgin Money Group Annual Report 2017 I 91
The total amount paid to the external auditors in 2017
was £1.6 million of which £0.3 million related to non-audit
services. In 2016 the total paid to the external auditors
was £1.2 million of which £0.3 million related to non-audit
services. Details of the payments for audit and non-audit
services provided in 2017 is shown in note 6 to the
financial statements.
External auditors tenure
A formal audit tender process was conducted in 2015, with
PwC appointed as external auditors at the AGM in 2016. The
external audit contract will be put out to tender at least every
ten years. 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.
Regulatory change
The Committee also monitored emerging regulation and
legislation, assessed the impact on the business and oversaw
the development of models, policies and procedures to
comply. Compliance with IFRS 9 was a key area of focus with
the Committee holding sessions with the Group finance
team and the external auditors to review and discuss the
requirements of IFRS 9 and the implementation plan to meet
the Group’s obligations under the revised standard.
External auditors 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 robust policy 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;
> 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 the external
auditors’ former staff to preserve further 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
their detailed knowledge and understanding of the business.
As an example, in 2017, the Committee considered proposals
that PwC be selected to provide non-audit services in relation
to the assurance work concerning the implementation of
IFRS 9 and in the development of the Group’s Covered Bond
programme. PwC was considered to be optimal for the
role, due to the value and operational synergies brought
by its understanding of the Group’s systems, processes
and personnel. The provision of the service for these
programmes was not considered to have a material effect on
the audited financial information nor to impede the auditors’
independence or objectivity, due to the precise scope of
the work. The Committee is satisfied that the Group was
compliant during the year with both the Code and the FRC’s
Ethical and Auditing Standards in respect of the scope and
maximum permitted level of fees incurred for non-audit
services provided by PwC. Where non-audit work is performed
by PwC, both the Group and PwC ensure adherence to robust
processes to prevent the objectivity and independence of the
auditors from being compromised.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
92 I Virgin Money Group Annual Report 2017
Board Risk Committee Report
Board Risk Committee Report
“The Committee continues to focus on strong risk
management culture as a fundamental part of
achieving our strategic objectives.”
Geeta Gopalan
Chair, Board Risk Committee
Membership and meetings
Meetings
attended
(held) in
20171
Independent
Committee Chair
Geeta Gopalan (from January 2018)
Colin Keogh2 (to January 2018)
Committee members
Norman McLuskie
Eva Eisenschimmel3
Darren Pope4
Marilyn Spearing5
Yes
Yes
Yes
Yes
Yes
Yes
5(5)
5(5)
5(5)
5(5)
3(3)
2(2)
1 Number of meetings held during the period the member held office.
2 Colin Keogh remains a Committee member following handover of the Chair to Geeta
Gopalan.
3 Eva Eisenschimmel joined the Committee on 25 January 2017.
4 Darren Pope joined the Committee on 1 March 2017.
5 Marilyn Spearing retired from the Committee on 3 May 2017, on her retirement from the
Board.
Chair’s overview
Having last month succeeded Colin Keogh as Chair of the Committee, I would like to take this opportunity to thank Colin for his strong
leadership and judgement and I look forward to his continuing contribution as a Committee member.
During 2017, the Board Risk Committee assisted the Board in consideration of all aspects of risk management across the Group, balancing its
agenda between existing and emerging risks. The Committee has exercised close oversight of the Group’s asset quality and retail credit risk
performance, including detailed discussion on credit card quality and performance with respect to customer behaviour and margins. Whilst
the UK economy and housing market remained resilient in 2017, the Committee introduced enhanced monitoring of the macro-economic
environment and customer behaviour, to ensure early identification of any emerging risks in these areas.
Through the strategic planning round, the Committee supported the work of the Board in re-assessing the Group’s risk appetite, capital
and liquidity adequacy and associated stress and scenario testing. This included oversight of the Internal Capital Adequacy Assessment
Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP). This also included a review of wholesale funding maturity
transformation and refinancing risk.
The Committee has monitored the Group’s risk management and governance framework continuing to build on the good progress reported
last year around managing risks relating to IT systems, cyber security and financial crime.
The Committee has also maintained its emphasis on conduct risk, including the monitoring of outsourcing arrangements and oversight of key
strategic programmes, with enhanced reporting on customer outcomes. Focus has also been on maintaining the Group’s risk culture and values
throughout the Group, including reviewing and supporting key policy changes and oversight of the risk adjustment elements of Executive
incentive schemes.
Finally, the Group continues to operate in a regulatory environment which is subject to considerable change and another key area of activity for
the Committee has been the monitoring of ongoing developments including the Financial Services Banking Reform Act (ring-fencing), Open
Banking, the Second Payment Services Directive (PSD2) and General Data Protection Regulation (GDPR).
Geeta Gopalan
Chair, Board Risk Committee
26 February 2018
Corporate Governance Report
Virgin Money Group Annual Report 2017 I 93
Committee purpose and responsibilities
The purpose of the Committee is to monitor and review the
Group’s compliance with the Board approved risk appetite
and risk management framework, and to ensure that the risk
culture is embedded throughout the Group.
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 has oversight of balance
sheet risks, including the adequacy of liquidity and capital.
The Committee monitors the Group’s risk management
framework, including policies and methodologies, overseeing
proposed changes and any actions arising from material
breaches. Details of the Group’s approach to risk management
can be found on pages 126 to 188.
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 were
updated during the year (in accordance with best practice)
and can be found on the website at virginmoney.com/virgin/
investor-relations.
The Committee is pleased to report that, during the year,
the Committee met its objectives and carried out its
responsibilities effectively, as confirmed by the annual
effectiveness review. More details on the Committee
evaluation can be found on pages 78 to 79.
Committee composition, skills and
experience
The Committee now comprises five Independent Non-
Executive Directors who have a wealth of risk management
experience across various industries including strong
representation in retail banking and financial services. The
Committee Chair is also a member of the Audit Committee.
Eva Eisenschimmel and Darren Pope became members of the
Committee on 25 January 2017 and 1 March 2017 respectively.
Marilyn Spearing retired from the Committee on 3 May 2017,
following her retirement from the Board.
As part of the medium term succession plan, and following
an orderly transition, Geeta Gopalan took over as the Chair
in January 2018. Colin Keogh, who is in his eighth year as a
Non-Executive Director, remains a member of the Committee.
Geeta has been a member of the Committee since June 2015
and has a strong background and experience in financial
services and risk management, with particular expertise in
operational resilience, IT systems, payments, digital and cyber.
In addition to relevant members of the Executive, the Internal
Audit Director attends the meetings, by invitation, so that
attendees from all three lines of defence are represented.
The external auditors also attend meetings as appropriate
and by invitation. During the year, the Committee held
private sessions with the Chief Risk Officer (without other
Executives present).
Significant risks considered by the
Committee
Further details of the Group’s principal risks can be found in
the Risk Overview on pages 36 to 39.
How the Committee spent its time in 2017
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.
Retail credit risk
The Committee monitored retail credit risk performance
against the Group’s risk appetite metrics and policies. The
Committee introduced external early warning and key
performance indicators in response to the changing macro-
economic outlook and increasing consumer indebtedness in
the UK market as a whole. The Committee also considered the
risk of adverse change in customer behaviour and its potential
resultant impact on impairment losses. Whilst the Group is
not exposed to the unsecured personal loan or motor finance
market, the Committee monitored the quality of the Group’s
credit card lending which has remained strong. In response
to the changing macroeconomic outlook, the Committee
oversaw further tightening of lending criteria in the first half
of 2017. This will remain an area of focus in 2018.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
94 I Virgin Money Group Annual Report 2017
Board Risk Committee Report
Market risk
The Committee monitored and reviewed monthly interest
rate risk positions against risk appetite metrics and policies.
Additional scenario planning and stress testing was also
undertaken to inform the Group’s strategic planning and
assist in the management of capital at risk driven by base
rate changes.
Operational risk
Regular updates across all aspects of operational risk were
considered by the Committee, including financial crime,
incident management, outsourcing management and security
infrastructure. The Committee continued to oversee the
delivery of the Group information security programme with
a particular focus on cyber resilience strategy to mitigate
the threat of cyber-attack. In particular, the Committee was
pleased to note the progress made in the year to improve
financial crime capability.
Conduct risk and compliance
The Committee considered reports on the proactive
identification and resolution of conduct related activity. In
addition, the Committee considered developments in the
Group’s conduct culture and reports on complaints and
product governance. The Committee also monitored risks
inherent in major outsource arrangements 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. Compliance matters were also monitored,
including the oversight of the FCA’s Client Asset Sourcebook
(CASS) regulatory attestation exercises and CASS remediation
in the investment business.
Strategic and financial risk
The Committee undertook a review of the risks inherent in
the strategic plan and provided input and support on their
mitigation and management. The quality of lending and credit
concentration risk is reviewed regularly against risk appetite
metrics and challenged by the Committee. The quality of
new lending, the credit performance of the portfolio and risk
adjusted returns were reviewed by the Committee resulting
in it recommending changes to Group policy or risk appetite
to manage exposures and balance risk/reward in these areas.
The Committee also introduced additional monitoring of the
performance against the assumed behaviours of the credit
card portfolio as that book matures.
Funding and liquidity risk
The Group Treasurer provided regular updates on balance
sheet management. The Committee challenged the current
and forecast funding and liquidity positions, and considered
reports on funding sources (including retail deposits, TFS,
RMBS and the establishment of a Covered Bonds programme)
to ensure a prudent mix is maintained within risk appetite
and policy limits. This included a particular focus on maturity
transformation and refinancing risk of maturing funding
schemes, and review of the funding plans carefully structured
to avoid undue refinancing risk.
Capital
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, is
within the risk appetite set by the Board and is well positioned
to meet future requirements. The Committee reviewed and
challenged management’s development of scenario planning
and stress testing as part of its assessment of the regulatory
capital requirements and preparation of the ICAAP and
Recovery and Resolution Plan (RRP). Further details on stress
testing can be found within the Risk Management Report on
page 129. The Committee concluded that the Group’s capital
remained well above minimum regulatory requirements and
within the risk appetite set by the Board.
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 Management Report
on pages 130 to 131.
The Committee oversaw the Group’s contingency planning
designed to respond to and mitigate the impact of adverse
macro-economic conditions.
Risks arising from the implementation of Financial Services
Banking Reform Act 2013 (which will require the ring-fencing
of retail banking operations) have also been considered,
ensuring forward planning is undertaken to address any
anticipated risks in implementation and compliance.
The Committee concluded that it was satisfied with the
implementation to ensure compliance by January 2019.
Minimum Requirement for Own Funds and Eligible Liabilities
(MREL) will be phased in by January 2022. The Committee
monitored the Group’s approach and the guidance was
fully reflected in the strategic planning process with the
Committee’s input.
Corporate Governance Report
Virgin Money Group Annual Report 2017 I 95
Directors’ Remuneration Report
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 ending 31 December 2017.
I was appointed as Committee Chair on 3 May 2017 having
been a member of the Committee since 2010. I would like
to take this opportunity to thank Marilyn Spearing for her
previous leadership of the Committee as well as her support
during the transfer of Chair responsibilities.
The Committee was strengthened this year with the
appointment of Eva Eisenschimmel and Darren Pope who have
already made significant contributions to the Committee’s
work. Eva and Darren also joined Geeta Gopalan and me
as members of the Board Risk Committee ensuring strong
alignment between risk and remuneration.
In July 2017 Peter Bole, the Chief Financial Officer, was
appointed to the Board. This report will therefore include
his remuneration arrangements and share interests
from that date.
2017 Executive Director outcomes
The performance of the Group in 2017 in a challenging
external environment once again reflects strong delivery
against the objectives set for the year.
The Committee has determined annual bonus outcomes
based on the financial and non-financial targets set at the
beginning of the year. Details of performance against these
targets are disclosed on page 108 of this report.
Annual Bonus awards for 2017 are 95.2% of maximum for the
Chief Executive and 91.7% of maximum for the Chief Financial
Officer reflecting the strong performance of the Group
within the year.
These awards will be subject to our deferral policy which was
reviewed during the year following a clarification of regulatory
expectations and practice by other large UK banks. Therefore,
for 2017 bonuses, 80% will be paid upfront (half in cash, half
in shares) with the remaining 20% delivered in share awards
deferred for between three and seven years. Bonus awards
delivered in shares will be subject to a 12-month hold period.
This approach continues to provide significant alignment
between Executive Director and shareholder interests over an
extended deferral period, and remains in line with regulatory
requirements.
The performance period for the 2015 Long Term Incentive
Plan (“LTIP”), the first such award granted following
the Group’s admission to the stock market, ended on
31 December 2017. Based on the achievement of performance
targets 65.3% of the shares under award will vest.
This outcome is a reflection of the Group’s delivery against the
growth, quality and returns targets set out in 2015 following
the Initial Public Offering (IPO). The Committee is satisfied
these performance conditions have remained relevant and
appropriate throughout the performance period.
Measure
Growth
Quality
Returns
Corporate Scorecard
Weighting
Outcome
30%
20%
30%
20%
100%
19.1%
20.0%
11.2%
15.0%
65.3%
Vested awards under the 2015 LTIP are delivered in shares and
will be released in three equal instalments up until 2020.
In March 2017 new share awards were granted to the Chief
Executive and the Chief Financial Officer under the 2017 LTIP
based on 100% of fixed pay.
Executive Directors continue to have the majority of their
variable pay delivered in Virgin Money share awards (80% for
2017), maintaining the strong alignment with the long-term
performance of the Group and shareholder interests.
2018 LTIP performance measures
The Committee will continue to operate within the current
approved Directors’ Remuneration Policy in 2018. However,
to ensure our remuneration approach remains aligned to our
strategy, we will be making changes to the LTIP performance
measures for 2018 awards. We have finalised these proposals
after reflecting on feedback from major shareholders.
The recent refresh of Group strategy highlighted two key
strategic developments: the build of the digital bank and entry
into the Small and Medium Enterprise (SME) market. Given
the importance of these initiatives to shareholder value, the
2018 LTIP award is being rebalanced to ensure that sufficient
focus is placed on both the continued performance of the core
business and the delivery of the strategic initiatives.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
96 I Virgin Money Group Annual Report 2017
2018 fixed pay
After careful consideration the Committee has determined
that the Chief Executive will receive an increase in base salary
of 2.6% to £800,000 for 2018. The Chief Financial Officer’s
salary will remain unchanged, however, he will receive an
allowance of £100,000 in recognition of the additional
responsibilities accompanying his appointment to the Board.
Taking account of his current shareholding, this will be
delivered in shares.
Considerations for other colleagues
The remuneration of colleagues across the Group is a key
consideration when determining Executive Director outcomes.
The average colleague salary will increase in the forthcoming
pay round by 1.9%, with the highest performers receiving an
increase of up to 6%.
The Group continues to pay all staff above the National Living
Wage which is in excess of the National Minimum Wage.
During 2018 the Group will apply to become a Living Wage
Accredited employer.
The Committee is mindful of the proposed changes to the
Corporate Governance Code. During the course of 2018 it will
review how effective engagement with colleagues and across
all stakeholders is maintained.
2018 policy review and consideration of shareholders’
views
The current remuneration policy will reach the end of its
three-year term at our 2019 AGM. During 2018 the Committee
will therefore consider if any changes to the Policy are
required ahead of a new binding shareholder vote in 2019.
As part of this process we will engage with shareholders to
ensure their views are taken into consideration.
Shareholder views relating to remuneration are an important
part of the Committee’s discussions. Having engaged with
a number of the Company’s largest shareholders recently,
I am confident that the approach outlined is aligned to the
interests of all shareholders.
I am pleased to recommend this statement and the 2017
Remuneration Implementation Report on page 103 to
shareholders, ahead of the 2018 AGM.
Norman McLuskie
Chair, Remuneration Committee
26 February 2018
Directors’ Remuneration Report
Virgin Money Group Annual Report 2017 I 97
Directors’ Remuneration Policy – abridged
> 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
> 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 2018 is
included on pages 105 and 106 of the Implementation Report.
As set out in the previous Directors’ Remuneration Reports,
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;
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
98 I Virgin Money Group Annual Report 2017
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
Maximum potential
Base salaries are normally reviewed annually. When determining and reviewing base salaries, the
Committee considers:
> 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.
Maximum potential
The maximum allowance is 100% of base salary.
Performance measures
N/A
The Fixed Allowance is not pensionable.
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
Directors’ Remuneration Report
Virgin Money Group Annual Report 2017 I 99
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.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
100 I Virgin Money Group Annual Report 2017
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 2017 I 101
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 Directors’
service agreements are shown below:
Notice period
Date of service
agreement
Jayne-Anne Gadhia
12 months
18 November 2014
Peter Bole
12 months
1 November 2016
The Group policy is that the Chair will normally have a six-
month notice period, to be served by either party.
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 Directors’ remuneration packages cascades down
to other colleagues. Particular points to note are:
> LTIP awards are granted to the wider Virgin Money Executive
Team;
> 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.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
102 I Virgin Money Group Annual Report 2017
Chair and Non-Executive Director fees in 2018
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 Chair 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 individual’s 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 106.
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 Chair 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
Chair 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 Chair and the Non-Executive Directors is capped at
£2 million under the Articles of Association.
Performance metrics
No remuneration payable to the Chair and the Non-Executive Directors has performance conditions.
Directors’ Remuneration Report
Virgin Money Group Annual Report 2017 I 103
Implementation Report
Purpose and membership of the Remuneration Committee
The primary 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.
In 2017 the Committee met its objectives and carried out its responsibilities effectively as confirmed by the annual effectiveness
review. More details on the Committee evaluation can be found on pages 78 and 79.
Remuneration Committee membership in 2017
Norman McLuskie
Marilyn Spearing
Geeta Gopalan
Eva Eisenschimmel
Darren Pope
Independent member
Joined 27 January 2010 (and Chair from 3 May 2017)
Independent member
Joined 29 January 2014, Chair from 1 January 2016 to 3 May 2017 on
which date she retired from the Board and the Committee
Independent member
Joined 25 June 2015
Independent member
Joined 25 January 2017
Independent member
Joined 1 March 2017
Other attendees (by invitation from time to time) included: the Chair, the Chief Executive, the People Director, and the
Reward Director. To manage potential conflicts of interest, those four 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) and a Virgin NED also attended meetings where invited. The Company Secretary attended meetings to record
minutes and advise on governance matters.
The Group manages the link between risk and remuneration carefully and all current members of the Remuneration Committee
are also members of the Board Risk Committee. In addition, representatives from the Risk function 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.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
104 I Virgin Money Group Annual Report 2017
Remuneration Committee activity in 2017
There were four meetings of the Remuneration Committee during 2017. The key matters were as follows:
Date
Q1
Q2
Q3
Q4
Pay / bonus
Policy / Governance
> 2016 pay and bonus outcomes
> Performance conditions for the 2017 Annual Bonus and LTIP > 2016 PRA Remuneration Policy Statement
> Review of Committee Terms of Reference
> Release of deferred bonus awards
> Review of Group-wide Remuneration Policy
> 2016 Directors’ Remuneration Report and Pillar 3
> Release of shares vesting under Buy-out Award
> Market update
> Release of Executive awards vesting under the IPO Share
Award
> Material Risk Taker population for 2017
> 2017 PRA Remuneration Policy Statement
> Living Wage Accreditation
> 2017 Directors’ Remuneration Report
> Review of performance measures for the 2018 Annual Bonus > Remuneration Committee Terms of Reference
and LTIP
> Review of deferral approach for 2018
> Determination of Group-wide pay and bonus budgets
Advisors to the Remuneration Committee
The Remuneration Committee took external advice from Deloitte, the Committee’s independent consultants in relation to
Directors’ remuneration.
Deloitte’s appointment as consultants was made by the Remuneration Committee. Deloitte 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 in 2017 amounted to £52,350. Deloitte also provide co-sourced internal audit services. Deloitte do not have any
other connection with the Group.
Statement of voting at Annual General Meeting
The Group’s remuneration policy, which was effective during 2017, was detailed within the Directors’ Remuneration Report for
2015 and voted on at the 2016 AGM. The remuneration awarded to the Executive Directors in 2016 was disclosed in last year’s
Remuneration Implementation Report and was voted on at the 2017 AGM. The shareholder votes submitted at the meetings,
either directly, by mail or by proxy, were as follows:
Remuneration Policy (2016 AGM)
Remuneration Implementation Report
(2017 AGM)
Votes in favour
Votes against
Votes withheld
Number of
shares
Percentage of
votes cast
Number of
shares
Percentage of
votes cast
349,102,101
353,955,397
91.79%
98.86%
31,219,817
4,083,364
8.21%
1.14%
Number of
shares
83,374
4,084,068
Directors’ Remuneration Report
Virgin Money Group Annual Report 2017 I 105
Implementation of the policy in 2018
The following sets out how the Directors’ Remuneration Policy will be applied in 2018:
Fixed Pay
Base salary
Jayne-Anne Gadhia (Chief Executive): £800,000
Peter Bole (Chief Financial Officer): £500,000
Fixed Allowance
Jayne-Anne Gadhia (Chief Executive): £100,000 (paid in cash)
Peter Bole (Chief Financial Officer): £100,000 (paid in shares)
Pension and other benefits
Jayne-Anne Gadhia (Chief Executive): 30% of base salary.
Peter Bole (Chief Financial Officer): 20% of base salary.
Annual Bonus
Opportunity
Deferral terms
Performance measures and targets
Long Term Incentive Plan
Opportunity
Vesting terms
Performance measures and targets
Maximum annual bonus opportunity is 100% of fixed pay.
For the 2018 performance year, annual bonus opportunity will be awarded in a combination of cash
and shares. Deferral will be consistent with regulatory requirements. Any shares released are subject
to a further holding period in line with regulatory requirements and market practice.
Deferred share awards will not receive dividends or dividend equivalents.
The Remuneration Committee has determined that for 2018 the annual bonus will be based on:
> 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 2018 will be granted over shares worth 100% of fixed pay.
The performance period will be the three years commencing on 1 January 2018. 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 2018.
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 further holding period in line with regulatory
requirements and market practice.
LTIP awards will not receive dividends or dividend equivalents.
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 2018 awards.
All awards will be subject to malus and clawback provisions.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
106 I Virgin Money Group Annual Report 2017
FY18 LTIP Performance Measures
Measure
Underlying basic earnings per share
Return on tangible equity
Target
Threshold: 35p
Maximum: 46p
Threshold: 10%
Maximum: 13%
Scorecard – relative to business strategy and
external comparators
a) Strategic delivery
(including digital bank and SME)
b) Customers (Advocacy)
c) Customers (Complaints)
d) Colleagues (Engagement)
Weighting
30%
30%
40%
Outcomes will be disclosed on a retrospective basis after the end of the three-year performance period.
Chair and Non-Executive Director fees in 2018
The annual fees for the Chair and Non-Executive Directors are unchanged to that specified in the 2016 Annual Report. A review
of the Chair fee was carried out in 2017 and a review of the Non-Executive Director fees was carried out in early 2018.
2018 fee policy
Chair fee1
Non-Executive Director basic fee
Senior Independent Directorship
Chair of Audit Committee
Chair of Remuneration Committee
Chair of Board Risk Committee
Chair of Nomination Committee
Audit Committee Membership
Remuneration Committee Membership
Board Risk Committee Membership
Nomination Committee Membership
2018
2017
£350,000
£350,000
£80,000
£80,000
£20,000
£20,000
£25,000
£25,000
£25,000
£25,000
£25,000
£25,000
N/A
N/A
£10,000
£10,000
£10,000
£10,000
£10,000
£10,000
N/A
N/A
1 The Chair 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. During 2018, Colin Keogh will be appointed as Chair of
the Board of Virgin Money Unit Trust Management (VMUTM), a regulated subsidiary of Virgin Money Holdings (UK) plc. In line
with this Remuneration Policy, Mr Keogh will receive a Non-Executive Director fee of £15,000 to take account of this additional
responsibility.
Directors’ Remuneration Report
Virgin Money Group Annual Report 2017 I 107
Remuneration outcome for 2017
Executive Directors (audited)
The following table summarises the total remuneration awarded in relation to Executive Directors’ services during 2017. In
respect of the Chief Financial Officer, the figures relate to the period from appointment to the Board on 25 July 2017.
Jayne-Anne Gadhia
Peter Bole
2016
£’000
Income from
25 July –
31 December
2017
£’000
2016
£’000
Salary
Fixed Allowance
Taxable benefits5
Pension allowance
Total fixed
Bonus
LTIP
Other
2017
£’000
780
100
1
234
1,115
1,060
5126
N/A
750
100
1
225
1,076
1,000
N/A
N/A
Total remuneration
2,6871
2,076
219
–
–
44
2632
2413
N/A
2824
786
–
–
–
–
–
–
–
–
–
1 The Chief Executive’s total remuneration has increased year-on-year by 29% in 2017. 84% of this increase is attributable to first vesting of share awards made under the LTIP scheme
granted in 2015 but where performance conditions ended on 31 December 2017.
2 The Chief Financial Officer became an Executive Director on 25 July 2017. The figures shown for fixed remuneration in 2017 are pro-rated for the period 25 July 2017 to 31 December 2017.
3 Figure represents the proportion of the bonus award for 2017 that relates to duties performed as an Executive Director.
4 ‘Other’ relates to the element of the Chief Financial Officer’s buy-out award, granted in 2016 prior to his appointment as an Executive Director. This award was subject to performance
conditions that ended on 31 December 2017. The average share price between 1 October 2017 and 31 December 2017 (281.2p) has been used to indicate the value.
5 Taxable benefits consist of Private Medical Insurance (Chief Executive: £715; Chief Financial Officer: £124).
6 The 2015 LTIP vesting outcome was confirmed by the Remuneration Committee at its meeting on 21 February 2018. The average share price between 1 October 2017 and 31 December
2017 (281.2p) has been used to indicate the value. The shares were awarded in 2015 based on a share price of 409p.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
108 I Virgin Money Group Annual Report 2017
Variable Awards
Annual Bonus
For 2017, Executive Directors had a maximum annual bonus opportunity of 100% of fixed pay.
The Executive Directors’ 2017 annual bonus determination was based on performance against:
> financial measures (50% of overall award): underlying profit before tax;
> risk, brand, culture, control objectives (25% of overall award): based on performance against objectives from the Group’s corporate
scorecard; and
> personal strategic objectives (25% of overall award): based on performance against pre-determined personal strategic objectives.
Actual performance against the 2017 bonus targets was as follows (audited):
Performance
measure
Underlying profit
before tax
Risk & Corporate
Scorecard
Personal strategic
objectives
Total bonus
Threshold
(0%)
Target
(60%)
Maximum
(100%)
Actual
performance
Weighting
at
maximum
£213.3m
£231m
£277m
£273.3m
50%
Bonus
score
48.9%
Weighting
at
maximum
50%
Bonus
score
48.9%
Chief Executive
Chief Financial Officer
as explained below
25%
21.3%
25%
21.3%
as explained below
25%
25%
25%
21.5%
100%
95.2%
100%
91.7%
Risk, Brand, Culture and Control Scorecard
(25% weighting)
> enhanced customer satisfaction and advocacy with position
as one of the leading UK banks for customer satisfaction
maintained;
Personal strategic objectives (25% weighting)
Jayne-Anne Gadhia
> Updated long-term strategy agreed with the Board and
communicated to the market, including entry to the SME
market and ground breaking digital bank proposition;
> improvement in intermediary relationships reflected in
> Delivered financial targets set out at IPO and in the annual
increased Net Promoter Score to +40;
plan, in particular a RoTE of 14%;
> progress to achieving the aim of 50%/50% gender balance by
2020, with women in senior leadership roles increasing from
22% to 29%;
> Donations of £95 million (including gift aid) made to charities
via Virgin Money Giving demonstrating continued support to
the communities in which we operate;
> Focus on quality achieved with liquidity coverage ratio at
203% and cost of risk at 13bps; and
> Efficiency improved with a cost:income ratio of less than 50%
in Q4 2017;
> Profit attributable to shareholders increased by 37% to
£192.1m, resulting in underlying EPS growing by 22% to
39.8p;
> Group succession plan in place with strong and improved
coverage. Senior capability enhanced, including the successful
appointment of Peter Bole to the Board;
> A continued focus and drive to ensure our customers have
> Significant delivery of activities to enhance colleague diversity,
been treated fairly measured by the Treating Customer Fairly
(TCF) scorecard.
with increased representation across all minority groups
(disability, ethnicity, gender, LGBT+) in 2017; and
2017 Final outcome: 21.3% out of a maximum 25%
> Enhancing the company reputation and brand, for example
through the success of the ‘Women in Finance Charter’ and
Board membership of UK Finance.
2017 Final outcome: 25% out of a maximum 25%
Directors’ Remuneration Report
Virgin Money Group Annual Report 2017 I 109
Peter Bole
> Enhanced financial control capabilities including disciplined
cost control and heightened monitoring and reporting of key
areas of accounting judgement;
> Further diversification of funding mix with successful RMBS
transaction, regulatory approval of covered bond programme
and implementation of second investment grade credit rating;
> Led debt and equity investor engagement with particular focus
on Group performance and strategy; and
> Ensured continued compliance with all statutory and
regulatory reporting and prepared the Group for transition to
IFRS 9 from January 2018.
2017 Final outcome: 21.5% out of a maximum 25%
2017 Deferral (audited)
Overall at least 60% of the Executive Directors’ 2017 variable
pay is deferred from 2021 through 2025 (via a combination of
deferred bonus and LTIP awards). For the 2017 annual bonus,
80% of the annual bonus will be paid in 2018 (half shares/
half cash). The remaining 20% will be deferred over seven
years with one-fifth vesting in March 2021, one-fifth vesting
in March 2022, one-fifth vesting in March 2023, one-fifth
vesting in March 2024 and the final one-fifth vesting in March
2025. Bonus awards delivered in shares will be subject to a
12-month holding period. No further performance conditions
apply although awards remain subject to service conditions
and clawback provisions, in line with the Group policy, which
includes arrangements for good leavers.
The Chief Executive and Chief Financial Officer received 2017
LTIP awards in March 2017 (100% of fixed pay). Awards will be
assessed against performance at 31 December 2019 based
on the performance conditions set out in detail in the 2016
Directors’ Remuneration Report. One-fifth of the award will
vest after four years in March 2021, one-fifth after five years
in March 2022, one-fifth after six years in March 2023, one-
fifth after seven years in March 2024 and one-fifth after eight
years in March 2025. Further details on these awards are set
out on page 117.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
110 I Virgin Money Group Annual Report 2017
LTIP Awards Vesting (audited)
2015
The Group has delivered strong performance during the period of the 2015 Long Term Incentive Plan, meeting or exceeding the
majority of the targets that were set at the IPO.
Alongside this strong financial performance, the Group has also made considerable progress against scorecard objectives during
the performance period:
> Enhanced satisfaction and advocacy is evidenced through increased Customer NPS scores: Since 2014 Customer NPS has risen by
26 points;
> Intermediary Sales NPS has risen by 36 points since 2014 to +61 representing upper quartile performance;
> Consistent delivery against Virgin Money Giving donations targets (£88 million in 2014; £95 million in 2017. Numbers include gift
aid); and
> Strong engagement scores throughout performance period.
Performance was measured from 1 January 2015 to 31 December 2017 for which, based on the outcomes detailed below, the
Remuneration Committee recommends that 65.3% of the maximum award will vest. Shares will be released to participants of the
plan, including the Chief Executive, in equal instalments, subject to malus and clawback, over three years with the first vesting
scheduled for March 2018.
Weighting Category Measure
Threshold
Target
Maximum
Vesting as
% maximum
30%
Growth
Scorecard of:
a) Mortgage market share
(gross lending)
2.5%
3%
3.5%
9.1%
Actual: 3.3%
Performance achievement versus targets
b) Cards growth (assets)
£2,200m
£2,450m
£2,700m
Actual: £3,024m
10%
c) Current account, Insurance and
Investments Income
-2%
Income growth rate (CAGR) in line
with net interest
+2%
0%
Actual: Below Threshold
20%
Quality
Capital Strength (CET1 ratio)
12.0%
12.5%
>12.5%, and up to 15%
Cost of Risk
22bps
30%
Returns
Underlying Cost: Income ratio1
52.5%
Underlying Return on Tangible Equit
y
13.5%
20bps
50.0%
15.0%
Actual: 13.8%
18bps
Actual: 13bps
47.5%
Actual: 51.8%
16.5%
Actual: 14.0%
20%
EBO
Continuous improvement toward top decile performance on
Scorecard of measures relative to
external comparators and internal scores Customers, Colleagues, Community, and Corporate Partners
LTIP Vesting (as a percentage of maximum)
10%
10%
5.4%
5.8%
15%
65.3%
1 The FSCS Levy was previously excluded from underlying performance measures but it is now included as it is considered to be a recurring cost to the Group however for the 2015 LTIP
performance measures have not been adjusted to reflect this change and outcomes are reported in the table excluding the FSCS Levy.
Directors’ Remuneration Report
Virgin Money Group Annual Report 2017 I 111
Chief Financial Officer – Legacy Award
On joining the Group, and prior to his appointment to the
Board, the Chief Financial Officer received share awards to
compensate for remuneration forfeited as a result of leaving
his previous employment. This included an LTIP buy-out
award to which performance conditions based on growth,
quality, returns and scorecard measures were applied.
The Remuneration Committee determined that 65.3% of
the maximum award will vest based on performance to
31 December 2017. Shares will be released to the Chief
Financial Officer in July 2018, in line with Mr Bole’s forfeited
awards from his former employer.
Chief Executive remuneration compared
with the wider employee population
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.
% change in
base salary
(2016-2017)1
% change in
annual
bonus
(2016-2017)2
% change
in taxable
benefits
(2016-2017)
Chief Executive
All Colleagues
4%
4%
6%
18%
11%
11%
Note the percentages for ‘All Colleagues’ included in the table above represent the
year-end position as at 31 December 2017 compared with the year-end position as at
31 December 2016. 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 2017 salary included in the single figure table on page 107 (£780,000) with
the corresponding figure in 2016 (£750,000).
2 This figure represents the average percentage change in full year 2017 Annual Bonuses
when compared with full year 2016 Annual Bonuses.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
112 I Virgin Money Group Annual Report 2017
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 2017 decreased by 1% as a result of organisational changes in 2016, especially at senior levels. Underlying profit
before tax increased by 28%. Dividend distributions in 2017 were £3.1 million higher compared with 2016.
£m
300
250
200
150
100
50
0
273.3
213.3
173.5
169.6
171.8
2016
2017
Underlying proÿt
before Tax
20.8
2016
23.9
2017
Dividends to shareholders
2016
2017
Salaries and performance
based compensation
Total Pension Entitlements (audited)
The Executive Directors do not have a 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 67). 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:
> the second and final tranche of a 2012 deferred bonus
payment totalling £250,312 was released to Finlay Williamson;
and
> a 2013 deferred bonus payment totalling £187,767 was
released to Lee Rochford.
Each of the above amounts were delivered in shares, with the
net number of shares subject to a six-month hold period.
Loss of office payments (audited)
There were no payments for the loss of office made to former
Directors during 2017.
Chair and Non-Executive Directors’ fees
(audited)
Glen Moreno1
Colin Keogh
Norman McLuskie
Marilyn Spearing (to 3/5/17)
Patrick McCall
Gordon McCallum (to 31/10/17)
Geeta Gopalan
Eva Eisenschimmel (from 25/1/17)
Darren Pope (from 1/3/17)
Amy Stirling (from 20/12/17)
Fees paid in
2017 (£000s)
Fees paid in
2016 (£000s)
350
115
145
43
80
67
110
103
99
–
253
111
125
124
80
80
109
–
–
–
1 Glen Moreno has access to a vehicle for personal use, which is a taxable benefit (£1,228).
(£5,618 in 2016).
Breakdown of Non-Executive Directors’ fees
Non-Executive Directors receive specific committee fees, as
set out in the table on page 106. There were no changes to
fees during 2017.
Directors’ Remuneration Report
Virgin Money Group Annual Report 2017 I 113
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 2017 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.
(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)
Virgin Money TSR v FTSE 350
(cid:18)(cid:23)(cid:17)
(cid:18)(cid:21)(cid:17)
(cid:18)(cid:19)(cid:17)
(cid:18)(cid:17)(cid:17)
(cid:25)(cid:17)
(cid:23)(cid:17)
(cid:21)(cid:17)
(cid:19)(cid:17)
(cid:17)
(cid:18) (cid:16) (cid:19)
(cid:18) (cid:16) (cid:18)
(cid:20)
(cid:25) (cid:16) (cid:18)
(cid:18)
(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)
(cid:21)
(cid:18)
(cid:17)
(cid:17)
(cid:21)
(cid:18)
(cid:19) (cid:16) (cid:19)
(cid:22)
(cid:18)
(cid:17)
(cid:19) (cid:16) (cid:19)
(cid:18) (cid:16) (cid:18)
(cid:20)
(cid:23)
(cid:18)
(cid:17)
(cid:19) (cid:16) (cid:19)
(cid:18) (cid:16) (cid:18)
(cid:20)
(cid:24)
(cid:18)
(cid:17)
(cid:19) (cid:16) (cid:19)
(cid:18) (cid:16) (cid:18)
(cid:20)
Chief Executive remuneration outcomes – 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
31/12/2014
31/12/2015
31/12/2016
31/12/2017
Jayne-Anne Gadhia
Jayne-Anne Gadhia
Jayne-Anne Gadhia
Jayne-Anne Gadhia
3,647
95%
–
1,617
88%
–
2,076
93%
–
2,687
95%
65.3%
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
114 I Virgin Money Group Annual Report 2017
Outstanding share awards (audited)
Directors’ share interests
The table below summarises shareholdings and share interests as at 31 December 2017.
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
Peter Bole
Ordinary shares
Breakdown of unvested shares:
(B) Deferred Bonus Share Plan Awards
(C) Long Term Incentive Plan Awards
Owned
outright
Number of shares1,2,3
Total
Unvested (not
subject to
performance
conditions)
Unvested
(subject to
performance
conditions)
2,016,558
67,690
101,710
366,938
904,211
3,389,417
209,783
369,743
647,216
1 The Executive Directors do not hold any vested or unvested options.
2 All unvested awards above will be subject to tax upon vesting.
3 Unvested shares subject to performance conditions include shares awarded under the 2015 LTIP, the performance period in respect of which expired on 31 December 2017.
Directors’ Remuneration Report
Virgin Money Group Annual Report 2017 I 115
Breakdown of share interests
Further details in respect of the unvested shares included in the Directors’ share interest table are provided in the following
tables. The details are in relation to the current Executive Directors and no other Directors have rights to shares. For awards
granted prior to 2015, the share numbers referred to in this section are adjusted for the effect of the re-organisation of the
Company’s share capital on listing in 2014.
(A) 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 2017
Awarded
during the
year
Vested
during the
year
Lapsed
during the
year
Jayne-Anne Gadhia
2012 deferred bonus
Jayne-Anne Gadhia
2013 deferred bonus
Total
242,580
203,420
–
–
242,580
101,710
–
–
Unvested
as at
31 Dec
20172
Date of grant
–
18 July 2013
101,710
101,710
27 February
2014
Market
value at
grant1
n/a
n/a
Notes
Vests March
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.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
116 I Virgin Money Group Annual Report 2017
(B) Annual Bonus – Deferred Bonus Share Plan (DBSP)
Conditional Share Awards were granted under the Deferred Bonus Share Plan in March 2017 in respect of 2016.
For the Chief Executive, the portion of the annual bonus converted into shares had a face value of £680,000. This value
was converted into the number of shares shown using the share price on the day immediately preceding grant. 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 awards made in respect of
2014 and 2015. The table also sets out awards made to the Chief Financial Officer prior to his appointment as an Executive
Director including awards made as part of his joining arrangements (as detailed in the 2015 Directors’ Remuneration Report).
At 1 Jan
20173
Awarded
during the
year
Vested
during the
year
Lapsed
during the
year
Unvested
as at
31 Dec
20172
Date of grant
Jayne-Anne Gadhia
2014 deferred bonus 221,570
Jayne-Anne Gadhia
2015 deferred bonus
52,965
–
–
–
221,570
26 March 2015
17,655
–
35,310
15 March 2016
Jayne-Anne Gadhia
2016 deferred bonus
Total
Peter Bole
Deferred Bonus
Buy-out
207,887
97,829
110,058
15 March 2017
366,938
217,889
15,810
202,079
1 December
2016
307.5p per
share
Peter Bole
2016 deferred bonus
7,704
Total
7,704
15 March 2017
327.1p per
share
209,783
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.
3 Reflects the position for the Chief Financial Officer at the time of appointment to the Board, 25 July 2017.
Market
value at
grant1
409p per
share
377.5p per
share
327.1p per
share
Notes
Vests
26 March
2018 and
2019
Vests
15 March
2018 and
2019
Vests
15 March
2020, 2021,
2022, 2023
and 2024
Vests
May and
July 2018,
December
2019
Vests
15 March
2020, 2021,
2022, 2023
and 2024
Directors’ Remuneration Report
Virgin Money Group Annual Report 2017 I 117
(C) Long Term Incentive Plan
Conditional Share Awards were granted under the 2017 Long Term Incentive Plan on 15 March 2017. Awards are subject to
performance conditions (as described in last year’s report) that will apply from 1 January 2017 to 31 December 2019, with
threshold performance resulting in 20% of the award vesting.
The face value of the award made to the Chief Executive was £1,114,000. 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
2021, one-fifth after five years in March 2022, one-fifth after six years in March 2023, one-fifth after seven years in March 2024,
and the final one-fifth after eight years in March 2025 (each with a 12-month holding period). Details of this award are included
in the table below alongside the awards made in respect of 2015 and 2016. The table also sets out awards made to the Chief
Financial Officer prior to his appointment as an Executive Director including awards made as part of his recruitment (as detailed
in the 2015 Directors’ Remuneration Report). All awards are subject to malus and clawback provisions.
At 1 Jan
20173
Awarded
during the
year
Unvested
as at
31 Dec
20172
Date of grant
278,875
–
278,875
26 March 2015
284,768
–
284,768
15 March 2016
–
340,568
340,568
15 March 2017
904,211
Market
value at
grant1
409p per
share
377.5p per
share
327.1p per
share
Notes
Vests 26
March 2018,
2019 and
2020
Vests 15
March 2020,
2021, 2022,
2023 and
2024
Vests 15
March 2021,
2022, 2023,
2024 and
2025
153,793
–
153,793
1 December
2016
307.5p per
share
Vests 15 July
2018
32,520
–
32,520
1 December
2016
307.5p per
share
183,430
–
183,430
15 March 2017
327.1 per
share
369,743
Vests
15 March
2020, 2021,
2022, 2023
and 2024
Vests
15 March
2021, 2022,
2023, 2024
and 2025
Jayne-Anne Gadhia
2015 LTIP
Jayne-Anne Gadhia
2016 LTIP
Jayne-Anne Gadhia
2017 LTIP
Total
Peter Bole
LTIP Buy-out4
Peter Bole
2016 LTIP4
Peter Bole
2017 LTIP4
Total
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.
3 Reflects the position for the Chief Financial Officer at the time of appointment to the Board, 25 July 2017.
4 The Chief Financial Officer’s LTIP Buy-out Award, 2016 LTIP Award and 2017 LTIP Award were granted prior to his appointment in to the Board. The awards are subject to performance
measures.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
118 I Virgin Money Group Annual Report 2017
Additional disclosures (audited)
Shareholding guidelines
Executive Directors are expected to hold 200% of salary in shares in the Company built up over five years from listing or
recruitment, whichever is the later.
As a result of the shareholdings in the table on page 119, the position for Executive Directors in 2017 is as follows:
Executive Directors
Jayne-Anne Gadhia
Peter Bole
Shareholding requirement
Current shareholding
Number of
shares
(at 31.12.17
closing price
of 284.2p)
% of base
salary
(at 31.12.17
closing price
of 284.2p)
Value of
shares held
(at 31.12.17
closing price
of 284.2p)
Requirement
met
Yes/No
% of base
salary
200%
200%
548,909
351,864
735%
£5,731,058
38%
£192,375
Yes
No
Base salary
£780,000
£500,000
Directors’ Remuneration Report
Virgin Money Group Annual Report 2017 I 119
Directors’ interests – summary of awards vested and purchases and sales made by directors in 2017 (audited)
Holding at
1 January 2017
(or appointment date)
Transactions
during year
Number of
shares
Notes
Jayne-Anne Gadhia
2,438,275
15 March 2017
242,918
Number of shares from vesting of deferred bonus
shares (2012 and 2013 Phantom Incentive and
2015 and 2016 DBSP) after tax
16 May 2017
700,000
Disposal of shares
25 July 2017
35,365
Purchase of shares
Peter Bole
59,3381
25 July 2017
8,352
Number of shares from vesting of deferred bonus
shares (DBSP Buy-out Award) after tax
Glen Moreno
Geeta Gopalan
Colin Keogh
Patrick McCall
71,164
–
157,260
–
–
–
–
–
–
–
–
–
–
–
Gordon McCallum
18,983
10 January 2017
18,983
Disposal of shares for nil consideration by way of
donation to charity
Norman McLuskie
90,080
–
–
–
1 Holding at 25 July 2017
Holding at
31 December
2017
2,016,558
67,690
71,164
–
157,260
–
–
90,080
Marilyn Spearing, Eva Eisenschimmel, Darren Pope and Amy Stirling did not hold shares in the Company during the year. There
have been no other changes to the above interests between 31 December 2017 and 25 February 2018.
On behalf of the Board
Norman McLuskie
Chair, Remuneration Committee
26 February 2018
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
120 I Virgin Money Group Annual Report 2017
Corporate governance statement
The Corporate Governance Report, 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).
Profits and dividends
The consolidated income statement shows a profit before tax for the year ended 31 December 2017 of £262.6 million.
The Directors have declared/recommended dividends as follows:
Type of dividend
Amount per ordinary share
Interim (2016)
Final (2016)
Interim (2017)
Final (2017)
1.6p
3.5p
1.9p
4.1p
Post balance sheet events
Post balance sheet events are disclosed in note 36 to the
financial statements.
Going concern
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
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 under Principal Risks on pages 36 to 39 and 132,
Funding and Liquidity on page 38 and pages 170 to 181 and
Capital position on pages 182 to 188, 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.
Payment date
23 September 2016
10 May 2017
22 September 2017
16 May 2018 (subject to approval by shareholders
at the 2018 AGM)
Viability statement
In accordance with the 2016 UK Corporate Governance Code
(Code), the Directors have assessed the viability of the Group.
Their assessment has taken into account the Group’s current
financial position, assessment of the Group’s prospects and
the potential impact of the principal risks, which are set out
on pages 36 to 39. The Directors have determined that a three
year period to 31 December 2020 constitutes an appropriate
period over which to perform this assessment. This period
presents a reasonable degree of confidence, while providing a
longer-term perspective.
In making this statement, the Directors have considered
the principal and emerging risks facing the Group, including
those that could potentially threaten the Group’s business
model, future performance, solvency or liquidity. The Group’s
current and projected capital and liquidity positions have
been assessed in comparison to risk appetite, early warning
indicators and regulatory minima.
Directors’ Report
Virgin Money Group Annual Report 2017 I 121
The Group’s strategy is set out on pages 18 to 19 of the
Strategic Report. The key factors which support the future
prospects of the Group are:
> the Group’s strong balance sheet position. The Group has
strong capital and liquidity, well in excess of regulatory
minima;
> the Group has high-quality assets and diversified funding
sources. The business delivered strong financial performance
in 2017, with continued improvement in operational
leverage;
> the Group has a number of established and new partnership
arrangements providing opportunity for growth in other
income streams; and
> the Group’s long-term strategy includes the development of
the SME proposition and the digital bank during 2018, which
provide significant future opportunities.
As described in the Corporate Governance Report on
page 81, the Audit Committee Report on page 89 and the
Risk Management Report on pages 126 to 188, the Board
monitored the Group’s risk management and internal control
systems, and oversaw their effectiveness. The monitoring
and review covered all material controls, including financial,
operational and compliance controls.
The Board considers its strategic plan at least annually and
monitors it on an ongoing basis. 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 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
underlying risk.
The Group performs a range of 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 show that sufficient
capital and liquidity is held to cover the stress scenarios, both
in amount and quality. Supporting capital and funding plans
are developed to survive the impact of the stress scenarios
over the planning horizon. This is captured in the Group’s
ICAAP and ILAAP.
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 on pages 18 and 19;
> the Group’s emerging risks are disclosed on pages 130 to
131;
> the Group’s principal risks, including mitigating actions, are
described on pages 132 to 188; and
> the Group’s approach to stress testing and reverse stress
testing is described on page 129.
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 2020.
Directors
The names and biographical details of the current Directors are shown on pages 66 to 68. Changes to the composition of the
Board since 1 January 2017, and up to the date of this report, are shown in the table below.
Name
Role
Date of appointment/retirement
Eva Eisenschimmel
Non-Executive Director
Darren Pope
Non-Executive Director
Marilyn Spearing
Non-Executive Director
Peter Bole
Executive Director
Gordon McCallum
Non-Executive Director
appointed 25 January 2017
appointed 1 March 2017
retired 3 May 2017
appointed 25 July 2017
retired 31 October 2017
Amy Stirling
Non-Executive Director
appointed 20 December 2017
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
122 I Virgin Money Group Annual Report 2017
Appointment and retirement of Directors
The appointment, retirement and/or replacement of Directors
is governed by the Articles of Association of the Company
(Articles), the Code and the Companies Act 2006 (Act). The
Articles may be amended only by a special resolution of the
shareholders in a general meeting.
The Directors appointed to the Board since the 2017 AGM
will stand for election by shareholders at the 2018 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 2018 AGM.
Virgin 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 Virgin) in order to be valid.
The outcome of both of these vote counts will be announced
following the 2018 AGM.
Directors’ indemnities
The Directors and former 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 and remain in force at the date of this report.
Deeds for current Directors, and the former directors who
retired during the year, are available for inspection at the
Company’s registered office. In addition, the Group had
appropriate Directors and Officers’ liability insurance cover,
as well as Professional Indemnity insurance cover, in place
throughout 2017.
Information included by reference
The following information forms part of the Directors’ Report
and is incorporated into the report by reference.
Subject matter
Page/note reference
Colleague engagement
and remuneration
Dividends
101
Note 11
Directors’ interests in shares
118 and 119
Internal control and risk management
systems in relation to financial reporting
81, 89 and 126 to 188
Information in relation to the use of
financial instruments
126 to 188
Share capital and control
Share capital and
restrictions on the transfer
of shares or voting rights -
Note 27, page 237 to 238
Special rights as regards
control of the Company –
Note 27, page 237 to 238
Information included in the Strategic Report
Subject matter
Future developments
Inclusion and diversity (including
employment of disabled people)
Page reference
18 to 29
14 to 15 and 22 to 23
Emissions reporting
28 to 29
Colleague engagement
Information of matters relevant to employees, including
financial and economic factors affecting the performance
of the Group, is communicated on a regular basis, with
engagement measured through an annual third-party survey.
Directors’ Report
Virgin Money Group Annual Report 2017 I 123
Disclosures required under LR 9.8.4R
Subject matter
Page reference
Relationship agreement
Publication of unaudited financial
information
80
133
Dividend waivers
Note 11, page 266
Allotment of equity securities
Note 27, page 237
Allotment of other equity securities
(ATI securities)
Note 28, page 238
Significant contracts
Note 35, page 247
Voting and Directors’ powers
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 dependants,
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 and in certain circumstances, including in
relation to the issuing or buying back by the Company of its
shares, are subject to authority being given to the Directors
by shareholders in general meeting. The Company did not
repurchase any of the issued ordinary shares during 2017
and up to the date of this report pursuant to the authority
granted at the 2017 AGM (where the Company was authorised
to buy back up to 44,494,200 ordinary shares, representing
10% of the Company’s issued ordinary share capital as at
23 March 2017).
Shareholders will be asked at the 2018 AGM to renew the
authorities granted at the 2017 AGM to allot, issue and buy
back shares, taking into account the latest institutional
shareholder guidelines.
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 2017,
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.
As at 31 December 2017
Shareholder
Virgin Group Holdings Limited
Standard Life Aberdeen plc
Prudential plc group of companies
In the period from 31 December 2017 to the date of this
report, the Company has received a notification from
Standard Life Aberdeen plc. This notification indicates that
the Standard Life Aberdeen plc shareholding as at the date of
this report is 52,988,708 ordinary shares representing 11.91%
of the total voting rights attached to issued share capital. The
holding is indirect.
Ordinary
shares held
% of voting
rights
155,120,454
53,756,010
29,475,132
34.86%
12.08%
6.62%
Direct/
indirect
interest
Direct
Indirect
Indirect
Information provided to the Company under the DTR is
publicly available via the regulatory information service and
on the Company’s website.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
124 I Virgin Money Group Annual Report 2017
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.
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
During the ordinary course of business the Group invests in
the development of platforms, products and services. During
2017 the Group has invested in the build of the Virgin Money
digital bank.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law
and regulation.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have prepared the Group financial statements and the Company
financial statements in accordance with IFRS as adopted by the
European Union (EU). 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 Company and of the profit or loss of the Group and
Company for that period. In preparing the financial statements,
the Directors are required to:
> select suitable accounting policies and then apply them
consistently;
> state whether applicable IFRS as adopted by the EU have been
followed for the Group and Company financial statements,
subject to any material departures disclosed and explained in the
financial statements;
> make judgements and accounting estimates that are reasonable
and prudent; and
> prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and
Companywill continue in business.
Directors’ Report
Virgin Money Group Annual Report 2017 I 125
Independent auditors and audit information
Each of the Directors who is in office at the date of this report and
whose name is listed on pages 66 to 68 confirms that:
> so far as the Director is aware, there is no relevant audit
information ofwhich the Company’s auditors are unaware; and
> they have taken all the steps that they ought to have taken as
a Director in order to make themselves aware of any relevant
audit information and to establish that the Company’s
auditors are aware of that information.
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 2018 AGM.
On behalf of the Board
Katie Marshall
Company Secretary
26 February 2018
Virgin Money Holdings (UK) plc
Registered No. 03087587
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Group and Company
and enable them to ensure that the financial statements and
the Directors’ Remuneration Report comply with the Act and,
as regards the Group financial statements, Article 4 of the
IAS Regulation.
The Directors are also responsible for safeguarding the assets of
the Group and Company and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the
Annual Financial Report
Each of the Directors who is in office at the date of this report and
whose names and functions are listed on pages 66 to 68, confirms
that, to the best of their knowledge:
> the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fairview
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 management report contained in the Strategic Report and
the Directors’ Report includes a fair review of the development
and performance of the business and the position of the Group
and Company, togetherwith 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 and Company’s position and performance, business
model and strategy.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
126 I Virgin Money Group Annual Report 2017
Risk Management Report
127 The Group’s approach to risk management
129 Risk management framework
130 Emerging risks
133 Risk classes
134 Full analysis of risk classes
Virgin Money Lounge, Glasgow
Virgin Money Group Annual Report 2017 I 127
The Group’s approach to risk management
Risk management is at the heart of the Group’s strategy to enable profitable, long-term
growth. This is achieved through a clearly defined 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 that reinforces accountability.
The Group’s risk values, outlined below, describe how all
colleagues, suppliers and partners are expected to operate.
Accountability
The Group uses a ‘Three Lines of Defence’ model which
defines clear responsibilities and accountabilities. This
ensures effective independent assurance over key
business activities.
(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. The Group’s risk appetite is approved by the
Board with each strategic planning cycle.
Governance and control
Delegation of authority from the Board to Executive
Committees and Senior 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.
> 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
undertake 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 line management. It is responsible for the design
and development of the risk management framework and risk
appetite. It provides a view of the Group’s risk profile while
reporting against risk appetite to the Board. It also oversees
the Group’s internal stress testing framework and maintains
the Group’s 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.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
128 I Virgin Money Group Annual Report 2017
The Group’s approach to risk management
(cid:51)(cid:74)(cid:84)(cid:76)(cid:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)
(cid:36)(cid:73)(cid:66)(cid:74)(cid:83)(cid:27)(cid:3)(cid:40)(cid:70)(cid:70)(cid:85)(cid:66)(cid:3)(cid:40)(cid:80)(cid:81)(cid:66)(cid:77)(cid:66)(cid:79)(cid:19)
(cid:9)(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:10)
(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)
(cid:36)(cid:73)(cid:66)(cid:74)(cid:83)(cid:27)(cid:3)(cid:40)(cid:77)(cid:70)(cid:79)(cid:3)(cid:46)(cid:80)(cid:83)(cid:70)(cid:79)(cid:80)
(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)(cid:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)(cid:84)(cid:18)
(cid:34)(cid:86)(cid:69)(cid:74)(cid:85)(cid:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)
(cid:36)(cid:73)(cid:66)(cid:74)(cid:83)(cid:27)(cid:3)(cid:37)(cid:66)(cid:83)(cid:83)(cid:70)(cid:79)(cid:3)(cid:49)(cid:80)(cid:81)(cid:70)
(cid:9)(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:10)
(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)
(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:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)
(cid:36)(cid:73)(cid:66)(cid:74)(cid:83)(cid:27)(cid:3)(cid:47)(cid:80)(cid:83)(cid:78)(cid:66)(cid:79)(cid:3)(cid:46)(cid:68)(cid:45)(cid:86)(cid:84)(cid:76)(cid:74)(cid:70)
(cid:9)(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:10)
(cid:51)(cid:74)(cid:84)(cid:76)(cid:3)(cid:46)(cid:66)(cid:79)(cid:66)(cid:72)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)
(cid:34)(cid:84)(cid:84)(cid:70)(cid:85)(cid:3)(cid:66)(cid:79)(cid:69)(cid:3)(cid:45)(cid:74)(cid:66)(cid:67)(cid:74)(cid:77)(cid:74)(cid:85)(cid:90)(cid:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)(cid:3)
(cid:36)(cid:73)(cid:66)(cid:74)(cid:83)(cid:27)(cid:3)(cid:36)(cid:73)(cid:74)(cid:70)(cid:71)(cid:3)(cid:51)(cid:74)(cid:84)(cid:76)(cid:3)(cid:48)(cid:395)(cid:68)(cid:70)(cid:83)
(cid:42)(cid:69)(cid:70)(cid:79)(cid:85)(cid:74)(cid:258)(cid:70)(cid:84)(cid:3)(cid:66)(cid:79)(cid:69)(cid:3)(cid:83)(cid:70)(cid:68)(cid:80)(cid:78)(cid:78)(cid:70)(cid:79)(cid:69)(cid:84)(cid:3)(cid:83)(cid:74)(cid:84)(cid:76)(cid:3)(cid:66)(cid:81)(cid:81)(cid:70)(cid:85)(cid:74)(cid:85)(cid:70)(cid:13)(cid:3)(cid:78)(cid:66)(cid:79)(cid:66)(cid:72)(cid:70)(cid:84)(cid:3)(cid:83)(cid:74)(cid:84)(cid:76)(cid:3)
(cid:88)(cid:74)(cid:85)(cid:73)(cid:74)(cid:79)(cid:3)(cid:66)(cid:72)(cid:83)(cid:70)(cid:70)(cid:69)(cid:3)(cid:77)(cid:74)(cid:78)(cid:74)(cid:85)(cid:84)(cid:13)(cid:3)(cid:78)(cid:80)(cid:79)(cid:74)(cid:85)(cid:80)(cid:83)(cid:84)(cid:3)(cid:76)(cid:70)(cid:90)(cid:3)(cid:83)(cid:74)(cid:84)(cid:76)(cid:3)(cid:70)(cid:89)(cid:81)(cid:80)(cid:84)(cid:86)(cid:83)(cid:70)(cid:84)(cid:3)
(cid:74)(cid:79)(cid:3)(cid:83)(cid:70)(cid:77)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:3)(cid:85)(cid:80)(cid:3)(cid:83)(cid:74)(cid:84)(cid:76)(cid:3)(cid:84)(cid:85)(cid:83)(cid:66)(cid:85)(cid:70)(cid:72)(cid:90)(cid:3)(cid:66)(cid:79)(cid:69)(cid:3)(cid:83)(cid:70)(cid:68)(cid:80)(cid:78)(cid:78)(cid:70)(cid:79)(cid:69)(cid:84)(cid:3)(cid:85)(cid:73)(cid:70)(cid:3)(cid:66)(cid:81)(cid:81)(cid:83)(cid:80)(cid:66)(cid:68)(cid:73)(cid:3)
(cid:85)(cid:80)(cid:3)(cid:78)(cid:66)(cid:79)(cid:66)(cid:72)(cid:74)(cid:79)(cid:72)(cid:3)(cid:66)(cid:77)(cid:77)(cid:3)(cid:85)(cid:90)(cid:81)(cid:70)(cid:84)(cid:3)(cid:80)(cid:71)(cid:3)(cid:83)(cid:74)(cid:84)(cid:76)(cid:15)
(cid:36)(cid:73)(cid:66)(cid:74)(cid:83)(cid:27)(cid:3)(cid:36)(cid:73)(cid:74)(cid:70)(cid:71)(cid:3)(cid:39)(cid:74)(cid:79)(cid:66)(cid:79)(cid:68)(cid:74)(cid:66)(cid:77)(cid:3)(cid:48)(cid:395)(cid:68)(cid:70)(cid:83)
(cid:51)(cid:70)(cid:84)(cid:81)(cid:80)(cid:79)(cid:84)(cid:74)(cid:67)(cid:77)(cid:70)(cid:3)(cid:71)(cid:80)(cid:83)(cid:3)(cid:78)(cid:66)(cid:79)(cid:66)(cid:72)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:3)(cid:66)(cid:79)(cid:69)(cid:3)(cid:78)(cid:80)(cid:79)(cid:74)(cid:85)(cid:80)(cid:83)(cid:74)(cid:79)(cid:72)(cid:3)
(cid:80)(cid:71)(cid:3)(cid:77)(cid:74)(cid:82)(cid:86)(cid:74)(cid:69)(cid:74)(cid:85)(cid:90)(cid:13)(cid:3)(cid:71)(cid:86)(cid:79)(cid:69)(cid:74)(cid:79)(cid:72)(cid:13)(cid:3)(cid:68)(cid:66)(cid:81)(cid:74)(cid:85)(cid:66)(cid:77)(cid:3)(cid:66)(cid:79)(cid:69)(cid:3)(cid:66)(cid:84)(cid:84)(cid:70)(cid:85)(cid:3)(cid:66)(cid:79)(cid:69)(cid:3)(cid:77)(cid:74)(cid:66)(cid:67)(cid:74)(cid:77)(cid:74)(cid:85)(cid:90)(cid:3)
(cid:78)(cid:66)(cid:79)(cid:66)(cid:72)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:3)(cid:88)(cid:74)(cid:85)(cid:73)(cid:74)(cid:79)(cid:3)(cid:66)(cid:72)(cid:83)(cid:70)(cid:70)(cid:69)(cid:3)
(cid:83)(cid:74)(cid:84)(cid:76)(cid:3)(cid:66)(cid:81)(cid:81)(cid:70)(cid:85)(cid:74)(cid:85)(cid:70)(cid:3)(cid:66)(cid:79)(cid:69)(cid:3)(cid:81)(cid:80)(cid:77)(cid:74)(cid:68)(cid:90)(cid:15)
(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:51)(cid:74)(cid:84)(cid:76)(cid:13)(cid:3)(cid:36)(cid:80)(cid:79)(cid:69)(cid:86)(cid:68)(cid:85)(cid:3)(cid:51)(cid:74)(cid:84)(cid:76)(cid:3)
(cid:66)(cid:79)(cid:69)(cid:454)(cid:36)(cid:80)(cid:78)(cid:81)(cid:77)(cid:74)(cid:66)(cid:79)(cid:68)(cid:70)(cid:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)
(cid:36)(cid:83)(cid:70)(cid:69)(cid:74)(cid:85)(cid:3)(cid:51)(cid:74)(cid:84)(cid:76)(cid:3)
(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)
(cid:53)(cid:83)(cid:70)(cid:66)(cid:84)(cid:86)(cid:83)(cid:90)(cid:3)(cid:51)(cid:74)(cid:84)(cid:76)(cid:3)
(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)
(cid:46)(cid:66)(cid:79)(cid:66)(cid:72)(cid:70)(cid:78)(cid:70)(cid:79)(cid:85)(cid:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)(cid:84)
(cid:18)(cid:3) (cid:42)(cid:79)(cid:3)(cid:66)(cid:69)(cid:69)(cid:74)(cid:85)(cid:74)(cid:80)(cid:79)(cid:13)(cid:3)(cid:85)(cid:73)(cid:70)(cid:83)(cid:70)(cid:3)(cid:74)(cid:84)(cid:3)(cid:66)(cid:3)(cid:35)(cid:80)(cid:66)(cid:83)(cid:69)(cid:3)(cid:47)(cid:80)(cid:78)(cid:74)(cid:79)(cid:66)(cid:85)(cid:74)(cid:80)(cid:79)(cid:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)(cid:15)
(cid:19)(cid:3) (cid:40)(cid:70)(cid:70)(cid:85)(cid:66)(cid:3)(cid:40)(cid:80)(cid:81)(cid:66)(cid:77)(cid:66)(cid:79)(cid:3)(cid:88)(cid:66)(cid:84)(cid:3)(cid:66)(cid:81)(cid:81)(cid:80)(cid:74)(cid:79)(cid:85)(cid:70)(cid:69)(cid:3)(cid:36)(cid:73)(cid:66)(cid:74)(cid:83)(cid:3)(cid:80)(cid:71)(cid:3)(cid:85)(cid:73)(cid:70)(cid:3)(cid:51)(cid:74)(cid:84)(cid:76)(cid:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)(cid:3)(cid:88)(cid:74)(cid:85)(cid:73)(cid:3)(cid:70)(cid:394)(cid:70)(cid:68)(cid:85)(cid:3)(cid:71)(cid:83)(cid:80)(cid:78)(cid:3)(cid:25)(cid:3)(cid:43)(cid:66)(cid:79)(cid:86)(cid:66)(cid:83)(cid:90)(cid:3)(cid:19)(cid:17)(cid:18)(cid:25)(cid:15)(cid:3)(cid:49)(cid:83)(cid:74)(cid:80)(cid:83)(cid:3)(cid:85)(cid:80)(cid:3)(cid:85)(cid:73)(cid:66)(cid:85)(cid:3)(cid:85)(cid:73)(cid:70)(cid:3)(cid:36)(cid:80)(cid:78)(cid:78)(cid:74)(cid:85)(cid:85)(cid:70)(cid:70)(cid:3)(cid:88)(cid:66)(cid:84)(cid:3)(cid:68)(cid:73)(cid:66)(cid:74)(cid:83)(cid:70)(cid:69)(cid:3)(cid:67)(cid:90)(cid:3)(cid:36)(cid:80)(cid:77)(cid:74)(cid:79)(cid:3)(cid:44)(cid:70)(cid:80)(cid:72)(cid:73)(cid:15)
Risk Management Report
Virgin Money Group Annual Report 2017 I 129
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 are used to:
> monitor compliance with the Group’s risk appetite and ensure
that the Group 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 Internal 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 in extreme adverse situations
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.
Risk management framework
The Group’s risk management framework is the foundation for
the delivery of effective risk management and is structured
around the following components:
I
T
S
y
s
t
e
m
s
c
i
g
e
t
a
r
t
S
g
n
i
n
n
a
l
P
D
a
t
a
M
Appetite
Risk
G o vern a n ce
structure
Risk
a
r
f
n
I
P
olic
R
is
k
G
o
y
,
C
v
P
o
e
r
r
i
n
n
n
t
e
a
c
i
x
n
p
t
c
e
l
e
s
,
k
a m e w o r
r
F
Policy
Culture
a
n
Ris
k
d c
Id
e
o
n
e
s
s
a
s
s
ntif
tr
ol
t
c
atio
n
m
e
n
R
i
s
k
A
n
a
l
y
t
i
c
s
Virgin Money
Risk
Framewor k
g y
RiskMetho d o l o
Assessme n t ,
Measureme n t ,
rin g
Monito
g
nir
o
tin
o
M
k
siR
s
IP
K
/
sIR
K
S
t
r
e
s
s
T
e
s
t
i
n
g
External
Forces*
o
d
els
Processes
People
a l
s i c
y
h
P
Risk Assurance
Reporting
Risk
* 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 risk logs and measured
using consistent methodologies. Risk measurement includes
the application of 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 and management actions is reported to the Risk
Management Committee, the Board Risk Committee and the
Board. The Chief Risk Officer is a member of the Executive and
has direct access to the Chair of the Board Risk Committee.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
130 I Virgin Money Group Annual Report 2017
Emerging risks
The Group considers the following to be key emerging risks
that have the potential to affect the performance of the Group.
Macro-economic environment
The UK economy remained resilient through 2017 and
performed better than markets had expected at the beginning
of the year. The economic outlook for 2018 has been
strengthened by global growth. Whilst there continues to be
no evidence of material changes in customer behaviour, the
potential risks around inflation, a slowing housing market and
rising unemployment remain.
The Bank of England increased interest rates from 0.25
per cent to 0.50 per cent in November 2017, and there is
the expectation that rates will continue to rise gradually
over the next three years. Low wage growth and higher
inflation may put pressure on some household budgets and
the Group remains alert to signs of customers in financial
distress. The commercial performance of the credit card
portfolio is exposed to changes in consumer behaviour and
the Group continues to monitor this closely. In addition,
changes to central bank rates can represent risk to future
financial performance.
The mortgage market saw heightened competition in the
second half of 2017 which may continue in 2018.
Political and economic uncertainty, including the impact
of the UK leaving the European Union, could impact the
wholesale funding markets. In addition, the closure of the
Bank of England’s Term Funding Scheme (TFS) has led to
cumulative refinancing risk across the industry. The Group’s
drawings from the TFS will be refinanced in the medium term.
The Group has a well-diversified wholesale funding portfolio
and further issuances of Residential Mortgage Backed
Securities, Global Medium Term Notes and Covered Bonds are
planned for 2018.
Key mitigating actions
> there is an ongoing programme of stress testing to assess
vulnerability to changing macro-economic conditions and to
inform the strategic planning process;
> the Group continues to monitor key exposures in light of
the prevailing and forecast economic outlook, and tests its
readiness to respond to future changes in the economy;
> additional oversight activities have been implemented,
alongside contingency plans, which are designed to respond
to and mitigate the impact of adverse conditions that may
emerge;
> the Group monitors its credit and liquidity positions,
operational capability and risk of disruption to payment and
other systems, to ensure it remains responsive to changes in
the macro-economic environment;
> the Group continues to review its capital plan in light of market
conditions; and
> retail funding is supplemented by a diversified wholesale
funding programme and the Group is planning its inaugural
Covered Bonds issuance in H1 2018.
Macro-structural landscape
There is a significant volume of regulatory change which will
impact the Group over the coming year. These changes may
also lead to increased competition.
Changes to capital requirements include an increase to the
countercyclical buffer, implementation of Structural Reform
and the introduction of Minimum Requirements for Own
Funds and Eligible Liabilities (MREL). Further information
regarding these changes can be found on page 183.
Open Banking and the second Payment Services Directive
(PSD2) came into force in January 2018, and General Data
Protection Regulation (GDPR) is due to follow in May. These
regulatory change programmes are aimed at protecting the
consumer and introducing greater choice. Consequently, they
are expected to have a material impact on the competitive
environment in which the Group operates, with non-bank
firms potentially entering the market.
IFRS 9 is effective from 1 January 2018 and will result in
new calculations of expected credit loss and additional
disclosure requirements.
The EU’s Markets in Financial Instruments Directive (MiFID II)
reforms are effective from January 2018. They are designed
to promote investor protection and increase market
transparency and efficiency. The Group is compliant with the
new regulations.
Risk Management Report
Virgin Money Group Annual Report 2017 I 131
Key mitigating actions
> the Board is focused on responding effectively and efficiently
to changes in the regulatory environment and overseeing the
delivery of these regulatory changes;
> 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;
> the Group actively participates in regulatory developments,
engaging with HM Treasury, the PRA, the FCA and the Bank
of England on the evolving UK regulatory framework and the
impact of EU directives; and
> new impairment models and business processes have been
developed and embedded to meet the requirements of IFRS 9.
Balance sheet risk
Credit
Low wage growth and higher inflation could cause a
reduction in household real earnings. In a rising interest rate
environment, the cost of borrowing may increase. Combined
with potential concern around consumer indebtedness, these
factors could lead to increases in defaults and impairments.
In relation to the housing market, although the potential
for the weakening of regional house prices exists, inflation,
low unemployment and record low mortgage rates support
consumer affordability while supply shortages continue to
support house prices.
Key mitigating actions
> the Group has well-established early warning indicators to
highlight signs of regional stress in the housing market;
> the Group has tightened credit card scorecard cut-offs and
implemented policy restrictions during the year to protect the
credit quality of new card lending; and
> the Group will continue to protect asset quality.
Cyber-crime and financial crime risk
The external threat of cyber-crime continues with reports
of data and security breaches increasing in frequency
and severity across all industries. Ongoing evidence of
ransomware attacks emphasises the need for firms to remain
alert to the emerging threat environment with detective and
preventative processes and systems.
The FCA regards financial crime risk as a significant threat to
realising their objective to promote and enhance the integrity
of the UK financial system and emphasises the need for firms
to ensure they have adequate and effective systems and
controls to manage this.
Key mitigating actions
> the Group has a Cyber Security Strategy to enhance its control
environment, IT resilience and information security capability,
taking account of both the external threat environment and
the changing risk profile of the business;
> the Group remains responsive to newly identified external
vulnerabilities, increasing monitoring where required to
mitigate risk to the Group; and
> the Group has in place a strategic financial crime programme
designed to enhance the Group’s systems and controls.
Supplier partnerships
The Group works with mortgage intermediaries and 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 risks in relation to
operational continuity.
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 DST (formerly IFDS). During 2017, DST
progressed a significant programme of remediation relating to
compliance with client asset regulations which will continue
into 2018. The Group continues to strengthen its oversight of
DST.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
132 I Virgin Money Group Annual Report 2017
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:26)(cid:13)(cid:18)(cid:24)(cid:26)(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: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: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: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:22)(cid:13)(cid:24)(cid:26)(cid:17)
(cid:22)(cid:18)(cid:25)
(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:19)(cid:13)(cid:19)(cid:25)(cid:20)
(cid:18)(cid:25)(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:20)
(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: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:20)(cid:20)(cid:26)
(cid:18)(cid:18)
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 36 to 39.
The Group’s emerging risks are shown on pages 130 and 131. Full analysis of the group’s risk classes is shown on
pages 134 to 188.
Risk Management Report
Virgin Money Group Annual Report 2017 I 133
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 134 to 188.
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.
Risk Values and Licence to Operate
Capital Pillar 1
Capital Pillar 2
Credit Risk
Market Risk
Operational
Risk
Infrastructure Risk
Conduct Risk and Compliance
Strategic and
Business Risk
Financial Risk
Liquidity
Capital
Retail
Wholesale
Conduct
Compliance
Mortgage
Wholesale
Credit Risk
Foreign
Exchange
Risk
Operational
Risk
Business
Resiliance
Financial
Crime
Partner
Conduct
Upstream
Regulation
Macro-
economic
Risk
Interest Rate
Risk in the
Banking Book
Retail
Funding Risk
Capital
Suÿciency
Personal
Current
Accounts
Large
Exposures
Credit Cards
Collections
& Recoveries
Technology
Risk
Information
Security &
Cyber-crime
Payment &
Market
Infrastructure
Risk
Physical
Security &
Environmental
Risk
Information
Management
Non-fnancial
Counterparty
Risk
Colleague
Competence
Regulatory
Reporting
Transformation
Risk
Retail
Concentration
Risk
O˛ -Balance
Sheet
Liquidity Risk
Capital
Eÿciency
Incentives
and Reward
Critical and
Important
Outsourcing
Legal
Risk
Secured
Wholesale
Debt
Marketable
Asset Risk
Accessible
Banking &
Financial
Inclusion
Sales
Practices &
Advice
Sourcebooks
CASS
COLL
MCOB
BCOB
BIPRU
COB
CCA
REMCODE
Reputation
Risk
Management
Pricing
Franchise
Viability
Risk
Competitive
Environment
Model Risk
Wholesale
Funding Risk
Wholesale
Credit
Concentration
Risk
Under-
estimation of
Credit Risk
Funding
Concentration
Risk
Intra-Day
Liquidity Risk
Settlement
Risk
Replenishment
Risk and
Collateral
Product
Design
Senior
Persons
Political
Risk
Postsale
Administration
Markets
Compliance
Customer
Outcomes,
Complaints &
Remediation
Anti Money
Laundering
Financial
Promotions &
Marketing
Fund
Governance
Privacy
and Data
Protection
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
134 I Virgin Money Group Annual Report 2017
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 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 138. 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.
Retail mortgages expose the Group to customer re-mortgage
risk. Re-mortgage risk is the possibility that an outstanding
exposure cannot be repaid at its contractual maturity date.
The debt management strategies employed by the Group are
detailed on page 151.
The Group’s 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
expectations and within strict underwriting criteria. The
Group has increased scorecard cut-offs for some customer
segments during 2017. The Group assesses customer
affordability rigorously and takes into account the total
unsecured debt held by a customer, and their ability to repay
existing debt as well as the additional credit requested.
Credit risk in the wholesale portfolio arises from debt
securities and derivatives. The Group’s wholesale credit risk
exposure is covered on page 153.
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 (‘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 and assess capital allocation.
Portfolios are assessed by using segmentation for
measurement and reporting purposes. Details of the
classifications used for asset quality can be found on page 137.
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. Further information on the stress testing process,
methodology and governance can be found on page 129.
Page 143 provides details of the Group’s approach to the
impairment of financial assets. Refer to note 1 to the financial
statements. From 1 January 2018, the Group will transition to
the new accounting requirements of IFRS 9.
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. Counterparty exposures are regularly reviewed
and action taken where necessary. Risk Assurance perform
independent risk-based reviews to provide an assessment of
the effectiveness of internal controls and risk management
practices. Oversight and review is also undertaken by
Internal Audit.
Risk Management Report
Virgin Money Group Annual Report 2017 I 135
Controls over AIRB rating systems
The Group has an established Independent Model Validation
team that sets common minimum standards for predictive
modelling development and operations. 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
requirements.
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 which take into account the debt customers
hold with other lenders.
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 ability to
afford that debt.
For residential mortgages, the Group’s policy is to accept only
standard applications with a loan-to-value (LTV) of less than
95%1. The Group has maximum % LTV limits which depend
upon the loan size. Residential mortgage limits are:
Loan size from
To
Maximum LTV
£1
£500,000
95% (purchase)
90% (re-mortgage)
£500,001
£1,000,000
80%
1 All originations included in the comparative period to 31 December 2016 which were
between 90% and 95% LTV were only permitted under the Help to Buy loan guarantee
scheme.
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. Residential mortgage applications in excess of
£1 million are approved by exception.
The PRA introduced more rigorous stress testing for landlords
with four or more mortgaged buy-to let properties, effective
from September 2017. The Group has taken a conservative
approach to applying these minimum standards and will
continue to review buy-to-let lending policy. The number of
buy-to-let mortgages held by a customer is capped at three
and the maximum customer exposure is capped at £2 million.
The Group’s approach to underwriting applications for
unsecured products takes into account the total unsecured
debt held by a customer and their ability to afford to
repay that debt.
The Group uses statistically based decisioning techniques
(primarily credit scoring models) for its retail portfolios.
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
responsibilities to support customers and act in their best
long-term interests. This allows customer credit facilities to
be brought back into a sustainable position. 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 designed to be
affordable and sustainable for the customer.
Customers are assisted by the Debt Management function
where tailored repayment programmes can be agreed.
Customers are actively supported and referred to free money
advice agencies in instances where they have multiple credit
facilities, including those at other lenders, which require
restructuring.
Specific tools are available to assist customers which vary
by product and the customer’s status. Further details can be
found on page 151.
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
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
136 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
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.
Collateral for secured retail and wholesale exposures
The sole collateral type for secured loans 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.
All new eligible derivative transactions with wholesale
counterparties are centrally cleared with cash posted as
collateral to further mitigate credit risk. Residual and non-
eligible trades are collateralised under a Credit Support Annex
in conjunction with the ISDA Master Agreement. 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 produces a
review of credit risk throughout the Group, including reports
on significant credit exposures, which are 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.
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 into account a range of potential indicators of
customer financial distress.
Impaired assets are reviewed on an ongoing basis. Regular
detailed analysis of impairment provisions is undertaken
recognising the impact of forbearance activities. Further
details on forbearance can be found on page 151.
Risk Management Report
Virgin Money Group Annual Report 2017 I 137
Credit quality of assets
Loans and receivables
The Group defines three classifications of credit quality (low
risk, medium risk and higher risk) for all credit exposures.
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%.
Unsecured exposures are categorised as:
> higher risk where assets are past due;
> medium risk where assets are currently not past due but are
benefitting 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 2017 and 31 December 2016.
Further asset quality categorisation is disclosed on page 140,
which reflects the impairment status of assets.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
138 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
Credit risk portfolio as at 31 December 2017
The tables below show the total credit risk exposures for the Group’s retail and wholesale portfolios.
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
27,317.2
6,367.3
3,071.3
2017 (audited)
Total gross loans and
advances to customers
> of which are low risk
26,770.5
6,322.5
3,025.2
> of which are medium risk
> of which are higher risk
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
220.0
326.7
11.7
33.1
3.5
42.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
359.4
2,579.0
0.3
1,051.8
–
–
–
–
–
–
–
–
Total
£m
36,755.9
36,118.3
235.2
402.4
359.4
2,579.0
0.3
1,051.8
–
78.8
78.8
0.1
0.1
–
–
–
–
–
–
–
Total
27,317.2
6,367.3
3,071.3
0.1
3,990.5
78.8
40,825.2
All of the Group’s wholesale exposures are categorised as low risk.
Risk Management Report
Virgin Money Group Annual Report 2017 I 139
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
2016 (audited)
Total gross loans and
advances to customers
> of which are low risk
21,565.5
5,256.8
2,451.2
> of which are medium risk
> of which are higher risk
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
1,699.5
1,018.0
172.1
39.5
2.9
32.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
635.6
786.3
0.7
858.8
–
–
–
–
–
–
–
Total
£m
32,238.0
29,273.6
1,874.5
1,089.9
635.6
786.3
0.7
858.8
–
104.2
104.2
0.1
0.1
–
–
–
–
–
–
–
Total
24,283.0
5,468.4
2,486.5
0.1
2,281.4
104.2
34,623.6
In addition, the maximum credit risk exposure of the Group
includes off-balance sheet items.
These items relate 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. No account is taken of any collateral
held, other credit enhancements or provisions for
impairment. As at 31 December 2017, off-balance sheet
items totalled £6.2 billion (2016: £5.3 billion) and were all
classified as low risk.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
140 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
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
Allowance for impairment – secured
Total loans and advances to customers – secured
Credit cards
Overdrafts
Unsecured receivables not subject to securitisation
Allowance for impairment – unsecured
Total loans and advances to customers – unsecured
Total loans and advances to customers excluding portfolio hedging adjustment
2017
£m
2016
£m
21,878.7
19,375.2
5,438.5
4,907.8
27,317.2
24,283.0
6,367.3
5,468.4
33,684.5
29,751.4
(12.1)
(10.6)
33,672.4
29,740.8
3,071.3
2,486.5
0.1
0.1
3,071.4
2,486.6
(47.3)
(39.5)
3,024.1
2,447.1
36,696.5
32,187.9
The mortgage portfolio is secured on residential and buy-to-let properties and represented 91.6% of total loans and advances
to customers at 31 December 2017. Residential lending grew by 12.5% (£3.0 billion) during the year and credit quality remained
strong with 99.0% of loans classified as neither past due nor impaired. Buy-to-let loans grew by 16.4% (£0.90 billion) to
£6.4 billion and remained low as a percentage of total secured loans at 18.9% (31 December 2016:18.4%).
The Group’s credit card portfolio represented 8.4% of total loans and advances to customers at 31 December 2017 (2016:
7.7%). Unsecured credit card lending increased by £584.8 million since 31 December 2016 to £3.1 billion and the quality of new
business remained strong. New lending was well within approved policy, lending and concentration limits. Further details on
impaired assets and impairment allowances can be found on page 143.
Credit risk categorisation
Description
Reference
Arrears
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.
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.
Page 142
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. Further information on forbearance solutions can be found
on page 151.
Past due and not impaired
Impaired assets
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.
Loans that are in arrears and where the carrying amount of the loan exceeds the expected
recoverable amount. All mortgage expired terms, fraud and operational risk loans are
categorised as impaired irrespective of the expected recoverable amount. Unsecured lending
assets are treated as impaired at one day past due.
Page 142
Page 143
Page 143
Risk Management Report
Virgin Money Group Annual Report 2017 I 141
The overall credit quality of retail assets has remained stable and is detailed in the tables below. Analysis of the movement in
impaired assets is provided on page 144.
Secured
Unsecured
Total
Residential
mortgage loans
Residential buy-to-
let mortgage loans
Credit cards
Overdrafts
2017 (audited)
£m
%
£m
%
£m
27,026.2
99.0
6,336.5
99.5
3,028.7
%
98.6
£m
0.1
%
£m
100.0
36,391.5
%
99.0
Neither past due nor
impaired
> of which in receipt
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
133.8
0.5
15.8
0.2
3.5
0.1
168.2
0.6
18.7
122.8
0.4
12.1
0.3
0.2
–
–
42.6
1.4
–
–
–
–
–
–
153.1
0.4
186.9
177.5
0.5
0.5
27,317.2
100.0
6,367.3
100.0
3,071.3
100.0
0.1
100.0
36,755.9
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 151.
Secured
Unsecured
Total
Residential
mortgage loans
Residential buy-to-
let mortgage loans
Credit cards
Overdrafts
2016 (audited)
£m
%
£m
%
£m
24,047.8
99.1
5,441.8
99.5
2,454.1
%
98.7
£m
0.1
%
£m
100.0
31,943.8
108.6
0.4
12.2
151.3
0.6
17.6
83.9
0.3
9.0
0.2
0.3
0.2
2.9
0.1
–
–
32.4
1.3
–
–
–
–
–
–
123.7
168.9
125.3
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. Forbearance disclosures have been restated to remove term extensions captured as part of the mortgage review process. Full forbearance disclosures can be
found on page 151.
The criteria the Group uses to determine that there is objective evidence of impairment are disclosed on page 140. 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.
%
99.1
0.4
0.5
0.4
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
142 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
Loans and advances which are neither past due nor impaired
Loans which were neither past due nor impaired have increased by £3.9 billion in the year to 31 December 2017 and represent
99.0% of total secured loans. The proportion of secured loans and advances classified as low risk has increased over the period
from 90.9% to 99.2%. Model development work undertaken during the year, to better align the Group’s internal rating systems
with portfolio performance, has led to improvements in credit quality measurements across the portfolio. In addition, third
party process improvements in relation to data matching have improved the accuracy of certain customers’ risk classifications,
increasing the proportion of loans classified as low risk. Additionally, new lending during the period, although having a diluting
effect, showed strong arrears performance.
The segmentation for low, medium and higher risk categories for the unsecured portfolio can be found on page 137.
The tables below show the details of the credit quality for neither past due nor impaired loans.
2017 (audited)
PD by internal ratings
Low risk
Medium risk
Higher risk
Residential mortgage loans
Residential buy-to-let
mortgage loans
£m
%
£m
%
Total
£m
26,770.5
220.0
35.7
99.1
0.8
0.1
6,322.5
99.8
33,093.0
11.7
2.3
0.2
–
231.7
38.0
%
99.2
0.7
0.1
Total neither past due nor impaired
27,026.2
100.0
6,336.5
100.0
33,362.7
100.0
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
Risk Management Report
Virgin Money Group Annual Report 2017 I 143
Loans and advances which are past due and not impaired
The balance of mortgages which were past due and not impaired totalled £186.9 million at 31 December 2017. These assets
represented 0.6% of secured loans at 31 December 2017 (31 December 2016: 0.6%). All unsecured assets which are past due are
treated as impaired. All loans and advances which are past due and not impaired are classified as higher risk. The tables below
show loans and advances which are past due and not impaired by overdue term.
2017 (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
70.1
74.3
16.5
7.3
%
41.7
44.2
9.8
4.3
£m
6.4
9.9
2.1
0.3
%
34.3
52.9
11.2
1.6
Total
£m
76.5
84.2
18.6
7.6
%
40.8
45.1
10.0
4.1
Total past due and not impaired
168.2
100.0
18.7
100.0
186.9
100.0
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
Impaired assets
Total impaired assets as a proportion of total assets has remained stable at 0.4% (2016: 0.4%). The Group’s definition of
impaired assets includes accounts that are in arrears and accounts that may not be in arrears but are showing non-delinquency
impairment indicators such as expired contractual terms or fraud. Balances with these indicators are categorised as impaired
irrespective of arrears status or expected recoverable amount.
As at 31 December 2017, the balance of impaired assets in arrears was £89.0 million1 (2016: £74.6 million)1. The remainder of the
impaired assets balance relates to:
> interest only expired term loans which have an average LTV of 25.8% and do not attract significant impairment provisions; and
> fraud balances, which have an average LTV of 57.2%. These balances account for less than 0.1% of the portfolio, are managed at
account level, and provisioning reflects the estimated credit loss associated with the individual account.
The balances not in arrears but showing non-delinquency impairment indicators, by their nature, typically give rise to lower
levels of loss and, as a result, attract lower levels of impairment provision.
Unsecured impaired assets increased by 31.5% to £42.6 million, representing 1.4% of total unsecured loans. This is driven both
by an increase in arrears balances, consistent with book growth, and by the expected seasoning of older assets on the portfolio.
The performance of more recent cohorts is in line with or better than vintage cohorts at a similar stage of maturity. Arrears
emergence on all cohorts remains in line with performance expectations.
1 Includes assets where the borrower’s property was in possession.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
144 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
The tables below show the movement of impaired loan balances during 2017 and 2016.
Secured
Unsecured
Wholesale
Credit cards
£m
Overdrafts
£m
Treasury
assets
£m
Derivative
exposures
£m
Residential
mortgage
loans
£m
83.9
229.9
Residential
buy-to-let
mortgage
loans
£m
9.0
26.4
32.4
95.6
27.4
85.0
(141.9)
(20.4)
(34.9)
(0.6)
(48.5)
122.8
(0.1)
(2.8)
12.1
(43.4)
(7.1)
42.6
Residential
mortgage
loans
£m
77.6
132.3
Residential
buy-to-let
mortgage
loans
£m
7.0
20.4
(112.9)
(17.7)
(38.3)
(0.6)
(12.5)
83.9
(0.2)
(0.5)
9.0
(32.3)
(9.4)
32.4
2017 (audited)
As at 1 January 2017
Classified as impaired during
the year
Transferred from impaired to
unimpaired
Amounts written off
Repayments
As at 31 December 2017
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£m
125.3
351.9
(197.2)
(44.1)
(58.4)
177.5
Total
£m
112.0
237.7
(168.9)
(33.1)
(22.4)
125.3
Secured
Unsecured
Wholesale
Credit cards
£m
Overdrafts
£m
Treasury
assets
£m
Derivative
exposures
£m
Risk Management Report
Virgin Money Group Annual Report 2017 I 145
An analysis of impaired assets by overdue term and assets where the borrower’s property was in possession is provided in the
tables below. All impaired loans and advances are classified as higher risk.
Residential mortgage
loans
Residential buy-to-let
mortgage loans
Credit cards
Overdrafts
Total
£m
80.3
17.6
20.4
2.5
1.5
0.5
%
65.5
14.3
16.6
2.0
1.2
0.4
£m
7.9
0.8
2.7
0.3
0.3
0.1
%
65.3
6.6
22.3
£m
0.3
15.5
13.4
%
0.7
36.3
31.5
2.5
13.1
30.8
2.5
0.8
0.3
–
0.7
–
122.8
100.0
12.1
100.0
42.6
100.0
£m
%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£m
88.5
33.9
36.5
15.9
2.1
0.6
%
49.8
19.1
20.6
9.0
1.2
0.3
177.5
100.0
Residential mortgage
loans
Residential buy-to-let
mortgage loans
Credit cards
Overdrafts
Total
£m
45.7
10.0
19.9
4.1
3.9
0.3
%
54.5
11.9
23.7
4.9
4.6
0.4
83.9
100.0
£m
4.9
1.3
2.2
0.3
0.2
0.1
9.0
%
54.5
14.5
24.4
3.3
2.2
1.1
£m
0.1
13.1
9.3
9.6
0.3
–
%
0.3
40.5
28.7
29.6
0.9
–
100.0
32.4
100.0
£m
%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£m
50.7
24.4
31.4
%
40.4
19.5
25.1
14.0
11.2
4.4
0.4
3.5
0.3
125.3
100.0
2017 (audited)
Up to date
Up to one month
One to three
months
Three to six
months
Over six months
Possession
Total impaired
assets
2016 (audited)
Up to date
Up to one month
One to three
months
Three to six
months
Over six months
Possession
Total impaired
assets
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
146 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
Impairment provisions
Secured impairment provisions have increased by £1.5 million, in line with book growth, representing 0.04% as a proportion
of gross balances as at 31 December 2017 and 31 December 2016. Secured impairment coverage has fallen from 11.4% at
31 December 2016, to 9.0% as at 31 December 2017 due to the impact of expired term and fraud loan balances.
Unsecured impairment provisions increased by £7.8 million during the period and have reduced as a percentage of gross
balances from 1.59% at 31 December 2016 to 1.54% at 31 December 2017. Impairment provisions as a proportion of impaired
balances decreased, from 121.9% to 111.0% during the year. The reduction in impairment provision coverage is a result of
improved debt recovery rates, which reduces the estimated credit loss attributable to these assets.
The tables below show impaired assets and impairment provisions.
2017 (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
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
Impaired
balances as
a % of gross
balances
%
Impaired
balances
£m
Impairment
provisions
£m
Impairment
provisions
as a % of
impaired
balances
%
122.8
12.1
134.9
42.6
–
42.6
–
–
–
0.4
0.2
0.4
1.4
–
1.4
–
–
–
10.8
1.3
12.1
47.2
0.1
47.3
–
–
–
8.8
10.7
9.0
110.8
–
111.0
–
–
–
177.5
0.4
59.4
33.5
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
27,317.2
6,367.3
33,684.5
3,071.3
0.1
3,071.4
3,990.5
78.8
4,069.3
40,825.2
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
Risk Management Report
Virgin Money Group Annual Report 2017 I 147
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
As at 1 January 2016
Advances written off
Gross charge to the income
statements
As at 1 January 2017
Advances written off
Gross charge to the income
statement
7.7
(0.6)
2.3
9.4
(0.6)
2.0
1.0
(0.2)
0.4
1.2
(0.1)
0.2
31.1
(26.6)
34.9
39.4
(34.2)
42.0
As at 31 December 2017
10.8
1.3
47.2
0.1
–
–
0.1
–
–
0.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£m
39.9
(27.4)
37.6
50.1
(34.9)
44.2
59.4
Of the total allowance in respect of loans and advances to customers, £57.5 million (2016: £49.4 million) was assessed on a
collective basis.
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 136. 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 149.
The Group holds collateral in respect of loans and advances to customers as set out on page 136. The Group does not hold
collateral against debt securities, comprising asset-backed securities and corporate and other debt securities, which are
classified as loans and receivables. The tables overleaf show the distribution of retail secured loans by LTV banding.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
148 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
Residential mortgage loans
Residential buy-to-let
mortgage loans
2017 (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
10,249.6
5,362.9
4,508.4
4,022.9
2,725.7
444.6
3.1
27,317.2
%
37.6
19.6
16.5
14.7
10.0
1.6
–
100.0
56.1%
70.0%
£m
2,293.5
1,851.5
1,441.4
778.1
1.9
0.6
0.3
6,367.3
%
36.1
29.1
22.6
12.2
–
–
–
100.0
54.1%
59.7%
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
12,543.1
7,214.4
5,949.8
4,801.0
2,727.6
445.2
3.4
33,684.5
Total
£m
11,399.4
6,412.9
5,190.7
3,959.2
2,326.7
447.3
15.2
29,751.4
%
37.2
21.4
17.7
14.3
8.1
1.3
–
100.0
55.8%
68.1%
%
38.3
21.6
17.4
13.3
7.8
1.5
0.1
100.0
55.4%
68.0%
The average indexed LTV of the overall mortgage portfolio increased by 0.4 percentage points as at 31 December 2017. This is well
within the current Group portfolio risk appetite limit of 70%. The average LTV for new business remained broadly flat at 68.1% as
at 31 December 2017.
Risk Management Report
Virgin Money Group Annual Report 2017 I 149
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.
20171 (audited)
Neither past due nor impaired
> of which in receipt of forbearance
Past due and not impaired
Impaired
> of which in possession
Total
Collateral value of
residential mortgage loans
Collateral value of
residential buy-to-let
mortgage loans
Total collateral value
£m
27,025.9
133.8
168.2
122.8
0.5
27,316.9
%
100.0
100.0
100.0
100.0
100.0
100.0
£m
6,336.5
15.8
18.7
12.1
0.1
6,367.3
%
100.0
100.0
100.0
100.0
100.0
100.0
£m
33,362.4
149.6
186.9
134.9
0.6
33,684.2
%
100.0
100.0
100.0
100.0
100.0
100.0
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.
20161 (audited)
Neither past due nor impaired
> of which in receipt of forbearance2
Past due and not impaired
Impaired
> of which in possession
Total
Collateral value of
residential mortgage loans
Collateral value of
residential buy-to-let
mortgage loans
Total collateral value
£m
24,046.6
108.6
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
12.2
17.6
9.0
0.1
5,468.3
%
100.0
100.0
100.0
100.0
100.0
100.0
£m
29,488.3
120.8
168.9
92.7
0.4
29,749.9
%
100.0
100.0
100.0
99.8
100.0
100.0
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.
2 Forbearance disclosures have been restated to exclude term extensions captured as part of the mortgage review process. Further details can be found on page 151.
As at 31 December 2017, there was £0.3 million (2016: £1.4 million) excess between the balance of residential mortgage loans
with a LTV of greater than 100% and the collateral held against them. All these mortgage balances were classified as neither
past due nor impaired (2016: £1.2 million). The recoverable amount used for impairment provision purposes reflects this level
of collateral.
Repossessions
The Group works with customers who have difficulty paying their mortgages, and will repossess a property only when all other
possibilities have been exhausted. Where properties have been repossessed, the Group will obtain the best price, 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 held ten repossessed properties as at 31 December 2017 compared to six as at 31 December 2016. The total number of
properties taken into possession during the year reduced to 12, from 36 in 2016.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
150 I Virgin Money Group Annual Report 2017
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 tables below provide details of balances which are on an interest only basis, analysed by maturity. This includes the interest
only balances for loans that provide the customer with the flexibility to choose to pay a proportion of the loan on a capital
repayment basis and a proportion on interest only (part-and-part loans).
The Group’s interest only exposure for customers on both interest only and part-and-part for the year to 31 December 2017
reduced to 27.6% of total secured balances, from 29.9% at 31 December 2016.
2017 (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 (%)
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 (%)
Residential
mortgage
loans
£m
Residential
buy-to-let
mortgage
loans
£m
46.0
156.2
432.0
1,047.5
2,296.9
3,978.6
11.1
14.6
40.6
3.5
16.3
112.4
677.4
4,499.4
5,309.0
61.4
83.4
55.2
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
Total
£m
49.5
172.5
544.4
1,724.9
6,796.3
9,287.6
72.5
27.6
49.5
Total
£m
32.0
183.9
483.0
1,604.7
6,578.6
8,882.2
56.4
29.9
49.6
Risk Management Report
Virgin Money Group Annual Report 2017 I 151
The Group contacts customers who have an interest only
mortgage scheduled to mature within the next ten years,
to confirm that 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, including a
mortgage review, to ensure the customers’ individual needs
continue to be met.
Interest only balances due to mature in the next two years
represent 1.9% of total interest only balances, totalling
£172.5 million at 31 December 2017. The increase in
interest only expired term loans of £17.5 million is in line
with expectations. Strategies exist to help customers
who may not be able to repay the full amount of principal
balance at maturity.
All expired term balances are categorised as impaired loans,
regardless of estimated credit loss. Less than 0.2% 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 £87,573 with an
average LTV of 25.8%.
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 balances has remained low during 2017,
representing 2.2% 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 15.0% to 12.3% during 2017.
The Group regularly reviews the effectiveness of its interest
only policy and contact strategies.
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
of capital repayment existing at the commencement of the
arrangement remain outstanding;
> 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.
Loans which are subject to forbearance are grouped with
other assets with similar risk characteristics and assessed
collectively for impairment. Loans are not considered as
impaired loans unless they meet the Group’s definition of an
impaired asset.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
152 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
The value of forbearance stock totalled £176.4 million at 31 December 2017 (2016: £141.3 million). £161.2 million
(31 December 2016: £128.6 million) of retail secured loans and advances were subject to forbearance, representing 0.48% of
total secured loans and advances (2016: 0.43%). This increase in forbearance is consistent with portfolio growth and reflects the
Group’s focus on proactive debt management due to the low level of arrears emergence.
During 2017, the Group amended its secured forbearance capture to exclude routine term extensions processed as part of the
mortgage review process, where there is no forbearance. Such cases had been captured prudently as forborne in prior reporting
periods. The 2016 comparative has been restated to reflect this change.
The tables below show analysis by forbearance category.
Neither past due
nor impaired
Past due not impaired
Impaired
Total
2017 (audited)
Secured
Payment arrangement
Transfer to interest only
Term extension
Payment holiday
£m
%
£m
%
£m
0.6
29.2
59.0
60.8
0.5
19.5
39.4
40.6
1.4
1.4
3.2
2.9
8.9
15.7
15.7
36.0
32.6
100.0
–
0.3
2.1
0.3
2.7
%
–
11.1
77.8
11.1
£m
%
2.0
30.9
64.3
64.0
1.2
19.2
39.9
39.7
100.0
161.2
100.0
Total secured forbearance
149.6
100.0
Unsecured
Accounts where the customer
has been approved on a
repayment plan
3.5
100.0
–
–
11.7
100.0
15.2
100.0
Total forbearance
153.1
100.0
8.9
100.0
14.4
100.0
176.4
100.0
2016 (audited)
Secured
Payment arrangement
Transfer to interest only
Term extension
Payment holiday
Neither past due nor
impaired
£m
%
0.1
21.8
44.5
54.4
0.1
18.0
36.9
45.0
Total secured forbearance
120.8
100.0
Past due not impaired
Impaired
Total
£m
0.6
1.8
1.9
1.2
5.5
%
11.0
32.7
34.5
21.8
100.0
£m
0.2
0.6
0.8
0.7
2.3
%
£m
%
8.7
26.1
34.8
30.4
0.9
24.2
47.2
56.3
0.7
18.8
36.8
43.8
100.0
128.6
100.0
Unsecured
Accounts where the customer
has been approved on a
repayment plan
2.9
100.0
–
–
9.8
100.0
12.7
100.0
Total forbearance
123.7
100.0
5.5
100.0
12.1
100.0
141.3
100.0
Risk Management Report
Virgin Money Group Annual Report 2017 I 153
Wholesale credit risk
Wholesale credit risk exposures increased by £1.7 billion during the year to £4.1 billion at 31 December 2017. This partly reflects
the replacement of off-balance sheet liquidity from the Bank of England’s Funding for Lending Scheme (FLS) with on-balance
sheet liquidity. The table below shows the wholesale credit risk exposures of the Group. Reserves placed with the Bank of
England are included as wholesale credit exposures within the table.
(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
2017
£m
359.4
2,579.0
0.3
1,048.7
78.8
2016
£m
635.6
786.3
0.7
850.9
104.2
4,066.2
2,377.7
The Group has increased its holdings of high-quality available-for-sale wholesale assets during the year including gilts,
supranational, covered bonds and RMBS investments. Wholesale credit risk exposures are assessed by reference to credit rating.
All of the Group’s wholesale exposures were investment grade and classified as low risk at 31 December 2017. Full disclosure of
the Group’s portfolio of liquid assets can be found on page 176.
At 31 December 2017, the single largest exposure to any single counterparty, which is not a sovereign or a supranational, was
£108.4 million (2016: £115.9 million). The table below shows the credit ratings of loans and advances to banks excluding the
Bank of England, which has a credit rating of AA (2016: AA).
(audited)
AA+
AA-
A+
A
A-
BBB+
Total
2017
£m
–
100.3
145.5
79.4
14.8
19.4
359.4
2016
£m
56.8
115.9
208.4
187.4
35.2
31.9
635.6
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
154 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
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
Supranational
Residential mortgage-backed securities
Covered bonds
Debt securities issued by banks
Total
2017
2016
Debt
securities
classified as
available-
for-sale
financial
assets
£m
Debt
securities
classified as
loans and
receivables
£m
Debt
securities
classified as
available-
for-sale
financial
assets
£m
Debt
securities
classified as
loans and
receivables
£m
–
–
0.3
–
–
356.7
234.1
61.4
396.5
–
0.3
1,048.7
–
–
0.7
–
–
0.7
317.3
129.3
52.2
327.1
25.0
850.9
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
2017
£m
692.0
–
356.7
–
–
0.3
2016
£m
508.6
–
317.3
25.0
–
0.7
1,049.0
851.6
The credit rating of the debt securities remains high, with 100.0% rated AA or higher at 31 December 2017 (2016: 97.0%).
Risk Management Report
Virgin Money Group Annual Report 2017 I 155
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 notes 13 and 33 to the financial statements. For derivatives not eligible for central clearing,
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 £78.8 million (2016: £104.2 million),
collateral of £84.4 million (2016: £86.4 million) was held.
The Group measures exposure in derivatives using the gross positive fair value of contracts outstanding with a counterparty,
increased by potential future rises in fair value and reduced by gross negative fair value of contracts and collateral received.
While exposures are managed on a net basis, they are represented on the balance sheet on a gross basis unless the IAS 32
offsetting rules are met. Derivative contracts which do not meet the IAS 32 offsetting rules, and have positive fair values, are
disclosed as assets in the balance sheet. Those with negative fair values are disclosed as liabilities.
Cash collateral received is classified as deposits from banks, and cash collateral posted is classified as loans and advances to
banks. The notes to the financial statements provide further information on collateral.
The table below details derivative exposures, excluding those that are centrally cleared.
(audited)
Gross positive fair value of derivative contracts
Netting with gross negative fair value of derivative contracts1
Potential future incremental exposure
Collateral received (deposits from banks)
Net 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 derivative liabilities, excluding those that are centrally cleared.
(audited)
Gross negative fair value of derivative contracts
Netting with gross positive fair value of derivative contracts1
Collateral pledged (loans and advances to banks)
Net derivative liability
2017
£m
78.8
(11.5)
47.3
(84.4)
30.2
2017
£m
(84.3)
11.5
74.6
1.8
2016
£m
104.2
(25.4)
61.2
(86.4)
53.6
2016
£m
(222.3)
25.4
168.1
(28.8)
1 The use of netting allows positions on all bilateral transactions with any given counterparty to be offset.
The only netting agreements in place are in relation to derivative financial instruments and repurchase transactions. In respect of
repurchase transactions, only the difference between the asset pledged and deposit received is classed as an exposure given the
balance sheet maintains the exposure to the underlying obligor.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
156 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
The table below provides credit quality analysis of the gross derivative exposures, excluding those that are centrally cleared, by
credit rating of the counterparties.
(audited)
AA-
A+
A
A-
BBB+
NR
Total
2017
2016
£m
1.7
6.5
67.0
0.3
0.2
3.1
%
2.2
8.2
85.0
0.4
0.3
3.9
£m
5.6
0.6
84.5
12.7
0.8
–
%
5.4
0.6
81.1
12.2
0.7
–
78.8
100.0
104.2
100.0
Risk Management Report
Virgin Money Group Annual Report 2017 I 157
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 as a natural consequence of carrying out and
supporting core business activities. The Group does not trade
or make markets and transacts foreign exchange for limited
operational purposes only. 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
interest rate risk in the banking book (IRRBB), in terms of
both potential changes to economic value, and changes to
expected net interest income or earnings. Risk appetite limits
and metrics are set with reference to stress scenarios using
measures described in this section.
Exposures
The Group’s banking activities expose it to the risk of adverse
movements in interest rates and exchange rates.
Term mismatch risk in the Group’s portfolio arises from the
different re-pricing characteristics of the Group’s assets,
liabilities and off-balance sheet exposures. Term mismatch
risk arises predominantly from the mismatch between assets
and liabilities either maturing or the amount resetting in
any given time period, and 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 Group is exposed to 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 unfavourable to those
that were expected. Variations in business volume outturn
to forecast arise from changes in customer behaviour and
relative product competitiveness.
Product optionality risk arises when customer balances
reduce more quickly or slowly than anticipated due to
economic conditions or customers’ responses to changes
in interest rates or other economic conditions differing
from expectations.
Swap spread risk arises through the hedging of the repricing
risk of fixed rate securities (e.g. gilt securities) with derivatives.
The yields in securities and swap markets for a given tenor
may not change by the same amount as each other. Such
differences cause spread risk to arise.
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. The Group
has minimal exposure to foreign currency risk.
Measurement
The Group quantifies the impact to economic value and
earnings arising from a shift to interest rates using stress
scenarios. These scenarios examine the interest rate re-
pricing gaps, asset and liability interest rate bases and
product optionality.
The Group maintains IRRBB management practices in line with
applicable 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 change 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), swap
spread risk and behavioural volume stresses (pipeline and
optionality risk). Both EaR and CaR are controlled by a defined
risk appetite limit and supporting metrics.
CaR measurements are based on a 2% parallel stress over the
balance sheet horizon, for term mismatch. EaR measurements
are based on a 1% parallel stress over a 12 month period. The
stress scenarios capture the risk of negative interest rates.
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. In the case of basis risk, the Group
uses an internal stress test outcome for CaR and EaR.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
158 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
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.
Mitigation
The Group uses derivative financial instruments to bring its
residual net exposure within risk appetite. The residual net
exposure takes account of natural offsets between assets
and liabilities.
As defined within the scope of the Group’s IRRBB Policy, the
Interest Rate Risk Transfer Pricing framework is used for
interest rate risk arising from commercial product lines that
can be hedged. 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.
Where possible, the Group mitigates basis risk by creating
natural offsets. When required, the Group uses basis
derivatives to maintain the residual exposure within
risk appetite.
The Group is exposed to fair value interest rate risk on fixed
rate customer loans and deposits and to cash flow interest
rate risk on variable rate loans and deposits. Accounting
methodology for derivative financial instruments and hedge
accounting is captured within the notes to the consolidated
financial statements.
Monitoring
Interest rate risk is monitored centrally on a day-to-day
basis using the measures described above and other key
risk indicators.
The Asset and Liability Committee and the Risk Management
Committee regularly review market risk exposure as part
of the wider risk management framework. The Asset and
Liability Committee reviews and approves strategies to
manage IRRBB.
Capital at Risk
CaR as at 31 December 2017 increased to £25.5 million from
£14.1 million at 31 December 2016 in a negative rate shock
scenario. In a positive rate shock scenario, it increased to
£52.2 million at 31 December 2017 from £34.2 million as at
31 December 2016. In both rate shock scenarios this was due
to the increase in the balance sheet, and the consequential
increase in interest rate mismatch risk, and optionality
risk arising from the increase in potential mortgage early
repayments and savings redemptions.
The table below shows CaR measurements, based on a 2% parallel stress over the balance sheet horizon.
Interest rate mismatch risk
Basis Risk
Pipeline risk
Optionality risk
Total interest rate risk – Capital at Risk
2017
2016
Positive
2% rate
shock
£m
Negative
2% rate
shock
£m
(6.3)
(1.4)
(4.7)
(39.8)
(52.2)
0.4
(1.4)
(5.5)
(19.0)
(25.5)
Positive
2% rate
shock
£m
1.6
–
(5.7)
(30.1)
(34.2)
Negative
2% rate
shock
£m
0.7
–
(7.1)
(7.7)
(14.1)
Risk Management Report
Virgin Money Group Annual Report 2017 I 159
Earnings at Risk
EaR has decreased over the year by £36.1 million in a positive rate shock scenario and by £11.9 million in a negative rate shock
scenario. These improvements are due to the Group’s savings pricing strategy and changes in customer terms and conditions,
which has benefited interest rate mismatch risk. Additionally, the further utilisation of basis swapped positions has reduced the
level of basis risk arising in these rate shock scenarios.
The table below shows that, due to reductions in the structural mismatches of assets and liabilities on the balance sheet across
the year, the Group’s net interest income at 31 December 2017 is significantly less likely to suffer from a large, sudden shock to
interest rates than it was at 31 December 2016.
Interest rate mismatch risk
Basis risk
Pipeline risk
Optionality risk
Total interest rate risk – Earnings at Risk
2017
2016
Positive
1% rate
shock
£m
Negative
1% rate
shock
£m
21.3
(0.1)
(2.5)
(6.3)
12.4
2.2
(9.0)
(1.3)
(1.6)
(9.7)
Positive
1% rate
shock
£m
(1.7)
(10.4)
(3.0)
(8.6)
(23.7)
Negative
1% rate
shock
£m
(1.4)
(17.6)
(2.3)
(0.3)
(21.6)
Foreign currency assets and liabilities
Exposures to adverse changes in currency 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
Intangible assets
Other assets
Total assets
Liabilities
Debt securities in issue
Other liabilities
Total liabilities
2017
2016
US$ in £m
€ in £m
US$ in £m
€ in £m
0.7
1.4
0.1
–
2.2
377.0
0.7
377.7
0.9
54.0
0.1
0.6
55.6
387.0
0.5
387.5
0.7
1.5
0.1
–
2.3
175.7
0.4
176.1
0.9
–
0.1
0.4
1.4
412.4
0.5
412.9
Notional value of derivatives affecting currency exposures
(375.4)
(332.9)
(174.1)
(412.4)
Net position
(0.1)
1.0
0.3
0.9
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
160 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
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.
Within
3 months
£m
2,521.3
20171 (audited)
Assets
Cash and balances at central
banks
Loans and receivables:
Loans and advances to banks
352.0
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
–
–
–
–
–
–
–
–
57.7
2,579.0
7.4
359.4
Loans and advances to
customers
Debt securities
Available-for-sale financial assets
Other assets
Total assets
Liabilities
7,281.3
2,137.5
4,843.8
21,650.2
532.8
294.6
36,740.2
0.3
406.8
(32.5)
–
13.1
–
–
5.0
–
–
–
122.8
444.8
–
–
10,529.2
2,150.6
4,848.8
21,773.0
977.6
–
59.3
409.6
828.6
0.3
1,051.8
377.1
41,107.8
Deposits from banks
5,379.0
–
–
–
Customer deposits
17,022.0
2,256.0
5,275.7
6,245.5
Debt securities in issue
2,439.3
Other liabilities
Equity
–
–
–
–
–
–
–
–
300.0
–
390.0
–
0.6
–
–
–
–
8.6
5,379.0
30,808.4
(2.4)
2,736.9
358.6
358.6
1,434.9
1,824.9
Total liabilities and equity
24,840.3
2,256.0
5,275.7
6,935.5
0.6
1,799.7
41,107.8
Notional values of derivatives
affecting interest rate sensitivity
12,799.6
676.0
674.8
(12,749.6)
(1,343.6)
(57.2)
Total interest rate sensitivity gap
(1,511.5)
Cumulative interest rate
sensitivity gap
(1,511.5)
570.6
(940.9)
247.9
(693.0)
2,087.9
1,394.9
(366.6)
(1,028.3)
1,028.3
–
–
–
–
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.
Risk Management Report
Virgin Money Group Annual Report 2017 I 161
Within
3 months
£m
732.0
20161 (audited)
Assets
Cash and balances at central
banks
Loans and receivables:
Loans and advances to banks
630.1
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
–
–
–
–
–
–
54.3
786.3
5.5
635.6
8,074.2
1,871.1
3,425.2
18,365.1
298.5
333.0
32,367.1
Loans and advances to
customers
Debt securities
Available-for-sale financial assets
Other assets
Total assets
Liabilities
0.7
212.9
54.0
–
–
–
–
–
–
–
154.5
–
–
426.0
–
9,703.9
1,871.1
3,425.2
18,519.6
724.5
Deposits from banks
2,132.5
–
–
–
Customer deposits
18,027.5
1,157.1
4,081.4
4,810.2
Debt securities in issue
2,299.9
Other liabilities
Equity
–
–
–
–
–
–
–
–
300.0
–
390.0
Total liabilities and equity
22,459.9
1,157.1
4,081.4
5,500.2
–
–
–
–
–
–
–
65.4
353.1
811.3
–
30.1
0.1
546.3
0.7
858.8
407.1
35,055.6
2,132.5
28,106.3
2,600.0
546.3
1,280.5
1,670.5
1,857.0
35,055.6
Notional values of derivatives
affecting interest rate sensitivity
10,864.0
(548.2)
1,388.0
(10,395.4)
(1,240.7)
(67.7)
Total interest rate sensitivity gap
(1,892.0)
165.8
Cumulative interest rate
sensitivity gap
(1,892.0)
(1,726.2)
731.8
(994.4)
2,624.0
1,629.6
(516.2)
(1,113.4)
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.
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. Expected future business that the Group hedges ahead of entering into a
customer contract is not taken into account. The Group manages interest rate risk on this basis. Therefore, the gap profile shown
above does not directly translate to the CaR and EaR term mismatch quantification.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
162 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
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.
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:
Exposures
The principal operational risks to the Group are:
> investment in IT infrastructure to ensure continued
availability, security and resilience;
> IT systems and resilience risk arising from failure to develop,
> investment in information security capability to protect
deliver and maintain effective IT solutions;
customers and the Group;
> information security risk arising from information leakage,
> investment in the protection of customer information,
loss or theft;
> external fraud arising from an act of deception or omission;
> cyber-crime 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 are used to monitor operational
risk, 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 cause
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.
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 considered 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.
Risk Management Report
Virgin Money Group Annual Report 2017 I 163
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 effective 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
The Group manages 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:
> promoting a culture throughout the business that places the
customer at the heart of decision-making, business planning
and culture;
> policies, processes and standards which provide a framework
for the business to operate in accordance with the relevant
laws and regulations;
> 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 mechanisms have been
established to learn from any 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.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
164 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
Concentration risk
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. Concentration
risk is the most significant component of financial risk and
therefore has been disclosed in detail.
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, restricts exposure to higher risk sectors
and segments and manages overall portfolio concentrations.
Risk appetite
The Group has limited appetite for concentrated exposures by
country, region, loan size and type.
Monitoring
Monthly reporting on concentration risk exposures is
made to the Board.
Exposures
The principal source of concentration risk is from loans and
advances to customers in relation to:
> geography (see page 165);
> loan size (see page 166); and
> loan type (see page 168).
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.
Secured credit
The Group’s large exposures are reported in accordance with
regulatory reporting requirements. Since the end of 2013
London and the South East have experienced 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 (59%)
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.
Risk Management Report
Virgin Money Group Annual Report 2017 I 165
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
2017
2017
2016
£m
862.4
1,784.3
1,118.2
1,881.5
2,512.2
1,785.5
2,676.6
8,447.1
9,297.2
753.7
2,030.3
534.0
1.5
%
2.6
5.3
3.3
5.6
7.5
5.3
7.9
25.1
27.6
2.2
6.0
1.6
–
£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
–
33,684.5
100.0
29,751.4
100.0
2016
˜ Greater London (28%)
˜ South East (25%)
˜ Scotland (6%)
˜ South West (8%)
˜ Other Regions (33%)
˜ Greater London (28%)
˜ South East (25%)
˜ Scotland (6%)
˜ South West (8%)
˜ Other Regions (33%)
The geographical split of the portfolio remains broadly unchanged.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
166 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
The table below shows retail secured credit concentrations by loan size.
(audited)
0-£100k
£100k-£250k
£250k-£500k
£500k-£1m
£1m-£2.5m
>£2.5m
Total
2017
£m
5,324.4
16,023.6
9,569.0
2,542.0
215.5
10.0
%
15.9
47.6
28.4
7.5
0.6
–
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
–
33,684.5
100.0
29,751.4
100.0
As at 31 December 2017, 0.7% (2016: 0.7%) of mortgage balances consisted of loans in excess of £1 million.
2017
2016
˜ 0 – £100k (16%)
˜ £100k – £250k (47%)
˜ £250k – £500k (28%)
˜ £500k – £1m (8%)
˜ £1m – £2.5m (1%)
˜ >£2.5m (0%)
˜ 0 – £100k (17%)
˜ £100k – £250k (47%)
˜ £250k – £500k (26%)
˜ £500k – £1m (9%)
˜ £1m – £2.5m (1%)
˜ >£2.5m (0%)
The value of loans with balances of up to £250,000 increased by £2,188.6 million during 2017. This represents 56% of the total
secured loans portfolio growth of £3,933.1 million.
Risk Management Report
Virgin Money Group Annual Report 2017 I 167
Residential
mortgage
loans
%
Residential
buy-to-let
mortgage
loans
%
42.1
58.9
59.1
50.9
43.1
34.0
56.1
56.1
54.9
50.3
43.7
38.7
–
54.1
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
Total
%
47.5
58.1
58.2
50.2
42.3
34.0
55.8
Total
%
48.4
58.2
57.1
50.3
42.2
35.8
55.4
The tables below show retail secured credit average LTV by loan size.
2017 (audited)
0-£100k
£100k-£250k
£250k-£500k
£500k-£1m
£1m-£2.5m
>£2.5m
Total
2016 (audited)
0-£100k
£100k-£250k
£250k-£500k
£500k-£1m
£1m-£2.5m
>£2.5m
Total
The Group’s policy 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, primarily due to seasoning of the portfolio and tightened underwriting
practices. The average indexed LTV across the loan size bands has reduced in the majority of bands reflecting positive house
price index movements throughout 2017.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
168 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
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.
Residential mortgage loans
Residential buy-to-let
mortgage loans
2017 (audited)
Capital repayment
Part-and-part
Interest only
Total
2016 (audited)
Capital repayment
Part-and-part
Interest only
Total
£m
22,963.2
1,007.1
3,346.9
%
84.0
3.7
12.3
27,317.2
100.0
£m
1,040.0
46.8
5,280.5
6,367.3
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
100.0
33,684.5
100.0
Total
£m
24,003.2
1,053.9
8,627.4
%
71.3
3.1
25.6
Total
£m
20,434.7
1,152.9
8,163.8
%
68.7
3.9
27.4
%
16.4
0.7
82.9
%
16.7
0.7
82.6
100.0
29,751.4
100.0
Risk Management Report
Virgin Money Group Annual Report 2017 I 169
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 Bank of England and the UK Sovereign.
The table below shows wholesale credit risk exposures by country.
(audited)
Australia
Canada
France
UK
Netherlands
USA
Supranational
Total
2017
£m
8.5
170.3
83.1
2016
£m
19.3
169.0
105.3
3,532.8
1,747.5
–
37.4
234.1
102.7
104.6
129.3
4,066.2
2,377.7
The Group’s wholesale credit risk exposure outside the UK remains well-diversified. UK exposures have increased by
£1,785.3 million during the year due to further drawings from the TFS.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
170 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
Funding and liquidity risk
Definition
Funding risk is defined as the inability to raise and maintain
sufficient cost-effective 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, and has a clear framework
for balance sheet structure in order to control funding,
refinancing and liquidity risk. The Group operates an
investment strategy for wholesale investments which
prioritises liquidity and ensures that the Group holds a liquid
asset buffer in excess of both regulatory and internally
assessed requirements.
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 are 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 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
Severe unexpected withdrawal of retail
deposits by customers 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
contractual obligations, are honoured as the
Group preserves ongoing franchise viability.
Liquid assets
The liquidity portfolio value is reduced,
reflecting stressed market conditions.
Risk Management Report
Virgin Money Group Annual Report 2017 I 171
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.
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 2017
During 2017, the Group maintained a strong funding and
liquidity position in excess of risk appetite and the short-
term liquidity stress metric, the Liquidity Coverage Ratio
(LCR). The Group’s LCR as at 31 December 2017 was 203.1%,
representing a material surplus above the UK regulatory
minimum requirement of 90%. The LCR improved from
153.7% at 31 December 2016 due to strong deposit raising
activity throughout the year, net TFS drawings made during
the year, and an RMBS issuance in September 2017, increasing
High Quality Liquid Assets (HQLA). The Group monitors the
NSFR based on its own interpretations of current guidance
available for CRD IV NSFR reporting.
Wholesale funding is used to support balance sheet growth,
lengthen the contractual tenor of funding and diversify
sources of funding. The Group has made use of the TFS during
the year, taking overall drawings to £4.2 billion.
> the Group maintains a Liquidity Contingency 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. Where funding
concentrations exist, for example refinancing at maturity,
these are managed within the appropriate internal risk
appetite, to control the size of the exposure. Refinancing
is 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. Such securities can be sold to provide,
or used to secure, additional cash inflows from market
counterparties or central bank facilities (Bank of England),
should the need arise.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
172 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
Funding sources
The Group is funded predominantly through retail customer
deposits. During 2017, the Group maintained a strong
presence in the retail savings market. Total customer deposits
increased by £2.7 billion in the year and represented 75.6%
of the Group’s funding at 31 December 2017. The Group’s
retail funding portfolio demonstrated resilience and stability
throughout 2017. The retention performance was in line with
plan following repricing activities and the retail product mix
moved towards fixed rate products, with overall contractual
tenor increasing.
The Group’s loan-to-deposit ratio increased to 119.1% as
planned during 2017 from 114.5% at 31 December 2016.
The table below 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
2017
£m
2016
£m
36,740.2
32,367.1
359.4
0.3
149.4
215.7
635.6
0.7
10.6
168.1
37,465.0
33,182.1
377.1
407.1
37,842.1
33,589.2
2,363.3
902.4
618.2
848.2
41,107.8
35,055.6
(371.6)
(560.8)
40,736.2
34,494.8
30,808.4
28,106.3
8,102.9
1,824.9
4,718.0
1,670.5
40,736.2
34,494.8
Risk Management Report
Virgin Money Group Annual Report 2017 I 173
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
2017
£m
2,736.9
1,130.0
4,236.0
8,102.9
2,033.5
10,136.4
2016
£m
2,600.0
850.0
1,268.0
4,718.0
2,683.7
7,401.7
Secured loans relate to the Group’s drawings from the Bank of England’s TFS. The increase is due to further TFS drawings that
were made during the year.
The tables below show residual maturity of the wholesale funding book.
2017 (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
Within
3 months
£m
3-12 months
£m
1-5 years
£m
After 5 years
£m
–
5.0
–
5.0
–
5.0
–
850.0
–
850.0
1,098.5
1,948.5
302.8
275.0
4,236.0
4,813.8
935.0
2,434.1
–
–
2,434.1
–
Total
£m
2,736.9
1,130.0
4,236.0
8,102.9
2,033.5
5,748.8
2,434.1
10,136.4
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
Within
3 months
£m
–
500.0
–
500.0
–
500.0
3-12 months
£m
1-5 years
£m
After 5 years
£m
Total
£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
2,600.0
–
–
2,294.2
–
2,294.2
850.0
1,268.0
4,718.0
2,683.7
7,401.7
An increase in average tenor of wholesale funding during 2017 is driven by the drawings of TFS, which are categorised as 1-5
years maturity.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
174 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
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 tables below show the total asset encumbrance position of the Group for 2017 and 2016.
2017 (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
Encumbered assets
Unencumbered assets
Pledged as
collateral1
£m
–
–
–
–
Other2
£m
215.7
–
149.4
–
93.0
201.1
Available as
collateral3
£m
–
0.3
899.3
–
–
Other4
£m
Total
£m
2,363.3
2,579.0
–
3.1
78.8
65.3
0.3
1,051.8
78.8
359.4
13,109.4
8.5
–
–
4,670.3
18,960.5
36,740.2
–
289.8
298.3
13,210.9
566.2
5,569.9
21,760.8
41,107.8
Treasury bills raised through FLS held off balance sheet5
182.9
–
1,850.6
–
2,033.5
Total assets plus off-balance sheet Treasury bills raised
through FLS
13,393.8
566.2
7,420.5
21,760.8
43,141.3
Risk Management Report
Virgin Money Group Annual Report 2017 I 175
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
Encumbered assets
Unencumbered assets
Pledged as
collateral1
£m
–
–
10.6
–
181.1
9,425.6
53.9
Other2
£m
168.1
–
–
–
354.4
–
–
Available as
collateral3
£m
–
0.7
840.3
–
–
Other4
£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
9,671.2
522.5
3,773.9
21,088.0
35,055.6
Treasury bills raised through FLS held off balance sheet5
–
–
2,683.7
–
2,683.7
Total assets plus off-balance sheet Treasury bills raised
through FLS
9,671.2
522.5
6,457.6
21,088.0
37,739.3
1 Encumbered assets pledged as collateral include amounts to derivative counterparties of £93.0 million (2016: £181.1 million) and amounts in respect of centrally cleared derivatives
of £8.5 million (2016: £53.9 million). Encumbered loans and advances to customers of £13,109.4 million (2016: £9,425.6 million) consist of securitised mortgages and other loan pools
positioned with the Bank of England that have been pledged as collateral for funding and liquidity transactions. As at 31 December 2017, £6,219.8 million (2016: £2,302.3 million) of loan
pools have been pledged as collateral in respect of secured loans and repo agreements.
2 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 £215.7 million (2016: £168.1 million) and cash reserves supporting secured funding structures of £201.1 million (2016: £354.4 million).
3 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.
4 Other unencumbered assets are assets which are not subject to any restrictions but are not readily available for use.
5 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 increased by £3.8 billion to 32.4% at 31 December 2017. This was primarily due to
using the TFS to support increased lending, which took total drawings to date to £4.2 billion. The Group manages the volume of
available unencumbered collateral to meet requirements arising from current and future secured funding transactions.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
176 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
Liquid asset portfolio
The Group maintains a portfolio of liquid assets, predominantly in high-quality unencumbered securities issued by the UK
Government or supranational institutions and deposits with the Bank of England. 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 cover more extreme stress
events and provide flexibility for liquidity management.
The table below shows the composition of the liquidity portfolio.
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
2017
£m
2017
Average
£m
2,525.9
1,923.0
207.3
221.8
–
–
234.1
178.0
2016
£m
737.2
306.7
–
129.3
2016
Average
£m
819.6
339.3
33.8
222.0
1,850.6
2,219.7
2,683.7
2,528.2
374.7
378.8
304.9
434.4
5,192.6
4,921.3
4,161.8
4,377.3
21.7
21.7
50.1
50.1
22.2
22.2
52.6
52.6
22.2
22.2
38.6
38.6
22.4
22.4
49.1
49.1
High quality liquid assets (Level 1 + 2a + 2b)
5,264.4
4,996.1
4,222.6
4,448.8
Other liquidity resources
Covered bonds
Non-eligible RMBS
Certificates of deposit
Floating rate notes
Money market loans
Total other liquidity resources
Self-issued RMBS
Total liquidity
–
11.4
–
–
13.8
25.2
601.7
–
8.6
40.8
6.3
13.3
69.0
958.2
5,891.3
6,023.3
–
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
5,105.3
The Group holds sufficient liquidity to meet all internal and regulatory liquidity requirements.
Risk Management Report
Virgin Money Group Annual Report 2017 I 177
The following tables 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.
In particular, the majority of customer deposits are 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 cash flow 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.
2017 (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
Within 3
months
£m
2,526.0
0.5
359.4
3,328.0
–
159.4
75.7
3-12 months
£m
1-5 years
£m
After 5 years
£m
–
76.8
53.0
0.1
Total
£m
2,579.0
78.8
–
1.4
–
–
–
359.4
794.2
4,429.1
28,188.9
36,740.2
–
18.9
7.3
–
314.9
60.3
0.3
558.6
155.0
0.3
1,051.8
298.3
6,449.0
821.8
4,881.1
28,955.9
41,107.8
18.0
850.0
27,268.6
2,144.2
9.4
–
185.8
4.4
–
70.2
4,511.0
1,395.0
64.3
302.8
5.7
–
0.6
15.4
5,379.0
30,808.4
93.5
2,434.1
2,736.9
3.4
265.1
27,481.8
3,068.8
6,278.8
2,453.5
39,282.9
Net liquidity (gap) / surplus
(21,032.8)
(2,247.0)
(1,397.7)
26,502.4
1,824.9
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
178 I Virgin Money Group Annual Report 2017
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
Within 3
months
£m
737.2
1.4
635.6
2,700.3
–
–
99.2
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
4,173.7
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
–
–
2,132.5
28,106.3
27.3
229.7
2,294.2
2,600.0
3.9
316.6
25,303.6
2,034.2
3,721.9
2,325.4
33,385.1
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 2017 I 179
Cash flow 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.
2017 (audited)
Deposits from banks
Customer deposits
Debt securities in issue
Total
2016 (audited)
Deposits from banks
Customer deposits
Debt securities in issue
Total
Within
3 months
£m
23.2
27,338.1
169.4
3-6 months
£m
6-12 months
£m
1-5 years
£m
Over 5 years
£m
858.9
847.3
169.7
12.4
1,495.7
335.4
4,567.9
1,571.6
2,102.3
8,241.8
–
0.6
–
0.6
27,530.7
1,875.9
1,843.5
Within
3 months
£m
514.1
24,628.0
158.7
25,300.8
3-6 months
£m
6-12 months
£m
1-5 years
£m
Over 5 years
£m
76.7
680.8
161.2
918.7
3.1
1,371.3
297.3
1,671.7
1,556.8
1,835.9
2,056.5
5,449.2
–
–
–
–
Total
£m
5,462.4
31,253.3
2,776.8
39,492.5
Total
£m
2,150.7
28,516.0
2,673.7
33,340.4
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
180 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
The following tables display future derivative cash flows in the relevant maturity groupings in which they fall due. Cash flows
for the floating legs of derivative transactions are calculated using the forward interest rate curve. These cash flows are not
discounted in the same way that derivative valuations are, and totals will therefore not be identical to those reported on
derivatives in the notes to the financial statements.
2017 (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
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
(1.5)
(12.9)
(14.4)
30.0
(29.4)
(13.8)
Within
3 months
£m
3-6 months
£m
6-12 months
£m
1-5 years
£m
Over 5 years
£m
(0.1)
(8.1)
(8.2)
28.9
(28.4)
(7.7)
(1.5)
(14.1)
(15.6)
54.7
(53.9)
(14.8)
(4.4)
(32.3)
(36.7)
224.9
(230.0)
(41.8)
–
(7.6)
(7.6)
–
–
(7.6)
Total
£m
(7.5)
(75.0)
(82.5)
338.5
(341.7)
(85.7)
3-6 months
£m
6-12 months
£m
1-5 years
£m
Over 5 years
£m
Total
£m
(1.8)
(0.5)
(4.5)
(12.2)
(0.3)
(19.3)
(26.1)
(27.9)
1.4
(1.5)
(21.2)
(21.7)
2.6
(3.0)
(37.6)
(42.1)
2.5
(2.8)
(110.0)
(122.2)
23.3
(26.6)
(6.2)
(6.5)
–
–
(201.1)
(220.4)
29.8
(33.9)
(28.0)
(22.1)
(42.4)
(125.5)
(6.5)
(224.5)
Risk Management Report
Virgin Money Group Annual Report 2017 I 181
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 2017 are as follows.
Long term
Short term
Outlook
Date of last rating action
Rating action type
Fitch
Moody’s
BBB+
Baa2
F2
P2
Stable
Stable
7 September 2017
26 June 2017
Affirmed
Assigned
In September 2017, the rating agency Fitch maintained Virgin Money plc’s outlook as Stable and affirmed its long-term
rating at BBB+. On 26 June 2017, the rating agency Moody’s assigned Virgin Money plc’s outlook as Stable and its long-term
rating as Baa2.
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
2017
2016
–
–
–
10.0
In addition, the Group could be required to post further collateral for payment systems, clearing houses and to support secured
funding transactions. These requirements can be directly linked to the Group’s external credit rating or driven by other factors.
The Group monitors the related collateral requirements and includes these in liquidity stress requirements.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
182 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
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 capital in excess of regulatory requirements
at all times.
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 134. 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. Pages
209 to 210 provide 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. As at
31 December 2017, as per the Group’s ICG, the Basel I floor
was the Group’s binding constraint and was equivalent to a
Pillar 2A capital add-on of 5.71%.
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. This stress testing generates an additional capital
requirement issued by the PRA, known as the PRA buffer,
which is a matter between the PRA and the Group. The PRA
buffer also takes account of the capital conservation buffer.
From 1 January 2018, the Group will transition to the new
accounting requirements of IFRS 9.
Risk Management Report
Virgin Money Group Annual Report 2017 I 183
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.
27 June 2018. In November 2017, the Bank of England
announced a further increase to 1.0%, with binding effect
from 28 November 2018. The Group expects to be able
to accommodate these stepped increases as and when
implemented within existing management buffers.
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 business growth.
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. These new buffers will influence the
type of capital instruments that best meet the requirements
likely to be expected of the Group.
A capital conservation buffer of 2.5% was introduced
on 1 January 2016. This is being introduced through a
transitionary period of four years with the buffer increasing
by 0.625% per annum from 1 January 2016. The Bank
of England announced in June that they would increase
the countercyclical capital buffer from 0% to 0.5% from
CRD IV also introduced a new leverage ratio measure. 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). The Group is not subject to the PRA
Leverage Framework until core deposits exceed £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 3.9% as at 31 December 2017 (2016: 4.4%).
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 1 January 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 Bank of England 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
expect to issue further senior debt over the next four year
period to ensure compliance with MREL obligations.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
184 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
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
Additional valuation adjustment
Intangible assets
Excess of expected loss over impairment
Deferred tax on tax losses carried forward
Total regulatory capital adjustments
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
2017
£m
654.6
384.1
(18.1)
804.3
2016
£m
654.6
384.1
(27.4)
659.2
1,824.9
1,670.5
(0.3)
(3.8)
(18.1)
(384.1)
22.7
(1.2)
(128.4)
(46.9)
(0.6)
5.4
(4.9)
(15.5)
(384.1)
31.5
(1.2)
(80.6)
(41.1)
(7.3)
(560.7)
(497.8)
1,264.2
1,172.7
384.1
384.1
1,648.3
1,556.8
14.3
14.3
11.9
11.9
1,662.6
1,568.7
13.8%
18.0%
18.1%
15.2%
20.2%
20.4%
As required by Article 26(2) of the Capital Requirements Regulation, a deduction has been made for foreseeable dividends
on 2017 profits.
Risk Management Report
Virgin Money Group Annual Report 2017 I 185
The table below shows movements in Common Equity Tier 1 capital.
At 1 January
Movement in retained earnings
Additional valuation adjustment
Movement in available-for-sale reserve
Distributions on ordinary shares paid during the year
Distributions on ordinary shares accrued during the year
AT1 coupons accrued at previous year end
AT1 coupons accrued at this year end
Movement in reserves of 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
2017
£m
2016
£m
1,172.7
1,070.0
145.1
114.4
0.0
0.5
23.9
(26.5)
4.9
(3.8)
(5.7)
(47.8)
(5.8)
6.7
(1.2)
4.4
20.8
(22.6)
2.1
(4.9)
0.9
(16.2)
(5.7)
10.7
1,264.2
1,172.7
The main drivers for the increase in capital resources are the increase in retained earnings and the reduction in deferred tax
asset on tax losses, offset by increased intangible assets, and other items as set out in the table above.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
186 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
The table below shows total risk-weighted assets.
Retail mortgages
Retail unsecured lending
Treasury
Other assets
Credit valuation adjustments
Operational risk
Total risk-weighted assets
2017
£m
5,790.5
2,282.9
134.8
204.3
10.4
755.7
2016
£m
4,764.5
1,847.4
178.6
226.4
22.6
655.3
9,178.6
7,694.8
The table below shows Pillar 1 risk-weighted assets and capital requirements by business line.
Mortgages and savings
Credit cards
Financial services
Central functions
Total
2017
Risk-
weighted
assets
£m
2017
Pillar 1
Capital
requirement
£m
6,308.1
2,467.6
53.4
349.5
504.6
197.4
4.3
28.0
2016
Risk-
weighted
assets
£m
5,204.5
2,012.3
50.4
427.6
9,178.6
734.3
7,694.8
2016
Pillar 1
Capital
requirement
£m
416.4
161.0
4.0
34.2
615.6
Risk Management Report
Virgin Money Group Annual Report 2017 I 187
Movement in risk-weighted assets
The table below shows the movement in risk-weighted assets
during the year to 31 December 2017. Lending growth in the
year resulted in a 19.3% increase in total risk-weighted assets.
For mortgages, growth in risk-weighted assets was higher
than growth in customer balances as the average mortgage
risk-weight density increased to 17.2% from 16.0% in 2016.
This was in line with the Group’s expectations as the advanced
ratings models result in higher risk-weights for new lending
than for maturing loans. For credit cards, growth in risk-
weighted assets was in line with growth in customer balances
as unsecured risk-weighted assets are calculated on the
standardised approach.
There was an additional increase in operational risk-weighted
assets of £100.4 million. This increase was in line with the
standardised approach for the calculation of operational risk,
where the growth in average income over the past three years
is recognised in a higher level of operational risk-weighted
asset. This was largely offset by a reduction in exposure to
higher risk-weighted instruments and counterparties in the
Group’s liquid asset portfolio.
IRB
mortgage
£m
Standardised
lending
£m
Other
standardised
assets
£m
Credit
valuation
adjustment
£m
Operational
risks
£m
RWAs at 1 January 2017
Book size
Other movements
4,764.5
1,179.7
(153.7)
RWAs at 31 December 2017
5,790.5
2,282.9
1,847.4
405.0
435.6
(0.1)
–
(65.9)
339.1
22.6
–
(12.2)
10.4
655.3
–
100.4
755.7
Total
£m
7,694.8
1,615.3
(131.5)
9,178.6
Leverage ratio
CRD IV introduced a new balance sheet metric, the
leverage ratio, from 1 January 2014. The leverage ratio is
risk insensitive, requiring capital to be held against total
on and off-balance sheet exposures including 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 2017 was 3.9% (December 2016: 4.4%) as
disclosed below.
Exposure values associated with derivatives and securities
financing transactions have been reported in compliance
with CRD IV rules. For the purposes of the leverage ratio, the
derivative measure has been adjusted for regulatory netting
rules, potential future exposures and cash collateral.
Off-balance sheet items are made up of undrawn credit
facilities. Credit conversion factors have been applied to these
items to convert them to an on-balance sheet equivalent in
compliance with the CRD IV rules.
Other regulatory adjustments consist of adjustments that
have been applied to Tier 1 capital which are also applied to
the leverage ratio exposure measure. This ensures consistency
between Tier 1 capital and the total exposures of the ratio.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
188 I Virgin Money Group Annual Report 2017
Full analysis of risk classes
Total tier 1 capital for leverage ratio
Common equity tier 1 capital
Additional tier 1 capital
Total tier 1 capital
Exposure measure
Statutory balance sheet assets
Derivative financial instruments
Loans and advances and other assets
Total assets
Deconsolidation adjustments
Loans and advances and other assets
Total deconsolidation adjustments
Derivative adjustments
Adjustments for regulatory netting
Adjustments for cash collateral
Net written credit protection
Regulatory potential future exposure
Total derivative adjustments
Securities financing transactions adjustments
Off-balance sheet items
Regulatory deductions and other adjustments
Total exposures
Leverage ratio
2017
£m
2016
£m
1,264.2
1,172.7
384.1
384.1
1,648.3
1,556.8
78.8
104.2
41,029.0
34,951.4
41,107.8
35,055.6
(0.4)
(0.4)
(11.5)
(142.5)
36.8
131.3
14.1
364.3
776.8
(154.4)
5.3
5.3
(25.4)
(195.0)
–
86.8
(133.6)
222.4
714.5
(98.7)
42,108.2
35,765.5
3.9%
4.4%
Risk Management Report
Virgin Money Group Annual Report 2017 I 189
Financial statements
191 Independent auditors’ report
200 Consolidated financial statements
251 Parent company financial statements
Virgin Money Lounge, Manchester
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
190 I Virgin Money Group Annual Report 2017
Financial statements
Independent auditors’ report
Consolidated income statement
Consolidated statement of
comprehensive income
Consolidated balance sheet
Consolidated statement of
changes in equity
191
200
201
202
204
Consolidated cash flow statement
206
Parent Company balance sheet
Parent Company statement of
changes in equity
251
252
Parent Company cash flow statement 253
Notes to the consolidated
financial statements
207
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 and
reconciliation to underlying
basis
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.
19.
20.
21.
22.
23.
24.
25.
26.
27.
Securitisation
Intangible assets
Tangible fixed assets
Deferred tax
Other assets
Deposits from banks
Customer deposits
Debt securities in issue
Other liabilities
Share capital and share
premium
28. Other equity instruments
29. Other reserves
30.
31.
32.
Retained earnings
Contingent liabilities and
commitments
Fair value of financial assets
and financial liabilities
33. Offsetting of financial assets
and financial liabilities
34.
35.
36.
37.
Cash flow statements
Related party transactions
Events after balance
sheet date
Future accounting
developments
38.
Country by country reporting
Notes to the Parent Company
financial statements
254
1.
2.
3.
4.
5.
6.
Basis of preparation and
accounting policies
Investment in subsidiary
undertakings
Deferred tax
Other assets
Other liabilities
Share capital, share premium
and other equity instruments
7.
8.
9.
10.
11.
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 2017 I 191
Independent auditors’ report to the members of
Virgin Money Holdings (UK) plc
Report on the audit of the financial statements
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law.
Our responsibilities under ISAs (UK) are further described
in the Auditors’ responsibilities for the audit of the financial
statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with
the ethical requirements that are relevant to our audit of
the financial statements in the UK, which includes the FRC’s
Ethical Standard, as applicable to listed public interest
entities, and we have fulfilled our other ethical responsibilities
in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-
audit services prohibited by the FRC’s Ethical Standard were
not provided to the Group or the Parent Company.
Other than those disclosed in note 6 to the financial
statements, we have provided no non-audit services
to the Group or the Parent Company in the period from
1 January 2017 to 31 December 2017.
Opinion
In our opinion, Virgin Money Holdings (UK) plc’s Group
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 2017 and of the
Group’s profit and the Group’s and the Parent Company’s cash
flows for the year then ended;
> have been properly prepared in accordance with IFRSs as
adopted by the European Union and, as regards the Parent
Company’s financial statements, as applied in accordance with
the provisions of the Companies Act 2006; and
> have been prepared in accordance with the requirements of
the Companies Act 2006 and, as regards the Group financial
statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within
the Annual Report and Accounts (the ‘Annual Report’), which
comprise: the Group and Parent Company balance sheets
as at 31 December 2017; the Group income statement, the
Group statement of comprehensive income, the Group and
Parent Company statements of cash flows, and the Group and
Parent Company statements of changes in equity for the year
then ended; and the notes to the financial statements, which
include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the
Audit Committee.
Our audit approach
Overview
Materiality
Audit scope
Key audit
matters
> Overall Group materiality: £13.4 million (2016: £9.8 million), based on 5% of adjusted
profit before tax, adjusted for £6.5 million of strategic items (as detailed in note 2), as
these are not considered to be recurring. This adjusted measure of profit is deemed as the
most appropriate benchmark upon which to base our materiality.
> We performed a full scope audit over the Group’s five 100% owned subsidiaries and
certain Special Purpose Vehicle (SPV) balances were scoped in on a line by line basis based
on their proportion of the consolidated financial statement line item. 98% of interest
income, 98% of profit before tax (98% of the adjusted profit before tax figure as used for
our overall materiality calculation) and 99% of total assets were subject to audit.
Key audit matters included:
> Revenue recognition – Effective Interest Rate (EIR) accounting.
> Impairment of loans and advances to customers.
> Recognition of intangible assets.
> Disclosure of impact of adoption of IFRS 9.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
192 I Virgin Money Group Annual Report 2017
Independent auditors’ report to the members of
Virgin Money Holdings (UK) plc
Report on the audit of the financial statements
The scope of our audit
As part of designing our audit, we determined materiality
and assessed 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.
We gained an understanding of the legal and regulatory
framework applicable to the Group and the industry in which
it operates, and considered the risk of acts by the Group which
were contrary to applicable laws and regulations, including
fraud. We designed audit procedures at group and significant
component level to respond to the risk, recognising that the
risk of not detecting a material misstatement due to fraud is
higher than the risk of not detecting one resulting from error,
as fraud may involve deliberate concealment by, for example,
forgery or intentional misrepresentations, or through
collusion. We focused on laws and regulations that could
give rise to a material misstatement in the Group financial
statements, including but not limited to, the Companies Act
2006, the Listing Rules, and UK tax legislation.
Our tests included, but were not limited to, review of the
financial statement disclosures to underlying supporting
documentation, review of correspondence with and reports to
the regulators, review of correspondence with legal advisors,
enquiries of management, and review of internal audit reports
in so far as they related to the financial statements.
There are inherent limitations in the audit procedures
described above and the further removed non-compliance
with laws and regulations is from the events and transactions
reflected in the financial statements, the less likely we would
become aware of it.
We did not identify any key audit matters relating to
irregularities, including fraud. As in all of our audits, we
also addressed the risk of management override of internal
controls, including testing journals and evaluating whether
there was evidence of bias by the Directors that represented a
risk of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors’
professional judgement, were of most significance in the
audit of the financial statements of the current period and
include the most significant assessed risks of material
misstatement (whether or not due to fraud) identified by the
auditors, including those which had the greatest effect on:
the overall audit strategy; the allocation of resources in the
audit; and directing the efforts of the engagement team.
These matters, and any comments we make on the results
of our procedures thereon, were addressed in the context
of our audit of the financial statements as a whole, and in
forming our opinion thereon, and we do not provide a separate
opinion on these matters. This is not a complete list of all risks
identified by our audit.
Each of the key audit matters below related to our audit of
Group financial statements.
Virgin Money Group Annual Report 2017 I 193
Independent auditors’ report to the members of
Virgin Money Holdings (UK) plc
Key audit matter
How our audit addressed the key audit matter
Revenue recognition – Effective Interest Rate (EIR) accounting
See note 1 of the financial statements for the disclosure of the
related accounting policies and critical estimates and judgements,
and page 88 for the Audit Committee’s consideration of key financial
issues and judgements.
The Group’s total loans and advances to customers balance of £36.7
billion and net interest income of £594.6 million include certain EIR
adjustments as per the requirements of IAS 39.
The vast majority of the income recognised by the Group is system
generated and requires minimal judgement, therefore we focused
our work in relation to revenue recognition on EIR accounting due
to the inherent subjectivity and complexity involved in forecasting
future customer behaviour on which the EIR adjustment calculation is
based. 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.
The most significant assumption for secured lending EIR is the
estimation of the expected life of the product over which fees are
spread.
For unsecured lending, significant judgement is applied in calculating
the EIR adjustment including setting assumptions relating to
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. Key assumptions include retail
spending levels and repayment rates.
Across both the secured and unsecured lending EIR calculation
models, we tested controls over data input and checked the accuracy
of model calculations. We also assessed controls over the setting and
approving of key assumptions.
We tested the impact of any changes in assumptions on the financial
statements, ensuring these were calculated in accordance with
IAS 39.
In relation to secured lending EIR, we:
> Substantively tested a sample of fees incorporated within the
calculation to underlying secured lending agreements and
considered the appropriateness of the inclusion of fees in the EIR
calculation; and
> Assessed the estimate of the expected life applied and forecast
cash flows during this life by comparing to recent Group experience
and expectations of future patterns.
We concluded that, whilst there is significant judgement inherent in
the secured EIR adjustment, the assumptions applied were within a
reasonable range based on past experience and future assumptions.
In relation to unsecured lending EIR, we:
> Tested controls over the ongoing monitoring of actual credit
card cash flows as compared with the forecast assumptions and
compared 2017 experience with expected experience for that
period on a sample basis;
> Assessed the key forecast assumptions, including expected life,
balance, repayment rate, volume of retail spend and interest
income earned by comparing to recent experience;
> Performed sensitivity analyses of key judgements to understand
the materiality of the impact that potential realistic changes in
assumptions may have, either individually or in combination, on the
EIR asset; and
> Assessed the sufficiency of the disclosures in the financial
statements relating to significant estimates made in the EIR
calculation, including disclosure of sensitivities.
We concluded that, whilst there is significant judgement inherent in
the unsecured EIR adjustment, the assumptions applied were within a
reasonable range based on past experience and future assumptions.
We concluded that the disclosures in note 1 of the financial statements
provide appropriate details of the degree and nature of estimation
uncertainty and the impact on the financial statements of actual
future customer experience differing from the assumptions made.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
194 I Virgin Money Group Annual Report 2017
Independent auditors’ report to the members of
Virgin Money Holdings (UK) plc
Report on the audit of the financial statements
Key audit matter
How our audit addressed the key audit matter
Impairment of loans and advances to customers
See note 1 of the financial statements for the disclosure of the
related accounting policies and critical estimates and judgements,
and page 88 for the Audit Committee’s consideration of key financial
issues and judgements.
The impairment provision of £59.4 million consists of provisions
of £12.1 million in relation to secured lending and £47.3 million
in relation to unsecured lending. Total loans and advances as at
31 December 2017 relating to secured lending was £33.7 billion and
£3.1 billion for unsecured lending.
We focused on this area because Management make subjective
judgements over both the timing of recognition and the size of
provisions for impairment of loans and advances. This judgement
includes considering the completeness of the provisions and whether
any specific judgemental overlays are appropriate to recognise the
impact of emerging trends not captured in the impairment models.
The Group has developed historic data based models that derive
key assumptions used within the provision calculation such as
probability of default (PD) and loss given default (LGD). The output of
these models is then applied to the provision calculation with other
information including the selection of an appropriate loss emergence
period (LEP) and the exposure at default (EAD).
Recognition of intangible assets
See note 1 of the financial statements for the disclosure of the related
accounting policies and also page 88 for the Audit Committee’s
consideration of key financial issues and judgements.
During 2017 certain technology project costs incurred by the Group
were capitalised. These projects require cash and non-cash resources
during development and management applies judgement in
considering whether or not costs should be capitalised in the context
of IAS 38.
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.
The Group’s total net book value of intangible assets was £128.4
million as at 31 December 2017.
We assessed and tested the design and operating effectiveness of
the controls over data flows, model governance and setting and
approval of key assumptions used in the provisioning process.
As part of our detailed work, we:
> Assessed the provision calculation methodology applied in the
context of industry practice and the requirements of accounting
standards;
> Tested key assumptions used within the models to internal and
external information where appropriate;
> Tested that the model calculations were consistent with our
understanding of the Group’s methodology and the requirements
of accounting standards; and
> Examined the basis for the judgemental overlays made to the
results produced by models and assessing the rationale for the
adjustments, as well as considering the completeness of the
overlays.
We found the approach taken in relation to the Group’s impairment
provisions to be consistent with the requirements of IAS 39 and
judgements made were reasonable.
We assessed 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 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 including those related
to new projects to check that these meet the criteria of IAS 38 for
capitalisation as intangible assets;
> Discussed 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 with management to inform our
independent consideration as to whether any possible impairment
triggers existed. One item was noted by management as requiring
impairment resulting in a charge of £4.8 million to the income
statement. This is disclosed in note 19.
We found the accounting treatment applied in recognising
capitalised costs was consistent with the requirements of IAS 38
and we did not identify any material matters which we considered
necessary to report to the Audit Committee.
Virgin Money Group Annual Report 2017 I 195
Independent auditors’ report to the members of
Virgin Money Holdings (UK) plc
Key audit matter
How our audit addressed the key audit matter
Disclosure of impact of adoption of IFRS 9
IFRS 9 became effective on 1 January 2018 and therefore does not
affect the Balance Sheet and Income Statement of the Group as at
31 December 2017.
However, under the requirements of IAS 8, the Group is required to
disclose the estimated impact that new accounting standards will
have on initial adoption.
The Group has presented a transition disclosure in note 37.
Management estimate that the transition to IFRS 9 will reduce
shareholders’ equity by approximately £35 million after deferred tax
as at 1 January 2018.
The most significant impact of adopting IFRS 9 to the Group relates
to a change in the way that credit losses are recognised, moving from
an incurred loss to an expected loss basis for financial instruments
held at amortised cost. The estimation of expected credit losses (ECL)
for the disclosure required in these 2017 financial statements has
required significant judgement to be applied in the development of
lifetime PD, LGD and EAD.
This has required a more complex provision calculation methodology
based on the application of differing levels of forecasting of losses.
This is dependent on whether a significant increase in credit risk has
occurred, as well as an adjustment applied for the impact of multiple
economic scenarios in the future.
We read the disclosure as set out in note 37 to assess its compliance
with the requirements of IAS 8. We also tested the completeness and
accuracy of data inputs for the Group’s material IFRS 9 models to
identify any material inconsistencies with source system data.
Our detailed work in auditing the estimated 2018 opening
impairment provisions included:
> Reading model documentation papers and assessing the Group’s
methodology and modelling approach in the context of our
understanding of IFRS 9;
> Independently estimating model outputs based on the Group’s
methodology and data for material IFRS 9 models and comparing
our outcomes with those of management; and
> Comparing macroeconomic forecasts used by the Group for IFRS 9
purposes with third party market information.
We found the disclosure in respect of the transition to IFRS 9 and the
estimated impact this has on shareholders’ equity to be consistent
with the requirements of accounting standards.
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 structure of
the Group, the accounting processes and controls, and the
industry in which the Group operates.
We updated our understanding of processes within the
business in order to understand and evaluate the key financial
processes and controls across the Group. Our audit plan was
presented to the Audit Committee. Following our procedures,
we were able to obtain sufficient appropriate audit evidence to
form a basis for our audit opinion.
The consolidated financial statements include the Group’s five
100% owned subsidiaries as well as a number of securitisation
related 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 audit purposes. Additionally, certain SPV balances
were scoped in for audit on a line by line basis based on
their proportion of the consolidated financial statement
line item to ensure adequate overall audit coverage for each
line item. 98% of interest income, 98% of profit before tax
(98% 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.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
196 I Virgin Money Group Annual Report 2017
Independent auditors’ report to the members of
Virgin Money Holdings (UK) plc
Report on the audit of the financial statements
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
in aggregate 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 materiality
How we determined it
Rationale for benchmark applied
Group financial statements
Parent Company financial statements
£13.4 million (2016: £9.8 million).
£13.4 million (2016: £2.8 million).
5% of adjusted profit before tax adjusted for £6.5
million of strategic items (as detailed in note 2), 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.
1% of total assets, capped to Group overall
materiality of £13.4 million
As the Company is not profit orientated on a solo-
entity basis, we have used 1% of total assets, but
cap this to the lower materiality of the Group.
For each component in the scope of our Group audit, we
allocated a materiality that is less than our overall Group
materiality. The range of materiality allocated across
components was between £0.02 million and £13.0 million.
We agreed with the Audit Committee that we would report to
them misstatements identified during our audit above
£0.67 million (Group audit) (2016: £0.49 million) and
£0.67 million (Parent Company audit) (2016: £0.14 million) as
well as misstatements below those amounts that, in our view,
warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we are required to report if we
have anything material to add or draw attention to in respect
of the Directors’ statement in the financial statements about
whether the Directors considered it appropriate to adopt the
going concern basis of accounting in preparing the financial
statements and the Directors’ identification of any material
uncertainties to the Group’s and the Parent Company’s ability
to continue as a going concern over a period of at least twelve
months from the date of approval of the financial statements.
We have nothing material to add or to draw attention to.
However, because not all future events or conditions can be
predicted, this statement is not a guarantee as to the Group’s
and Parent Company’s ability to continue as a going concern.
We are also required to report if the Directors’ statement
relating to Going Concern in accordance with Listing Rule
9.8.6R(3) is materially inconsistent with our knowledge
obtained in the audit. We have nothing to report.
Virgin Money Group Annual Report 2017 I 197
Independent auditors’ report to the members of
Virgin Money Holdings (UK) plc
Reporting on other information
The other information comprises all of the information in the
Annual Report other than the financial statements and our
auditors’ report thereon. The Directors are responsible for the
other information. Our opinion on the financial statements
does not cover the other information and, accordingly, we do
not express an audit opinion or, except to the extent otherwise
explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements,
our responsibility is to read the other information and,
in doing so, consider whether the other information is
materially inconsistent with the financial statements or our
knowledge obtained in the audit, or otherwise appears to
be materially misstated. If we identify an apparent material
inconsistency or material misstatement, we are required to
perform procedures to conclude whether there is a material
misstatement of the financial statements or a material
misstatement of the other information. If, based on the work
we have performed, we conclude that there is a material
misstatement of this other information, we are required to
report that fact. We have nothing to report based on these
responsibilities.
With respect to the Strategic Report, Directors’ Report
and Corporate Governance Statement, we also considered
whether the disclosures required by the Companies Act 2006
have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, the Companies Act
2006 (CA06), ISAs (UK) and the Listing Rules of the Financial
Conduct Authority (FCA) require us also to report certain
opinions and matters as described below (required by ISAs
(UK) unless otherwise stated).
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report
for the year ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with applicable legal
requirements. (CA06)
In light of the knowledge and understanding of the Group and Parent Company and their environment obtained in the course of the audit, we did
not identify any material misstatements in the Strategic Report and Directors’ Report. (CA06)
Corporate Governance Statement
In our opinion, based on the work undertaken in the course of the audit, the information on pages 81, 89 and 126 to 188 of the Annual Report
about internal controls and risk management systems in relation to financial reporting processes, and in note 27 to the financial statements about
share capital structures in compliance with rules 7.2.5 and 7.2.6 of the Disclosure Guidance and Transparency Rules sourcebook of the FCA (DTR) is
consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and Parent Company and their environment obtained in the course of the audit, we did
not identify any material misstatements in this information. (CA06)
In our opinion, based on the work undertaken in the course of the audit, the information given on pages 71 to 94 of the Annual Report with respect
to the Parent Company’s corporate governance code and practices and about its administrative, management and supervisory bodies and their
committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the DTR. (CA06)
We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared by the Parent
Company. (CA06)
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group
We have nothing material to add or draw attention to regarding:
> The Directors’ confirmation on page 132 of the Annual Report 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;
> The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated; and
> The Directors’ explanation on page 120 of the Annual Report 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 to report having performed a review of the Directors’ statement that they have carried out a robust assessment of the principal
risks facing the Group and 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 UK Corporate Governance Code (the Code); and considering whether the statements are consistent
with the knowledge and understanding of the Group and Parent Company and their environment obtained in the course of the audit. (Listing Rules)
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
198 I Virgin Money Group Annual Report 2017
Independent auditors’ report to the members of
Virgin Money Holdings (UK) plc
Reporting on other information
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
> The statement given by the Directors, on page 125, that they consider the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the 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 obtained in the
course of performing our audit;
> The section of the Annual Report on pages 88 and 89 describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee; and
> The Directors’ statement relating to the Parent Company’s compliance with the Code does not properly disclose a departure from a relevant
provision of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies
Act 2006.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description
forms part of our auditors’ report.
Use of this report
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.
Responsibilities for the financial statements
and the audit
Responsibilities of the Directors for the financial
statements
As explained more fully in the Statement of Directors’
responsibilities set out on page 124, the Directors are
responsible for the preparation of the financial statements
in accordance with the applicable framework and for being
satisfied that they give a true and fair view. The Directors are
also responsible for such internal control as they determine is
necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the Directors are
responsible for assessing the Group’s and the Parent
Company’s ability to continue as a going concern, disclosing
as applicable, matters related to going concern and using the
going concern basis of accounting unless the Directors either
intend to liquidate the Group or the Parent Company or to
cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error,
and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance
with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these
financial statements.
Virgin Money Group Annual Report 2017 I 199
Independent auditors’ report to the members of
Virgin Money Holdings (UK) plc
Other required reporting
Companies Act 2006 exception reporting
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
> certain disclosures of Directors’ remuneration specified by law
are not made; 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.
Appointment
Following the recommendation of the audit committee, we
were appointed by the members on 4 May 2016 to audit the
financial statements for the year ended 31 December 2016
and subsequent financial periods. The period of total
uninterrupted engagement is two years, covering the years
ended 31 December 2016 and 31 December 2017.
Catrin Thomas (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Edinburgh
26 February 2018
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
200 I Virgin Money Group Annual Report 2017
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
2017
£ million
958.0
(363.4)
594.6
29.6
–
29.6
41.8
(3.3)
68.1
662.7
(355.9)
306.8
(44.2)
262.6
(70.5)
192.1
192.1
192.1
37.8
37.5
3
4
5
13
6
8
9
10
10
2016
£ million
948.1
(425.7)
522.4
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
Virgin Money Group Annual Report 2017 I 201
Consolidated statement of comprehensive income
For the year ended 31 December
Profit for the year
Other comprehensive income/(expense)
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 income/(expense) for the year, net of tax
Total comprehensive income for the year
Note
2017
£ million
192.1
2016
£ million
140.1
29
29
29
29
29
29
14.1
(13.5)
(0.1)
0.5
(1.2)
12.6
(2.6)
8.8
9.3
201.4
44.4
(38.3)
(1.7)
4.4
(36.1)
13.6
6.3
(16.2)
(11.8)
128.3
Total comprehensive income attributable to equity owners
201.4
128.3
The accompanying notes are an integral part of these consolidated financial statements.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
202 I Virgin Money Group Annual Report 2017
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
2017
£ million
2016
£ million
13
14
15
16
19
20
21
22
2,579.0
78.8
786.3
104.2
359.4
635.6
36,740.2
32,367.1
0.3
0.7
37,099.9
33,003.4
1,051.8
128.4
74.5
11.5
83.9
858.8
80.6
77.4
23.0
121.9
41,107.8
35,055.6
Consolidated balance sheet (continued)
Virgin Money Group Annual Report 2017 I 203
As at 31 December
Equity and liabilities
Liabilities
Deposits from banks
Customer deposits
Derivative financial instruments
Debt securities in issue
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
2017
£ million
2016
£ million
23
24
13
25
26
27
28
29
30
5,379.0
2,132.5
30,808.4
28,106.3
93.5
2,736.9
241.5
23.6
229.7
2,600.0
299.9
16.7
39,282.9
33,385.1
654.6
384.1
(18.1)
804.3
654.6
384.1
(27.4)
659.2
1,824.9
1,670.5
41,107.8
35,055.6
The accompanying notes are an integral part of these consolidated financial statements.
The financial statements on pages 200 to 250 were approved and authorised for issue by the Board and were signed on its behalf
on 26 February 2018.
Glen Moreno
Chair
Jayne-Anne Gadhia CBE
Chief Executive
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
204 I Virgin Money Group Annual Report 2017
Consolidated statement of changes in equity
For the year ended 31 December 2017
Attributable to equity holders
Balance at 1 January 2017
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 income
Total comprehensive 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 (net of tax)
Other distributions
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
384.1
(27.4)
659.2
1,670.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
192.1
192.1
0.5
8.8
9.3
9.3
–
–
–
–
–
–
–
–
–
–
0.5
8.8
9.3
192.1
201.4
(23.9)
(32.7)
8.4
(8.5)
9.9
(0.2)
(47.0)
804.3
(23.9)
(32.7)
8.4
(8.5)
9.9
(0.2)
(47.0)
1,824.9
Balance at 31 December 2017
654.6
384.1
(18.1)
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 27 to 30.
Virgin Money Group Annual Report 2017 I 205
Consolidated statement of changes in equity
For the year ended 31 December 2016
Attributable to equity holders (continued)
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
Balance at 1 January 2016
Comprehensive income
Profit for the year
Other comprehensive income/(expense)
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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 27 to 30.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
206 I Virgin Money Group Annual Report 2017
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 provided by/(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 (used in)/provided by investing activities
Cash flows from financing activities
Dividends paid to ordinary shareholders
Distributions to Additional Tier 1 security holders
Other distributions
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
2017
£ million
2016
£ million
262.6
194.4
34(a)
34(b)
34(c)
(4,357.8)
(5,387.3)
5,806.6
3,957.3
48.2
(45.1)
60.3
(22.1)
1,714.5
(1,197.4)
(541.5)
(670.0)
497.1
1,150.0
(74.3)
(5.8)
–
(31.6)
(8.6)
0.7
(124.5)
440.5
(23.9)
(32.7)
(0.2)
746.2
(608.3)
(8.5)
–
72.6
1,662.6
1,372.2
3,034.8
(20.8)
(12.6)
–
1,278.9
(798.1)
(7.3)
227.6
667.7
(89.2)
1,461.4
1,372.2
11
25
25
34(d)
For the year ended 31 December
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 207
Note 1: Basis of preparation and accounting policies
1.1 Reporting entity
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.
IFRS comprises accounting standards prefixed IFRS issued
by the International Accounting Standards Board (IASB) and
those prefixed IAS issued by the IASB’s predecessor body
as well as interpretations issued by the IFRS Interpretations
Committee (IFRS IC) and its predecessor body. The
EU endorsed version of IAS 39 ‘Financial Instruments:
Recognition and Measurement’ relaxes some of the hedge
accounting requirements; the Group has not taken advantage
of this relaxation, and therefore there is no difference in
application to the Group between IFRS as adopted by the EU
and IFRS as issued by the IASB.
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 2017, the Group adopted amendments to existing standards
that were endorsed for adoption by the EU and mandatory for
annual reporting periods beginning on or after 1 January 2017.
The adoption of the amendments to IAS 12 ‘Income Taxes’ had
no impact on these financial statements or the accounting
polices applied in their preparation. In adopting the
amendments to IAS 7 ‘Statement of cash flows’ reconciliation
disclosures have been provided in the notes to these financial
statements on liabilities included within ‘financing activities’
in the consolidated and parent cash flow statements.
New accounting standards issued by the IASB that are
relevant to the Group and effective in future periods are
presented in note 37.
1.4 Presentation of information
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 de-consolidated 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.
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.
The Virgin Money Foundation is classified as an associate.
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 and available-for-sale
financial assets held at fair value. 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.
The accounting policies have been applied consistently to all
periods presented in these financial statements.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
208 I Virgin Money Group Annual Report 2017
Note 1: Basis of preparation and accounting policies (continued)
1.7 Client money
The Group’s unit trust management and investment
intermediary subsidiary administers 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.
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, loan
commitment fees 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 on the written down carrying value using
the asset’s original effective interest rate, being 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.
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 of stocks
and shares ISAs, pensions, authorised unit trusts and other
financial services products.
Other operating income from sales of units in managed funds
is recognised daily based on the average volume of funds
under management.
Other income includes commission on donations and other
sundry income.
(e) 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:
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’s chief operating decision maker (which has been
determined by the Group to be the Executive Committee)
assesses performance and makes decisions regarding the
allocation of the Group’s resources, in accordance with IFRS 8
‘Operating Segments’. All of the Group’s product lines are
managed under a single centralised commercial function, with
the Group’s performance assessed, and resource allocation
decisions made, on a centralised basis. Therefore the Group
has determined that it has only one reportable segment.
The underlying basis is the basis on which financial
information is presented to the chief operating decision
maker which excludes certain items included in profit or loss
determined under IFRSs as adopted by the EU.
(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
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 209
Note 1: Basis of preparation and accounting policies (continued)
> 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 that
employees are required to provide services.
> 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 that employees are
required to provide services.
> 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
are held separately from those of the Group in independently
administered funds.
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 operates a number of equity settled share based
payment schemes in respect of services received from certain
of its employees.
The value of the employee services received in exchange for
awards granted under these schemes 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 vesting period).
All awards granted under current schemes are conditional
shares which have service conditions. The Long Term Incentive
Plan awards also have non-market performance conditions.
No awards have market performance conditions and no share
options have been granted in the current or prior year.
The employee expense is determined by reference to the
fair value of the number of shares that are expected to vest.
The fair value of the shares granted is based on market
prices at the date of award. The determination of fair values
excludes the impact of service conditions and any non-
market performance conditions, which are included in the
assumptions used to estimate the number of shares that are
expected to vest. At each balance sheet date, this estimate
is reassessed and if necessary revised. Any revision of the
original estimate is recognised in the income statement,
together with a corresponding adjustment to equity.
(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
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.
> Loans and receivables at amortised cost
The Group assesses whether objective evidence of impairment
exists individually for financial assets that are individually
significant. Financial assets that are not individually
significant are assessed on a collective basis, except for such
assets where there are specific circumstances indicating
evidence of impairment (for example loans that have entered
possession or where fraud has been committed).
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
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
210 I Virgin Money Group Annual Report 2017
Note 1: Basis of preparation and accounting policies (continued)
> 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 for retail assets 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
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.
When a loan or receivable is uncollectible, it is written off
against the related allowance 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.
An allowance 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
allowance is held for accounts where an impairment trigger
event has occurred which includes accounts benefitting
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 is impaired.
The loss is measured as the difference between the asset’s
acquisition cost less principal repayments and amortisation
and the current fair value. 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
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 & Customs.
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 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 and awards granted to employees.
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 211
Note 1: Basis of preparation and accounting policies (continued)
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.
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 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.
(j) Financial instruments
Financial assets
Management determines the classification of its financial
instruments at initial recognition.
In line with IAS 39 ‘Financial Instruments: Recognition and
Measurement’, financial assets can be classified in the
following categories:
> loans and receivables;
> available-for-sale;
> held to maturity; or
> financial assets at fair value through profit or loss.
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
> 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. No financial
assets were classified as held to maturity during either the
current or prior year.
> Financial assets at fair value through profit or loss
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)).
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.
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
212 I Virgin Money Group Annual Report 2017
Note 1: Basis of preparation and accounting policies (continued)
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
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.
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
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
and subsequently at fair value. Fair values 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. 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.
Derecognition of financial assets and liabilities
Derecognition is the point at which the Group ceases to
recognise an asset or liability on 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. 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.
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 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.
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 213
Note 1: Basis of preparation and accounting policies (continued)
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;
> hedging the interest rate risk of a portfolio of non-prepayable
fixed rate liabilities with interest rate derivatives. This solution
is used to establish a macro fair value hedge for derivatives
hedging fixed rate savings;
> hedging the interest rate risk of non-prepayable fixed rate
assets with interest rate derivatives. This solution is used to
establish micro fair value hedges for fixed rate investments;
and
> hedging the interest rate and foreign currency exchange 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. This
solution is used to establish micro fair value hedges for foreign
currency denominated fixed rate investments.
(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.
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.
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.
In accordance with note 1.5, the Group has assessed that it
controls the SPVs and therefore consolidates the assets and
liabilities of the SPVs, on a line by line basis.
(p) Funding for Lending Scheme
The Group participates in the Bank of England’s 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;
> it is probable that the asset created will generate future
economic benefits; and
> the development cost of the asset can be measured reliably.
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
214 I Virgin Money Group Annual Report 2017
Note 1: Basis of preparation and accounting policies (continued)
(r) Tangible fixed assets and depreciation
Following the initial recognition of development expenditure,
Tangible fixed assets are stated at cost less accumulated
the cost is amortised over the estimated useful lives of the
depreciation and provision for impairment, as appropriate.
assets created. Amortisation commences on the date that the
Cost includes the original purchase price of the asset and
asset is brought into use.
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.
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.
> Banking platforms
Banking platforms primarily represent the construction
of operating platforms, which are internally generated.
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
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.
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
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.
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 215
Note 1: Basis of preparation and accounting policies (continued)
(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.
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.
> Share issue costs
(t) Deposits from banks
Deposits from 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.
Trade creditors and accruals 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
> where the instrument will or may be settled in the 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.
> Dividends
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.
(aa) Contingent liabilities
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.
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
216 I Virgin Money Group Annual Report 2017
Note 1: Basis of preparation and accounting policies (continued)
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.
In the event that these estimates are revised at a later date,
a present value adjustment may be recognised in profit and
loss. This adjustment includes an element that adjusts income
previously recognised, as well as an element that adjusts
for future interest not yet recognised. Such adjustments
can introduce significant volatility. As such the EIR method
introduces a source of estimation uncertainty. Management
consider the most material risk of adjustment to be in relation
to the application of EIR to the Group’s credit card portfolio.
The Group offers a range of credit card products. Interest
income is recorded under the EIR method, which provides
a level yield over the life of the card. Management model
expected future cash flows over the estimated customer life,
restricted to a maximum of seven years, which is supported
by observed experience. Income recognition can differ
significantly from actual cash receipts over that period.
Similarly, the selection of expected life for modelling purposes
also has a material bearing on the EIR rate used for each
cohort. A shorter modelling period results in a lower rate for
income recognition. If the modelled period had been restricted
to five years at origination, the profit for the year would have
been reduced by approximately £25.2 million in 2017 and
£15.8 million in 2016.
As at 31 December 2017 the EIR method gave rise to an
adjustment of £159.8 million (2016: £81.8 million) to the
balance sheet value of unsecured loans. This adjustment
represented 5.3% (2016: 3.3%) of the balance sheet carrying
value of unsecured loans. The movement in the year of
£78.0 million was recognised as interest income.
In the calculation of EIR, Management uses estimates and
assumptions of future customer behaviour. These include the
estimation of utilisation of available credit, transaction and
repayment activity and the retention of the customer balance
after the end of a promotional period. Should Management’s
current estimation of future cash flows be inaccurate to the
extent that the original effective interest rates on unsecured
lending cohorts were all reduced by 0.1%, the present value
adjustment to interest income, in relation to the revised
future cash flows, would be approximately £(10.2) million as at
31 December 2017.
A significant proportion of the Group’s credit card portfolio
includes customers within promotional periods. The level
of repayment immediately post promotional period is a key
sensitivity within the EIR assumptions. There is evidence to
support the expected behaviour of customers after the end
of promotional periods, however there is inherent risk that
this data may not be indicative of actual future behaviour. If
the proportion of customers who repay their balance post-
promotion differs to Management’s estimate it can have a
material impact on the revised future cash flows.
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 32 for a description of different levels within the
fair value hierarchy. Levels are reviewed at each balance sheet
date and this determines whether 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 at bid price and
liabilities at ask price.
1.10 Critical estimates and judgements
The preparation of financial statements in conformity
with IFRS requires Management to make estimates and
judgements in the application of accounting policies that
affect the reported amounts of assets, liabilities, income and
expense. Estimates and judgements are based on historical
experience and Management’s best knowledge of the amount.
Due to the inherent uncertainty in making estimates and
judgements, actual results in future periods may be based on
amounts which differ from those estimates.
(a) Critical assumptions and sources of estimation
uncertainty
The following areas are the critical assumptions concerning
the future and the key sources of estimation uncertainty in
the reporting period. These areas may have a significant risk
of causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial year:
> Effective interest rates
For financial instruments recorded at amortised cost, IAS 39
requires interest to be measured under the effective interest
rate (EIR) method. For the Group this includes interest
income earned on mortgages and credit cards, as well as
interest expense paid on wholesale liabilities. The EIR rate
is determined at inception based upon Management’s best
estimate of the future cash flows of the financial instrument.
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 217
Note 1: Basis of preparation and accounting policies (continued)
To illustrate this, Management have undertaken a sensitivity
on post-promotion payment rates for all cohorts which are
still within their promotional periods at the end of 2017. For
these cohorts, should the payment rate be 10% higher than
forecast for the six months following end of promotion,
Management estimate this would result in a negative present
value adjustment to interest income of approximately £(30.8)
million as at 31 December 2017. In such an adjustment,
£(11.5) million would relate to write-off of income previously
recognised, and £(19.3) million would adjust for future interest
not yet recognised.
Fair value of financial assets and liabilities
Management must use estimation when calculating the fair
value of financial instruments categorised as level 2 and level
3 (as defined by IFRS 13). In these instances the necessary
valuation inputs are not observable and/or specific factors
may need to be considered. Details of the Group’s level 2 and
level 3 financial instruments are included in note 32.
Impairment of loans and receivables
Management must make a best estimate of losses incurred
at the balance sheet date when determining the appropriate
allowance for impairment of loans and receivables. Judgement
is required when individually assessing loans for impairment
and significant estimation is required when using statistical
models for collective assessment. The key assumptions
used within the statistical models are based on behavioural
and arrears status. These variables include measurement
of probability of default, probability that default results in
charge-off or possession, and any subsequent loss incurred
in that event. In relation to measuring incurred loss the
estimation of the period over which incurred losses emerge is
also an area of estimation uncertainty.
Management consider that the measurement of allowance
for impairment for a retail bank is a critical estimate. Whilst
the estimates used to determine the appropriate balance
sheet allowance are not currently considered to be a source
of material uncertainty, it is acknowledged that the Group
has observed historically low levels of customer arrears and
default. Material change in future customer behaviours and
unanticipated changes in the economic environment could
result in higher losses being incurred in future periods.
The most significant estimation within the measurement of
the secured impairment allowance is considered to be the
estimation of house prices. To the extent that house prices
differed adversely or positively by 10%, the impairment
allowance would be an estimated £1.7 million higher (2016:
£1.3 million) or £3.2 million lower (2016: £2.6 million) at
31 December 2017.
In relation to the measurement of the unsecured impairment
allowance, the estimation of the period over which incurred
losses emerge is considered to be the most significant
estimation. To the extent that the emergence period of six
months differs by +/-3 months, the impairment allowance
would be an estimated £7.1 million higher (2016: £5.9 million)
or £7.1 million lower (2016: £5.9 million) respectively.
The most significant area of estimation uncertainty relates
to the Group’s level 2 derivative financial instruments,
where valuations are not derived from quoted prices. The
accuracy of fair value calculations would be affected by
unexpected market movements and any inaccuracies within
the discounted cash flow models used, particularly use of
incorrect interest yield curves. For example, to the extent the
interest yield curve differed by +/- 10 bps, the net impact on
fair values of derivative financial instruments would be an
estimated increase of £41.5 million (2016: £33.1 million) or
decrease of £41.7 million (2016: £33.3 million) respectively.
(b) Critical judgements in applying accounting policies
The following are the critical judgements that have been made
in the process of applying the Group’s accounting policies that
have the most significant effect on the amount recognised in
the financial statements:
Capitalisation of intangibles and assessment for
impairment
Significant judgement is required when assessing whether the
conditions of IAS 38 have been met to allow the capitalisation
of project development costs as an intangible asset. During
the reporting period the Group has incurred significant costs
in relation to the development of the Group’s digital banking
programme. Following a detailed review of the programme
and the nature of the costs incurred, Management have
determined that the amount of £38.3 million meets the
recognition criteria for capitalisation as an intangible asset.
Separately, Management judgement is required in assessing
whether capitalised intangible assets or assets not yet in use
exhibit any indicators of impairment at the reporting date.
If there are indicators of impairment, an estimate of the
recoverable amount is made which may indicate the need for
an impairment charge to be recognised. Management have
assessed and reviewed intangible assets for the existence
of impairment indicators. This exercise identified previous
software development, with a carrying value of £4.8 million,
which was discontinued in the year in light of a strategic
decision to consolidate activities within the digital banking
programme. An impairment charge of £4.8 million was
recognised in the financial statements (2016: £nil).
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
218 I Virgin Money Group Annual Report 2017
Note 2: Segmental analysis and reconciliation to underlying basis
The Group falls within the scope of IFRS 8 ‘Operating Segments’. The Group’s chief operating decision maker (which has been
determined to be the Executive Committee) assesses performance and makes decisions based on the performance of the Group
as a whole. The Group has therefore determined that it has one reportable operating segment and is therefore not required to
produce additional segmental disclosure.
The Group operates in a single geographic segment, being the UK. The Group is not reliant on a single customer.
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 page 48. The table below
reconciles the statutory results to the underlying basis.
Adjusted for
Statutory
results
£m
IPO
share based
awards
£m
Strategic
items
£m
Fair value
losses on
financial
instruments
£m
Underlying
basis
£m
594.6
68.1
662.7
(355.9)
306.8
(44.2)
262.6
–
–
–
0.9
0.9
–
0.9
–
–
–
6.5
6.5
–
6.5
Adjusted for
–
3.3
3.3
–
3.3
–
3.3
594.6
71.4
666.0
(348.5)
317.5
(44.2)
273.3
Statutory
results
£m
IPO
share based
awards
£m
Strategic
items
£m
Simplification
costs
£m
Fair value
losses on
financial
instruments
£m
Underlying
basis
£m
522.4
59.0
581.4
(349.4)
232.0
(37.6)
194.4
–
–
–
2.0
2.0
–
2.0
(3.4)
–
(3.4)
5.8
2.4
–
2.4
–
–
–
5.6
5.6
–
5.6
–
8.9
8.9
–
8.9
–
8.9
519.0
67.9
586.9
(336.0)
250.9
(37.6)
213.3
Year ended 31 December 2017
Net interest income
Other income
Total income
Total operating expenses
Profit before tax from operating activities
Impairment
Profit before tax
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
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 219
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 impaired assets was £7.1 million (2016: £5.8 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
2017
£m
945.2
0.9
946.1
5.6
6.3
2016
£m
933.1
2.3
935.4
8.9
3.8
958.0
948.1
(16.5)
(310.8)
(31.0)
(5.1)
(363.4)
594.6
2017
£m
21.3
8.3
29.6
–
29.6
(7.6)
(370.7)
(40.6)
(6.8)
(425.7)
522.4
2016
£m
19.5
9.3
28.8
(1.2)
27.6
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
220 I Virgin Money Group Annual Report 2017
Note 5: Other operating income
Investment and pension income
Gains on sale of available-for-sale financial assets
Other
Total other operating income
Note 6: Operating expenses
Staff costs:
Wages and salaries
Social security costs
Other pension costs
Employee share schemes
Premises and equipment:
Hire of equipment
Rent and rates
Other property costs
Other expenses:
Marketing costs
Telecommunications and IT
Professional fees
Other
Depreciation, amortisation and impairment:
Depreciation of tangible fixed assets
Amortisation of intangible assets
Impairment of intangible assets
Total operating expenses
2017
£m
32.0
8.4
1.4
41.8
2016
£m
31.7
6.8
1.8
40.3
2017
£m
2016
£m
161.9
160.7
15.5
10.9
9.9
14.6
10.7
12.8
198.2
198.8
4.6
14.4
11.0
30.0
21.8
18.5
23.1
29.1
92.5
8.7
21.7
4.8
35.2
355.9
4.6
14.3
9.6
28.5
21.0
17.4
20.0
42.7
101.1
5.6
15.4
–
21.0
349.4
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 221
Note 6: Operating expenses (continued)
Average headcount
The monthly average number of persons (including Directors)
employed by the Group during the year was as follows:
Full time
Part time
Total
2017
2,413
811
3,224
2016
2,394
746
3,140
Retirement benefit obligations
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 £10.9 million (2016:
£10.7 million) during the year. There were no contributions
overdue at the year end (2016: £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 Company’s current year Annual Report and Accounts
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 services
Total other non-audit fees
Total fees payable to the auditors by the Group
All amounts are shown exclusive of VAT.
2017
£m
2016
£m
0.2
1.1
1.3
0.2
1.5
0.1
0.1
1.6
0.2
0.7
0.9
0.2
1.1
0.1
0.1
1.2
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 Report and Accounts 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 statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
222 I Virgin Money Group Annual Report 2017
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 Selected senior
plan
employees
Conditional share
award
Continuing employment or leavers in certain
circumstances and achievement of performance
conditions
Issue dates2
2015, 2016 &
2017
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 & 2017
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.
(A) Long-term incentive plan (LTIP)
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.
The performance period for the 2015 awards ended on
31 December 2017. Based on performance against the targets
set, 65.3 per cent of the 2015 awards will vest.
During 2017, selected senior employees of the Group were
granted up to a maximum of 1,382,905 Ordinary Shares
under the LTIP scheme. 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
2017 was £3.27 based on market prices at the date of grant.
(B) Deferred bonus share plan
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 2017 bonuses will be
granted under this scheme in 2018.
During 2017, selected senior employees of the Group were
granted up to a maximum of 1,833,349 Ordinary Shares under
the scheme. This number includes an award granted to senior
employees who joined the Company in 2017 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
2017 was £3.26 based on market prices at the date of grant.
(C) – (F) Phantom share award, IPO incentive scheme,
Recruitment award and IPO share award
These schemes relate to awards issued in previous
years. No awards were granted under these schemes in
2017 (2016: none).
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 223
Note 7: Share based payments (continued)
Movement in share options and conditional shares
Ordinary Shares
Interest
in share
options1
Long-term
incentive
plan
Deferred
bonus share
plan
Phantom
share
award
IPO share
award
Shares in existence at 1 January 2017
625,328
2,651,338
2,098,649
2,044,480
68,920
Granted in year
Exercised or vested in year
Forfeited in year
–
–
–
1,382,905
1,833,349
–
–
(47,021)
(1,105,235)
(1,480,940)
(66,304)
(153,464)
(124,782)
–
(2,616)
Outstanding 31 December 2017
625,328
3,833,758
2,701,981
563,540
Of which exercisable
625,328
–
–
–
–
–
Shares in existence at 1 January
2016
Granted in year
Exercised or vested in year
Forfeited in year
Outstanding 31 December
2016
–
–
–
Ordinary Shares
Interest
in share
options1
Long-term
incentive
plan
Deferred
bonus share
plan
Phantom
share
award
IPO incentive
scheme
Recruitment
award
IPO share
award
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
–
Of which exercisable
625,328
–
–
–
1 This scheme was set up for Sir David Clementi, who was Chairman for the period from October 2011 to May 2015. All share options granted under the scheme had vested prior to 1 January
2016. No share options have been exercised during 2017 or 2016. The weighted-average exercise price for options outstanding at 1 January 2017 and 31 December 2017 was £2.15. The
options outstanding will expire 10 years from the date of listing if not exercised.
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
224 I Virgin Money Group Annual Report 2017
Note 8: Allowance for impairment losses on loans and receivables
2017
On
unsecured
loans
£m
39.5
(34.2)
42.0
47.3
On secured
loans
£m
10.6
(0.7)
2.2
12.1
Total
£m
50.1
(34.9)
44.2
59.4
On secured
loans
£m
8.7
(0.8)
2.7
10.6
2016
On
unsecured
loans
£m
31.2
(26.6)
34.9
39.5
At 1 January
Advances written off
Charge to the income statement
As at 31 December
Of the total allowance in respect of loans and advances to customers, £57.5 million (2016: £49.4 million) was assessed on a
collective basis.
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
2017
£m
(63.5)
(0.6)
(64.1)
(6.9)
0.9
(0.4)
(6.4)
(70.5)
Total
£m
39.9
(27.4)
37.6
50.1
2016
£m
(40.3)
0.4
(39.9)
(14.0)
(0.2)
(0.2)
(14.4)
(54.3)
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 225
Note 9: Taxation (continued)
Analysis of tax charge recognised in Other Comprehensive Income:
Current tax
Cash flow hedge reserve
Deferred tax
Revaluation reserve in respect of available-for-sale financial assets
Cash flow hedge reserve
Total (charge)/credit
2017
£m
2016
£m
2.4
4.9
(0.1)
(5.0)
(2.7)
(1.7)
1.4
4.6
(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 19.25% (2016: 20%)
Factors affecting charge:
Disallowed items
Bank corporation tax surcharge
UK corporation tax rate change
Deferred tax charge in respect of share schemes
Adjustments in respect of prior years
Total tax charge
2017
£m
262.6
(50.5)
(1.0)
(18.9)
(0.4)
–
0.3
2016
£m
194.4
(38.9)
(1.8)
(12.5)
(0.2)
(1.1)
0.2
(70.5)
(54.3)
The main rate of corporation tax reduced from 20% to 19% on 1 April 2017, and will reduce further to 17% on 1 April 2020 in
accordance with the Finance Act 2016.
The charge in respect of the corporation tax surcharge for banks which was introduced from 1 January 2016 is £18.9 million in
the year ended 31 December 2017. 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 statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
226 I Virgin Money Group Annual Report 2017
Note 10: Earnings per share
Profit attributable to equity owners – basic and diluted
Distributions to Additional Tier 1 security holders (net of tax)
Profit attributable to equity shareholders 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)
2017
£m
192.1
(24.8)
167.3
2016
£m
140.1
(10.1)
130.0
2017
Number
of shares
(million)
2016
Number
of shares
(million)
442.1
3.8
445.9
37.8
37.5
442.8
4.7
447.5
29.4
29.1
Basic earnings per share has been calculated after deducting 2.8 million (2016: 1.7 million) ordinary shares representing the
weighted-average of 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 2017 none were anti-dilutive (2016: nil).
Note 11: Dividends
An interim dividend of 1.9 pence (2016: 1.6 pence) per Ordinary Share, amounting to £8.4 million (2016: £7.1 million), was paid in
September 2017 and a final dividend in respect of the year ended 31 December 2016 of 3.5 pence (31 December 2015: 3.1 pence)
per Ordinary Share amounting to £15.5 million (31 December 2015: £13.7 million), was paid in May 2017. These dividends were
deducted from retained profits in the current year.
The Directors have recommended for approval at the 2018 AGM the payment of a final dividend in respect of the year ended
31 December 2017 of 4.1 pence per ordinary share, amounting to £18.1 million. If approved, this final dividend will be paid on
16 May 2018 to shareholders on the register at close of business on 6 April 2018. The financial statements for the year ended
31 December 2017 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 2018.
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 2017 I 227
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
–
–
–
–
–
–
–
–
2,579.0
–
359.4
36,740.2
0.3
–
55.0
–
–
–
–
–
1,051.8
–
–
11.9
–
11.5
–
2,579.0
55.4
78.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
359.4
36,740.2
0.3
1,051.8
55.0
39,733.9
1,051.8
11.9
11.5
55.4
40,864.5
243.3
41,107.8
5,379.0
30,808.4
–
2,736.9
215.1
39,139.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,379.0
30,808.4
10.7
82.5
0.3
93.5
–
–
–
–
–
–
2,736.9
215.1
10.7
82.5
0.3
39,232.9
50.0
39,282.9
1,824.9
41,107.8
As at 31 December 2017
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 statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
228 I Virgin Money Group Annual Report 2017
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
–
–
–
–
–
–
–
–
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
22.9
206.8
–
–
–
–
22.9
206.8
–
–
–
–
–
–
234.1
35,055.6
2,132.5
28,106.3
229.7
2,600.0
189.5
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
Virgin Money Group Annual Report 2017 I 229
Note 13: Derivative financial instruments
The fair values and notional amounts of assets and liabilities recognised within Derivative financial instruments are set out in the
following table.
As at 31 December 2017
As at 31 December 2016
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 (gross)
Less: contracts centrally cleared
Interest rate derivatives (net)
Derivatives designated as cash flow hedges:
Interest rate derivatives (gross)
Less: contracts centrally cleared
Interest rate derivatives (net)
Currency derivatives
Total derivative assets/(liabilities) –
in accounting hedge relationships
23,314.7
(17,360.6)
5,954.1
1,199.0
(1,199.0)
–
705.6
6,659.7
61.7
(50.2)
11.5
–
–
–
55.4
66.9
(91.0)
21,584.8
8.5
(8,194.1)
(82.5)
13,390.7
(2.9)
2.9
–
(0.3)
(82.8)
1,287.0
(1,287.0)
–
520.3
13,911.0
Derivatives in economic hedging relationships but not in accounting hedge relationships
Interest rate derivatives (gross)
Less: contracts centrally cleared
Interest rate derivatives (net)
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)
7,205.6
(2,830.7)
4,374.9
76.0
25.7
4,476.6
9.6
(0.8)
8.8
3.0
0.1
11.9
(10.4)
7,549.6
2.8
(7.6)
(3.1)
–
(3,665.1)
3,884.5
56.0
149.5
(10.7)
4,090.0
34.7
(13.7)
21.0
3.5
(3.5)
–
64.7
85.7
15.7
(2.5)
13.2
3.4
1.9
18.5
(219.8)
13.0
(206.8)
(2.2)
2.2
–
–
(206.8)
(24.0)
9.2
(14.8)
(3.8)
(4.3)
(22.9)
11,136.3
78.8
(93.5)
18,001.0
104.2
(229.7)
The notional 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 on page 155.
The fair values and notional amounts shown in the line ‘Total recognised derivative assets/(liabilities)’ above reflect amounts
relating only to contracts that are not centrally cleared. Centrally cleared interest rate derivatives are set off in the balance sheet
as they meet the offsetting criteria under IAS 32 (refer note 33).
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
2017
£m
(7.2)
(15.5)
(22.7)
2016
£m
(9.2)
(22.3)
(31.5)
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
230 I Virgin Money Group Annual Report 2017
Note 13: Derivative financial instruments (continued)
Fair value losses on financial instruments
Fair value gains/(losses) from derivatives designated as fair value hedges
Fair value (losses)/gains from underlying hedged risk
Fair value gain from fair value hedge accounting¹
Fair value losses from cash flow hedges
Fair value gains/(losses) from other derivatives²
Fair value losses on financial instruments
2017
£m
104.8
(99.4)
5.4
(12.6)
3.9
(3.3)
2016
£m
(69.9)
81.8
11.9
(13.6)
(7.2)
(8.9)
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
Cash collateral pledged to banks (refer note 17)
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
2017
£m
201.0
13.8
93.0
51.6
359.4
2017
£m
21,878.7
5,438.5
27,317.2
6,367.3
33,684.5
3,071.4
36,755.9
2016
£m
354.3
33.0
181.1
67.2
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
(59.4)
(50.1)
36,696.5
32,187.9
43.7
179.2
36,740.2
32,367.1
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.
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 2017 I 231
Note 16: Available-for-sale financial assets
At 1 January
Additions
Disposals (sales and redemptions)
Exchange differences
Changes due to amortisation and accrued interest
Net (losses)/gains on changes in fair value
At 31 December
2017
£m
858.8
690.9
2016
£m
1,296.9
670.0
(483.2)
(1,111.1)
1.2
(5.0)
(10.9)
1,051.8
0.1
(11.6)
14.5
858.8
Gains on sale of available-for-sale securities amounted to £8.4 million (2016: £6.8 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 154. 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 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 2017 cash collateral of £101.5 million
had been pledged by the Group, comprising £93.0 million
recognised within loans and advances to banks and
£8.5 million within other assets (2016: £235.0 million,
comprising £181.1 million recognised within loans and
advances to banks and £53.9 million within other assets) and
£53.9 million (2016: £14.0 million) has been received as cash
collateral by the Group, of which £13.0 million is recognised
within deposits from banks (2016: £14.0 million) and
£40.9 million within other liabilities (2016: £nil).
At 31 December 2017 available-for-sale financial assets of
£nil (2016: £10.6 million) are pledged as collateral in respect of
derivative transactions.
At 31 December 2017 loans and advances of £6,219.8 million
(2016: £2,302.3 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 statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
232 I Virgin Money Group Annual Report 2017
Note 18: Securitisation
Securitisation programmes
Loans and advances to customers include loans securitised under the Group’s Gosforth securitisation programmes, which have
been sold by Virgin Money plc to bankruptcy remote SPVs. The transfers of the mortgage loans to the structured entities are not
treated as sales by the Group. No gain or loss has been recognised on pledging the mortgages to the programmes.
The SPVs are principally engaged in providing long-term funding to the Group through the issue of amortising mortgage
backed securities to investors on terms whereby the majority of the risks and rewards of the loans and advances are retained by
Virgin Money plc. As a result, the SPVs are fully consolidated in these financial statements and all of the loans and advances are
retained on the Group’s balance sheet, with the related securities included within debt securities in issue.
Residential mortgage loans
Less: securities held by the Group
Total securitisation programmes
2017
2016
Loans and
advances
securitised
£m
Securities in
issue
£m
Loans and
advances
securitised
£m
Securities in
issue
£m
5,438.5
5,132.7
4,907.8
4,616.7
–
(2,698.6)
–
(2,322.5)
5,438.5
2,434.1
4,907.8
2,294.2
The full liabilities associated with the securitisation programme (excluding the proportion relating to securities retained) are
recognised within debt securities in issue. However, the Group’s obligations are limited to the cash flows generated from the
underlying securitised assets.
At the reporting date the Group had over-collateralised the securitisation transactions, as set out in the table above, to meet
the terms of the transaction and to provide operational flexibility. In addition, the Group held cash deposits and permitted
investments of £350.4 million (2016: £354.3 million) supporting the securities issued. To satisfy transaction requirements the
Group may provide additional support to the SPV in the form of increased cash reserves funded by further subordinated loans.
Transfers of financial assets
There were no transactions in the year involving the transfer of financial assets that were derecognised by the Group but with
ongoing exposure (2016: none). There were also no transactions in the year where the Group transferred assets that should have
been derecognised in their entirety (2016: none).
As noted above, loans and advances transferred to SPVs do not represent transfers of financial assets by the Group as all of the
SPVs are consolidated in these financial statements.
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 233
Core
deposit
intangible
£m
Software
£m
Banking
platforms
£m
Total
£m
4.8
–
–
4.8
–
–
4.8
3.4
1.4
–
4.8
–
–
–
4.8
–
–
85.1
31.6
(2.1)
114.6
36.0
(5.7)
144.9
40.7
10.4
(2.1)
49.0
18.1
(5.7)
4.8
66.2
78.7
65.6
21.5
111.4
–
–
21.5
38.3
–
59.8
2.9
3.6
–
6.5
3.6
–
–
10.1
49.7
15.0
31.6
(2.1)
140.9
74.3
(5.7)
209.5
47.0
15.4
(2.1)
60.3
21.7
(5.7)
4.8
81.1
128.4
80.6
Note 19: Intangible assets
Cost:
At 1 January 2016
Additions
Disposals
At 31 December 2016
Additions
Disposals
At 31 December 2017
Accumulated amortisation and impairment:
At 1 January 2016
Charge for the year
Disposals
At 31 December 2016
Charge for the year
Disposals
Impairment
At 31 December 2017
Balance sheet amount at 31 December 2017
Balance sheet amount at 31 December 2016
Within Banking platforms at 31 December 2017 is £38.3 million of expenditure relating to the development of the Group’s digital
banking programme.
The impairment charge of £4.8 million in the year represents previous software development which has been discontinued in
light of a strategic decision to consolidate activities within the digital banking programme.
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
234 I Virgin Money Group Annual Report 2017
Note 20: Tangible fixed assets
Cost:
At 1 January 2016
Additions
Disposals
At 31 December 2016
Additions
Disposals
At 31 December 2017
Accumulated depreciation and impairment:
At 1 January 2016
Depreciation charge for the year
Disposals
At 31 December 2016
Depreciation charge for the year
Disposals
At 31 December 2017
Balance sheet amount at 31 December 2017
Balance sheet amount at 31 December 2016
Plant,
equipment,
fixtures,
fittings and
vehicles
£m
Land and
buildings
£m
63.3
1.8
(0.6)
64.5
–
–
64.5
9.5
0.1
(0.5)
9.1
2.4
–
11.5
53.0
55.4
39.5
6.8
(3.0)
43.3
5.8
(0.1)
49.0
18.7
5.5
(2.9)
21.3
6.3
(0.1)
27.5
21.5
22.0
Total
£m
102.8
8.6
(3.6)
107.8
5.8
(0.1)
113.5
28.2
5.6
(3.4)
30.4
8.7
(0.1)
39.0
74.5
77.4
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 235
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
Total deferred tax assets
2017
£m
10.8
(2.1)
0.2
(3.2)
0.6
5.2
11.5
2016
£m
12.9
(2.6)
5.2
(4.0)
7.3
4.2
23.0
The Group has not recognised deferred tax assets in respect of gross unused tax losses of £31.2 million (2016: £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
2017
£m
23.0
(2.1)
(6.7)
2.4
(6.4)
(0.1)
(5.0)
–
(5.1)
11.5
2017
£m
6.3
40.2
37.4
83.9
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
Included within ‘Other’ assets are amounts receivable from clearing houses on centrally cleared derivative financial instruments
of £8.5 million (2016: £50.7 million) recorded on a net basis.
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
236 I Virgin Money Group Annual Report 2017
Note 23: Deposits from banks
Liabilities in respect of securities sold under repurchase agreements
Secured loans
Other deposits from banks
Total deposits from banks
Secured loans relate to the Group’s drawings from the Bank of England’s Term Funding Scheme.
Note 24: Customer deposits
Savings and investment accounts
Personal current accounts
Total customer deposits
Note 25: Debt securities in issue
2017
£m
1,130.0
4,236.0
13.0
2016
£m
850.0
1,268.0
14.5
5,379.0
2,132.5
2017
£m
2016
£m
30,393.0
27,762.7
415.4
343.6
30,808.4
28,106.3
At 1 January 2016
Repayments
Issues
Revaluations
Other movements
At 31 December 2016
Repayments
Issues
Revaluations
Other movements
At 31 December 2017
Securitisation
programmes
£m
Medium
term notes
£m
Total
£m
1,741.9
(798.1)
1,278.9
73.0
(1.5)
2,294.2
(608.3)
746.2
1.5
0.5
297.5
2,039.4
–
–
–
8.3
305.8
–
–
–
(3.0)
(798.1)
1,278.9
73.0
6.8
2,600.0
(608.3)
746.2
1.5
(2.5)
2,434.1
302.8
2,736.9
Other movements comprise amortisation of issuance costs and hedge accounting adjustments.
Securitisation programmes
On 25 September 2017, the Group raised £746.2 million from institutional investors through the issuance of Residential
Mortgage Backed Securities (RMBS) in the Gosforth Funding 2017-1 transaction in US Dollars and Sterling.
In 2016, the Group also raised £1,278.9 million through the issue of RMBS in the Gosforth Funding 2016-1 and Gosforth Funding
2016-2 transactions in Euro, US Dollars 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.
Medium term notes
The Group’s Medium Term Notes have a nominal value of £300 million at a coupon of 2.25% per annum and will be repayable on
21 April 2020. They were issued as part of the Group’s £3 billion Global Medium Term Note programme.
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 237
2017
£m
66.3
7.5
2.3
110.9
54.5
241.5
2017
£m
0.1
654.5
654.6
2016
£m
59.0
8.5
3.0
127.2
102.2
299.9
2016
£m
0.1
654.5
654.6
2016
£
Note 26: Other liabilities
Trade creditors and accruals
Provisions
Deferred income
Accrued interest
Other liabilities
Total other liabilities
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.
Note 27: Share capital and share premium
Share capital
Share premium
Total share capital and share premium
Issued and fully paid share capital
Ordinary Shares of £0.0001 each
At 1 January
Issued during year
At 31 December
Deferred Shares of £0.001 each
At 1 January and at 31 December
2017
Number
of shares
2017
£
2016
Number
of shares
444,942,008
44,494
443,711,458
44,371
–
–
1,230,550
123
444,942,008
44,494
444,942,008
44,494
10,052,161
10,052
10,052,161
10,052
As permitted by the Companies Act 2006, the Company’s Articles of Association do not contain any references to authorised
share capital.
The following describes the rights attaching to each share class at 31 December 2017:
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. The shares represented 81.6 per cent of the total share capital at 31 December 2017 (2016:
81.6 per cent).
There are no restrictions in the transfer of Ordinary Shares in the Company other than:
> certain restrictions which may from time to time be imposed by law and regulations (for example, insider trading laws);
> where Directors and certain employees of the Group require the approval of the Company to deal in the Company’s Ordinary
Shares; and
> pursuant to the rules of some of the Group’s employee share plans where certain restrictions may apply while the Ordinary Shares
are subject to the plan.
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
238 I Virgin Money Group Annual Report 2017
Note 27: Share capital and share premium (continued)
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. The shares represented 18.4 per cent of the total share capital at 31 December 2017
(2016: 18.4 per cent).
Note 28: 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. 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 of 8.750% and
7.875% from their issue dates up to their first reset dates on
10 November 2021 and 31 July 2019 respectively;
2017
£m
384.1
–
384.1
2016
£m
156.5
227.6
384.1
> 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.
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 239
2017
£m
4.1
2.6
(13.5)
11.5
(0.1)
4.6
2017
£m
(31.5)
(1.2)
12.6
(2.6)
(22.7)
2017
£m
659.2
192.1
(23.9)
(24.3)
(8.5)
9.9
(0.2)
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)
2016
£m
544.8
140.1
(20.8)
(10.1)
(7.3)
12.5
–
804.3
659.2
Note 29: Other reserves
Revaluation reserve in respect of available-for-sale financial assets
At 1 January
Net gains from changes in fair value
Net gains on disposal transferred to income statement
Amounts transferred to income statement 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
Note 30: 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)
Other distributions
As at 31 December
Other distributions represent distributions paid by certain SPVs currently in the process of liquidation.
Employee Benefit Trust (EBT)
Retained earnings are stated after deducting £8.0 million (2016: £6.9 million) representing 2,868,458 (2016: 2,922,220) 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 2017 is £8.0 million (2016: £6.9 million). The market value of the shares held in the EBT at 31 December 2017 was
£8.2 million (2016: £8.8 million).
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
240 I Virgin Money Group Annual Report 2017
Note 31: Contingent liabilities and commitments
Contingent liabilities
The Board was not aware of any significant contingent liabilities as at 31 December 2017 (31 December 2016: 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
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
2017
£m
2016
£m
5,815.9
4,854.3
97.1
280.5
88.2
346.6
6,193.5
5,289.1
2017
£m
7.5
26.0
18.7
52.2
2017
£m
4.6
–
–
4.6
2016
£m
7.1
25.0
20.0
52.1
2016
£m
4.6
4.6
–
9.2
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 241
Note 31: Contingent liabilities and commitments (continued)
Capital commitments
Capital commitments for the acquisition of fixed assets:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Total capital commitments
2017
£m
1.1
–
–
1.1
2016
£m
1.0
–
–
1.0
Note 32: 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 2017
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
Level 1
£m
Level 2
£m
Level 3
£m
Total
fair
value
£m
Total
carrying
value
£m
–
–
–
0.3
–
–
2,579.0
359.4
–
–
–
55.0
–
–
2,579.0
2,579.0
359.4
359.4
36,951.6
36,951.6
36,740.2
–
0.3
–
0.3
0.3
55.0
0.3
0.3
55.0
Total financial assets at fair value
0.3
2,993.4
36,951.9
39,945.6
39,734.2
Deposits from banks
Customer deposits
Debt securities in issue
Other liabilities
Total financial liabilities at fair value
–
–
5,379.0
30,800.5
2,748.3
–
–
215.1
2,748.3
36,394.6
–
–
–
–
–
5,379.0
5,379.0
30,800.5
30,808.4
2,748.3
2,736.9
215.1
215.1
39,142.9
39,139.4
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
242 I Virgin Money Group Annual Report 2017
Note 32: Fair value of financial assets and financial liabilities (continued)
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
Total financial assets at fair value
Deposits from banks
Customer deposits
Debt securities in issue
Other liabilities
Total financial liabilities at fair value
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
68.8
0.7
0.3
68.8
–
–
–
0.7
–
–
786.3
635.6
–
–
–
68.8
0.7
1,490.7
32,514.3
34,005.7
33,858.8
–
–
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
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 243
Note 32: 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, the Group’s policy is to hedge fixed rate loans
in respect of interest rate risk, which limits the Group’s
exposure to this difference in value to be within the Group’s
risk appetite.
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.
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 statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
244 I Virgin Money Group Annual Report 2017
Note 32: 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.
2017
Financial assets
Derivative financial instruments
Available-for-sale financial assets
Financial liabilities
Derivative financial instruments
2016
Financial assets
Derivative financial instruments
Available-for-sale financial assets
Financial liabilities
Derivative financial instruments
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
–
1,048.7
78.8
–
–
2.8
78.8
1,051.5
–
93.5
–
93.5
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 Valuations
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.
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 unlisted preferred stock. The valuations take into account relevant information on the individual
investments, with discounts applied to reflect their illiquid nature and, in respect of the preferred stock, risks of reduction in
conversion rights. The discounts applied are the most significant unobservable valuation inputs.
The Group’s shares in VocaLink Holdings Limited (Vocalink) were included within this category at 31 December 2016. The shares
were sold in April 2017 following regulatory approval of Mastercard’s acquisition of Vocalink, resulting in recognition of a gain on
disposal of £6.1 million, included within other operating income.
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 245
Note 33: 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
Net amounts
£m
129.8
359.4
5,379.0
107.7
251.9
(51.0)
–
–
(14.2)
(36.8)
78.8
359.4
5,379.0
93.5
215.1
(11.5)
–
–
(11.5)
–
(67.3)
(74.6)
(8.4)
(63.6)
–
–
284.8
5,370.6
18.4
215.1
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
Net amounts
£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)
–
–
–
(78.8)
(168.1)
–
–
467.5
68.8
(10.7)
2,121.8
(25.4)
(168.1)
–
–
36.2
189.5
As at 31 December 2017
Financial assets
Derivative financial instruments
Loans and advances to banks
Financial liabilities
Deposits from banks
Derivative financial instruments
Other liabilities
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
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 statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
246 I Virgin Money Group Annual Report 2017
Note 34: 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 deposits from banks
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, amortisation and impairment
Other non-cash items
Total non-cash and other items
(d) Analysis of cash and cash equivalents as shown in the balance sheet
Cash and balances at central banks
Less: mandatory reserve deposits1
Loans and advances to banks
Available-for-sale financial assets (with a maturity of less than 3 months)
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.
2017
£m
2016
£m
(4,417.3)
(5,295.7)
25.4
34.1
(21.9)
(69.7)
(4,357.8)
(5,387.3)
2017
£m
3,247.1
2,702.1
(136.2)
(6.4)
2016
£m
833.2
2,961.4
73.7
89.0
5,806.6
3,957.3
2017
£m
35.2
13.0
48.2
2017
£m
2,579.0
(53.0)
2,526.0
359.4
149.4
2016
£m
21.0
39.3
60.3
2016
£m
786.3
(49.1)
737.2
635.6
–
(5,379.0)
(2,132.5)
5,379.0
2,131.9
–
(0.6)
3,034.8
1,372.2
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 247
Note 35: Related party transactions
Key Management Personnel
Key Management Personnel refer to the Executive Committee 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
2017
£m
6.7
6.1
0.9
13.7
2016
£m
7.4
7.6
0.8
15.8
Aggregate contributions in respect of Key Management Personnel to defined contribution pension schemes £0.9 million (2016:
£0.8 million).
Deposits
At 1 January
Placed (includes deposits of appointed Key Management Personnel)
Withdrawn (includes deposits of former Key Management Personnel)
Deposits outstanding at 31 December
2017
£m
2016
£m
1.4
0.6
(0.9)
1.1
2.2
1.5
(2.3)
1.4
Deposits placed by Key Management Personnel attracted interest rates of up to 3.0% (2016: 3.0%). At 31 December 2017, the
Group did not provide any guarantees in respect of Key Management Personnel (2016: none).
At 31 December 2017, 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 £0.6 million with 7 Key
Management Personnel (2016: £0.9 million with 7 Key Management Personnel).
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.
Other transactions
Transaction value at year end:
Trademark licence fees paid to Virgin Enterprises Limited
Commissions received and charges paid to Virgin Atlantic Airways Limited
Donations to The Virgin Money Foundation
Dividend payment to Virgin Group Holdings Limited
Other costs paid to Virgin Management Group Companies
Balance outstanding at year end:
Trademark licence fees to Virgin Enterprises Limited
Commissions received and charges paid to Virgin Atlantic Airways Limited
Asset recognised in relation to Virgin Atlantic Airways Limited agreement
Liability recognised in relation to Virgin Atlantic Airways Limited agreement
Donations to The Virgin Money Foundation
Other costs to Virgin Management Group Companies
2017
£m
(8.0)
0.5
(1.4)
(8.4)
(0.3)
2017
£m
(0.6)
0.1
10.0
(10.0)
–
–
2016
£m
(7.0)
0.4
(1.4)
(7.3)
(0.3)
2016
£m
(0.6)
0.1
–
–
(0.2)
(0.1)
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
248 I Virgin Money Group Annual Report 2017
Note 35: Related party transactions (continued)
Trademark licence fees paid to Virgin
Enterprises Limited
Licence fees are payable to Virgin Enterprises Limited for the
use of the Virgin Money brand trademark.
of support services to the Foundation on a pro bono basis,
including use of facilities and employee time. The estimated
gift in kind for support services provided during the year was
£0.4 million (2016: £0.3 million).
Virgin Atlantic Airways Limited
The Group receives credit card commissions and incurs air
mile charges to Virgin Atlantic Airways Limited (VAA) in
respect of an agreement between the two parties.
In June 2017 an agreement was signed with VAA which will
give rise to related party transactions in future periods. An
asset and liability has been recognised during the year in
relation to a committed payment under this agreement.
Donations to The Virgin Money Foundation
(the Foundation)
The Group has made donations to the Foundation in both the
current and prior year to enable the Foundation to pursue its
charitable objectives. The Group has also provided a number
Dividend payment to Virgin Group Holdings
Limited
The Group made dividend payments totalling £8.4 million to
Virgin Group Holdings Limited in the year which represented
that company’s proportionate share of the total final 2016
dividend and the total interim 2017 dividend. In the prior year,
the Group made dividend payments totalling £7.3 million
to Virgin Group Holdings Limited, which represented that
company’s proportionate share of the total final 2015 dividend
and the total interim 2016 dividend.
Other costs paid to Virgin Management
Group Companies
These costs include transactions with other companies in
the Virgin Group.
Note 36: Events after balance sheet date
There have been no significant events between 31 December 2017 and the date of approval of the financial statements which
would require a change or additional disclosure in the financial statements.
Note 37: 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.
(a) IFRS 9 ‘Financial instruments’
(Effective 1 January 2018, EU endorsed on
22 November 2016)
Background
In July 2014, the IASB issued the final version of IFRS 9
‘Financial Instruments’ which replaces IAS 39 ‘Financial
Instruments: Recognition and Measurement’. This new
accounting standard is effective from 1 January 2018 and has
three core areas of change: Classification and Measurement;
Hedge Accounting; and Impairment. The most significant
impacts on the Group are from the changes to impairment.
Classification and Measurement
The Classification and Measurement requirements of IFRS 9
require financial assets to be classified into one of three
measurement categories, fair value through profit or loss
(FVTPL), fair value through other comprehensive income
(FVOCI) and amortised cost. For financial assets 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. IFRS 9 retains most of the
existing classification requirements for financial liabilities.
In relation to Classification and Measurement, IFRS 9 will not
result in a significant change to current asset and liability
measurement bases. The Group’s debt security investment
portfolio, which is classified as Available-for-Sale under
IAS 39, will be reclassified into the FVOCI category on
1 January 2018, with no change in measurement basis and
no impact to the Group’s financial position. The Group’s
small number of equity investments, which are classified as
Available-for-Sale under IAS 39, will be reclassified to either
FVOCI or FVTPL on a case by case basis, with no change in
measurement basis.
Hedge Accounting
The hedge accounting requirements of IFRS 9 are more closely
aligned with risk management practices and follow a more
principle-based approach. IFRS 9 includes an accounting
policy choice to maintain existing IAS 39 hedge accounting
rules until the IASB completes its project on macro hedging.
The Group has decided to apply this accounting policy choice
and will continue applying IAS 39 hedge accounting.
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 249
Note 37: Future accounting developments (continued)
Impairment (Expected Credit Loss)
The impairment requirements of 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.
Key accounting judgements
The Group undertook a full technical assessment of IFRS 9
which highlighted certain significant accounting policies and
judgements. These areas include the selection of quantitative
and qualitative criteria for the determination of significant
increase in credit risk and the application of forward-looking
data into the expected credit loss calculations, including
multiple economic scenarios. The following summarises
the key accounting judgements the Group will apply on
adoption of IFRS 9:
Measurement of Expected Credit Loss
Expected credit loss is measured on either a 12 month or
lifetime basis depending on whether a significant increase in
credit risk has occurred since initial recognition or whether
the asset meets the definition of default. Expected credit loss
is the product of the probability of default (PD), exposure at
default (EAD) and loss given default (LGD), discounted at the
effective interest rate.
Significant Increase in Credit Risk (movement from stage 1
to stage 2)
The Group has identified a series of quantitative, qualitative
and backstop criteria that will be used to determine if an
account has demonstrated a significant increase in credit risk,
and therefore should move from stage 1 to stage 2:
> Quantitative measures consider the increase in an accounts
remaining lifetime PD compared to the expected residual
lifetime PD when the account was originated. The Group
will segment its credit portfolios into PD bands and has
determined a relevant threshold for each PD band, where
a movement in excess of threshold is considered to be
significant. These thresholds have been determined separately
for each portfolio based on historical evidence of delinquency.
> Qualitative measures include the observation of specific
events such as short-term forbearance, payment cancellation,
historical arrears or extension to customer terms.
> IFRS 9 includes a rebuttable presumption that 30 days past
due is an indicator of a significant increase in credit risk.
The Group considers 30 days past due to be an appropriate
backstop measure and will not rebut this presumption.
Definition of default (movement to stage 3)
The Group has identified a series of quantitative and
qualitative criteria that will be used to determine if an
account meets the definition of default, and therefore should
move to stage 3:
> IFRS 9 includes a rebuttable presumption that 90 days past
due is an indicator of default. The Group considers 90 days
past due to be an appropriate measure of default and will not
rebut this presumption.
> Qualitative measures include the observation of specific
events such as insolvency or enforcement activity.
Forward-looking information and multiple economic
scenarios
The assessment of significant increase in credit risk and the
calculation of expected credit loss both incorporate forward-
looking information. The Group has identified the most
significant macroeconomic factors including house price
inflation, unemployment rate and Bank Base Rate. These
variables and their associated impact on PD, EAD and LGD
have been factored into the credit loss models.
The Group has determined an approach to the selection and
application of multiple scenarios. The Group does not have
an in-house economics function and will therefore source
economic scenarios from a third party source to form the
basis of the economic scenarios used. The Group will consider
a minimum of three scenarios on a probability-weighted
approach. These scenarios include a base, an upside and a
downside scenario.
IFRS 9 implementation programme and governance
The Group has managed the transition to IFRS 9 through
an IFRS 9 delivery programme to ensure a high-quality
implementation in compliance with the accounting and
regulatory guidance. The Audit Committee has had oversight
responsibility for the implementation of IFRS 9.
The Group has developed and built new expected credit loss
models for the key retail portfolios (secured and unsecured).
The Group has run these models during the second half of
2017 in a period of parallel run to ensure full readiness in
advance of implementation from 1 January 2018. The Group
is in the process of completing the refinement and validation
of these models. The Group’s auditors have undertaken
extensive audit procedures during the course of 2017 to
provide proactive assurance over the new expected credit loss
models and the Group’s IFRS 9 accounting policies.
Notes to the consolidated financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
250 I Virgin Money Group Annual Report 2017
Note 37: Future accounting developments (continued)
The Group continues to monitor the wider market
developments in relation to IFRS 9, including evolving
disclosure requirements and regulatory developments such as
potential capital transitionary rules.
Impact of transition to IFRS 9
The Group will record an adjustment to its opening
1 January 2018 retained earnings to reflect the application
of the new requirements of IFRS 9 and will not restate
comparative periods.
The Group estimates the transition to IFRS 9 will reduce
shareholders’ equity by approximately £35 million after
deferred tax as at 1 January 2018. The impact on the
Group’s CET1 ratio will reflect the recently published capital
transitional arrangements. This adjustment arises from the
increase in the Group’s balance sheet loan loss allowances
as a result of the application of IFRS 9 requirements, with
the Group’s retail credit card portfolio being the most
significantly impacted.
The Group continues to refine, monitor and validate certain
elements of the impairment models and related controls
ahead of full reporting of IFRS 9 impacts later in 2018.
(b) IFRS 15 ‘Revenue from Contracts with
Customers’ (Effective 1 January 2018, EU
endorsed on 22 September 2016)
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.
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.
(c)
IFRS 16 ‘Leases’ (Effective 1 January
2019, EU endorsed on 31 October 2017)
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.
This will mainly impact properties the Group currently
accounts for as operating leases. A project is in place and
the Group is currently undertaking a review of its lease
agreements. No decisions have been made yet in relation to
transition options.
Note 38: 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
2,959
£662.7m
£262.6m
£45.1m
£0.0m
Notes to the consolidated financial statements
Virgin Money Group Annual Report 2017 I 251
Parent Company balance sheet
For the year ended 31 December
Assets
Loans and advances to banks
Derivative financial instruments
Investment in related 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
2017
£ million
2016
£ million
2
3
4
5
6
6
7
23.0
1.4
41.0
4.6
1,380.3
1,370.4
0.1
3.7
0.1
17.0
1,408.5
1,433.1
1.3
–
104.2
105.5
654.6
384.1
264.3
1,303.0
1,408.5
2.5
4.3
86.2
93.0
654.6
384.1
301.4
1,340.1
1,433.1
1 The Company profit for the year was £11.3 million (2016: £56.3 million)
The accompanying notes are an integral part of the parent company financial statements.
The financial statements on pages 251 to 260 were approved and authorised for issue by the Board and were signed on its behalf
on 26 February 2018.
Glen Moreno
Chair
Jayne-Anne Gadhia CBE
Chief Executive
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
252 I Virgin Money Group Annual Report 2017
Parent Company statement of changes in equity
For the year ended 31 December
Balance as at 1 January 2017
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
Tax attributable to Tier 1 securities
Dividends paid to ordinary shareholders
Balance as at 31 December 2017
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
Tax attributable to Tier 1 securities
Dividends paid to ordinary shareholders
Balance as at 31 December 2016
Share capital
and share
premium
£ million
Other equity
instruments
£ million
Retained
earnings
£ million
Total
equity
£ million
654.6
384.1
301.4
1,340.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
654.6
384.1
11.3
11.3
9.9
(8.5)
–
(32.7)
6.8
(23.9)
264.3
11.3
11.3
9.9
(8.5)
–
(32.7)
6.8
(23.9)
1,303.0
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
The accompanying notes are an integral part of the parent company financial statements.
Virgin Money Group Annual Report 2017 I 253
Parent Company cash flow statement
For the year ended 31 December
Profit before taxation
Adjustments for:
Change in operating assets
Change in operating liabilities
Non-cash and other items
Movement in amounts from group undertakings
Net cash provided by/(used in) operating activities
Net cash outflow from investing activities
Increase in investment in subsidiary undertaking
Investment in Additional Tier 1 instruments issued by subsidiary undertaking
Net cash used in investing activities
Net cash (outflow)/inflow from financing activities
Issue of Additional Tier 1 securities (net of issue costs)
Distribution to Additional Tier 1 security holders
Purchase of own shares
Repayments of amounts due to group undertakings
Borrowings drawn from group undertakings
Dividends paid on ordinary shares
Net cash (used in)/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 the parent company financial statements.
Notes
2017
£ million
2016
£ million
14.0
55.5
10(a)
10(b)
10(c)
10(d)
2.8
(2.3)
9.4
(1.1)
22.8
(21.0)
(2.3)
(23.3)
(2.8)
6.8
(58.7)
(0.9)
(0.1)
–
(227.7)
(227.7)
–
227.6
(32.7)
(8.5)
(17.0)
64.6
(23.9)
(17.5)
(18.0)
41.0
23.0
(12.6)
(7.3)
(25.0)
3.9
(20.8)
165.8
(62.0)
103.0
41.0
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
254 I Virgin Money Group Annual Report 2017
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 including interpretations issued by the
IFRS Interpretations Committee 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 of
the Companies Act 2006.
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 the Group has no policy in
respect of investments in related undertakings.
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.
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.
Investments in related undertakings are recognised at
historical cost, less any provision for impairment. They are
reviewed annually for impairment, or more frequently when
there are indications that the investment may be impaired.
An impairment loss is recognised for the amount by which the
carrying amount of the investment exceeds its recoverable
amount, which is defined as the higher of its fair value less
costs of disposal or its value in use.
These accounting policies have been applied consistently to all
years presented in these financial statements.
Note 2: Investment in related undertakings
At 1 January
Increase in investment in subsidiary undertaking
Decrease in investment in subsidiary undertaking
Capital contribution – share based payments
Investment in Additional Tier 1 instruments issued by subsidiary undertaking
At 31 December
2017
£m
2016
£m
1,370.4
1,127.6
21.0
(21.0)
9.9
–
–
–
12.8
230.0
1,380.3
1,370.4
Change in investment in subsidiary undertakings
The transfer of stocks and shares ISA contracts from Virgin Money Personal Financial Service Limited (VMPFS) to Virgin Money
Unit Trust Managers Limited (VMUTM) was completed in March 2017, following approval by the Directors of those companies.
Subsequent to the transfer, all new stocks and shares ISA sales are written by VMUTM. The transfer was funded through a new
share issuance made by VMUTM to the Company, resulting in an increase in the investment held in VMUTM, with a related
decrease in the investment held in VMPFS.
The decrease in the investment held in VMPFS of £21.0 million was determined based on a value-in-use calculation, using cash
flow projections based on financial budgets approved by the Board covering a three year period, applying a discount rate of 11%.
Notes to the Parent Company financial statements
Virgin Money Group Annual Report 2017 I 255
Note 2: Investment in related undertakings (continued)
Related undertakings
The following entities were related undertakings of the Company during the year, including SPVs controlled by the Company in
accordance with note 1.5 to the consolidated financial statements:
Name
Subsidiary undertakings
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
Indirect holdings
Eagle Place Covered Bonds LLP1,2
Virgin Money Nominees Limited1,2
Northern Rock Limited1,2
Associated undertaking
The Virgin Money Foundation¹
Class of Share
Holding
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
N/A
Ordinary
Ordinary
100%
100%
100%
100%
100%
N/A3
100%
100%
N/A
N/A3
Notes to the Parent Company financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
256 I Virgin Money Group Annual Report 2017
Note 2: Investment in related undertakings (continued)
Name
Special purpose vehicles
Gosforth Funding 2011-1 plc4
Gosforth Funding 2012-1 plc4
Gosforth Funding 2012-2 plc4
Gosforth Funding 2014-1 plc5
Gosforth Funding 2015-1 plc5
Gosforth Funding 2016-1 plc5
Gosforth Funding 2016-2 plc5
Gosforth Funding 2017-1 plc5
Gosforth Mortgages Trustee 2011-1 Limited4
Gosforth Mortgages Trustee 2012-1 Limited4
Gosforth Mortgages Trustee 2012-2 Limited4
Gosforth Mortgages Trustee 2014-1 Limited5
Gosforth Mortgages Trustee 2015-1 Limited5
Gosforth Mortgages Trustee 2016-1 Limited5
Gosforth Mortgages Trustee 2016-2 Limited5
Gosforth Mortgages Trustee 2017-1 Limited5
Gosforth Holdings 2011-1 Limited4
Gosforth Holdings 2012-1 Limited4
Gosforth Holdings 2012-2 Limited4
Gosforth Holdings 2014-1 Limited5
Gosforth Holdings 2015-1 Limited5
Gosforth Holdings 2016-1 Limited5
Gosforth Holdings 2016-2 Limited5
Gosforth Holdings 2017-1 Limited5
Class of Share
Holding
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
Issue of securitised notes
Trust
Trust
Trust
Trust
Trust
Trust
Trust
Trust
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
1 Registered office: Jubilee House, Gosforth, Newcastle upon Tyne, NE3 4PL.
2 Dormant companies.
3 The entity does not have share capital.
4 These companies are in the process of liquidation and their registered office is C/O KPMG LLP, 8 Princes Parade, Liverpool, L3 1QH.
5 Registered office: Fifth Floor, 100 Wood Street, London, EC2V 7EX.
Note 3: Deferred tax
The Company has not recognised deferred tax assets in respect of gross unused tax losses of £31.1 million (2016: £31.1 million).
Note 4: Other assets
Amounts owed from subsidiary undertakings
Group relief owed from related parties
Total
2017
£m
–
3.7
3.7
2016
£m
13.7
3.3
17.0
Amounts owed from subsidiary undertakings of £8.2 million were waived during the year as a result of a simplification of the
Group’s intercompany structure. A further amount of £6.6 million was waived in January 2018 and so was provided for at the
balance sheet date.
Notes to the Parent Company financial statements
Virgin Money Group Annual Report 2017 I 257
Note 5: Other liabilities
Other creditors
Trading amounts owed to subsidiary undertakings
Loan amounts owed to subsidiary undertakings
Total
Loan amounts owed to subsidiary undertakings is analysed further below:
At 1 January
Repayments
Borrowings drawn
Amounts offset against dividends received from subsidiary undertakings
Total
2017
£m
3.4
0.6
100.2
104.2
2017
£m
83.1
(17.0)
64.6
(30.5)
100.2
Note 6: Share capital, share premium and other equity instruments
Details of the Company’s share capital, share premium and other equity instruments are given in notes 27 and 28 of the
consolidated financial statements.
Note 7: Retained earnings
At 1 January 2016
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
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 2017
Subsidiary
contribution
£m
Investment
in own
shares
£m
Retained
profits
£m
38.5
(2.9)
234.9
–
–
–
–
–
12.8
51.3
–
–
–
–
–
9.9
61.2
–
–
–
(7.3)
3.3
–
(6.9)
–
–
–
(8.5)
7.4
–
(8.0)
56.3
(20.8)
(10.1)
–
(3.3)
–
257.0
11.3
(23.9)
(25.9)
–
(7.4)
–
211.1
264.3
2016
£m
–
3.1
83.1
86.2
2016
£m
163.9
(25.0)
3.9
(59.7)
83.1
Total
£m
270.5
56.3
(20.8)
(10.1)
(7.3)
–
12.8
301.4
11.3
(23.9)
(25.9)
(8.5)
–
9.9
Notes to the Parent Company financial statementsStrategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
258 I Virgin Money Group Annual Report 2017
Note 8: Analysis of financial assets and financial liabilities
by measurement basis
2017
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
Non financial liabilities
Total liabilities
Equity
Total liabilities and equity
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
Financial liabilities
at amortised cost
£m
Loans and
receivables
£m
Derivatives not in
IAS 39 hedges
£m
–
–
–
–
1.3
–
100.8
102.1
23.0
–
–
23.0
–
–
–
–
–
1.4
–
1.4
–
–
–
–
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
Total
£m
23.0
1.4
–
24.4
1,384.1
1,408.5
1.3
–
100.8
102.1
3.4
105.5
1,303.0
1,408.5
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
Notes to the Parent Company financial statements
Notes to the Parent Company financial statements
Virgin Money Group Annual Report 2017 I 259
Note 9: Fair value of financial assets and financial liabilities
Financial assets
Loans and advances to banks
Amounts owed from
subsidiary undertakings
Financial liabilities
Amounts owed to subsidiary
undertakings
Deposits from banks
Level 1
£m
Level 2
£m
Level 3
£m
–
–
–
–
23.0
–
100.8
1.3
–
–
–
–
2017
2016
Total
fair value
£m
Total
carrying
value
£m
Total
fair value
£m
Total
carrying
value
£m
23.0
–
23.0
–
41.0
13.7
41.0
13.7
100.8
100.8
86.2
86.2
1.3
1.3
2.5
2.5
The Company has £1.4 million (2016: £0.3 million) of net derivative financial instruments classified as level 2 in the fair
value hierarchy.
Note 10: 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
Amounts offset against dividends received from subsidiary undertakings
Other non-cash items
Non-cash movement in investments
Total non-cash and other items
2017
£m
3.2
(0.4)
2.8
2017
£m
(4.3)
2.0
(2.3)
2017
£m
(30.5)
28.8
11.1
9.4
2016
£m
(3.1)
0.3
(2.8)
2016
£m
3.6
3.2
6.8
2016
£m
(59.7)
16.1
(15.1)
(58.7)
(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 £23.0 million at 31 December 2017 (31 December 2016:
£41.0 million).
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
260 I Virgin Money Group Annual Report 2017
Note 11: 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 35 to the consolidated financial statements. The Company has no employees (2016: 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
Net loans owed (to)/from subsidiaries
Dividend payment to Virgin Group Holdings Limited
Transaction value
Year ended 31 December
Balance outstanding
at 31 December
2017
£m
(0.7)
(16.4)
(8.4)
2016
£m
(0.7)
(2.2)
(7.3)
2017
£m
3.1
(100.2)
–
2016
£m
0.3
(69.5)
–
Amounts owed from subsidiary undertakings of £8.2 million were waived during the year as a result of a simplification of the
Group’s intercompany structure. A further amount of £6.6 million was waived in January 2018 and so was provided for at the
balance sheet date.
Notes to the Parent Company financial statements
Virgin Money Group Annual Report 2017 I 261
Other information
262 Alternative performance measures
263 Glossary
266 Abbreviations
267 Shareholder information
i
F
n
a
n
c
a
i
l
S
t
a
t
e
m
e
n
t
s
O
t
h
e
r
I
n
f
o
r
m
a
t
i
o
n
Virgin Money Lounge, Manchester
Strategic ReportFinancial ResultsGovernanceRisk Management Report
262 I Virgin Money Group Annual Report 2017
Alternative Performance Measures
The Group analyses its performance on an underlying basis, as described in the basis of preparation of the financial results on
page 48, and reconciled to the statutory results in note 2 to the consolidated 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.
Banking Net Interest Margin (NIM) Net interest income, calculated on an underlying basis, as a percentage of simple average interest-earning
banking assets.
Cost of funds (spread)
Funding costs divided by average funding balances less the average 3 month Libor interest rate for the period.
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
Loan-to-deposit ratio
Net interest margin (NIM)
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.
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 income, calculated on an underlying basis, as a percentage of simple average interest-earning
assets.
Return on assets
Profit attributable to equity owners divided by closing total assets.
Return on tangible equity (RoTE)
Underlying profit before tax (adjusted to deduct distributions to Additional Tier 1 securities) less tax
calculated using the statutory effective tax rate of the Group, divided by simple average tangible equity.
Tangible equity is calculated as total equity less other equity instruments 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 before tax (adjusted to deduct distributions to Additional Tier 1 securities) less tax
calculated using the statutory effective tax rate of the Group, divided by the weighted-average number of
Ordinary Shares outstanding during the period (excluding own shares held).
Underlying net interest income
Statutory net interest income adjusted for a subset of certain items as detailed on page 48.
Underlying profit/(loss) before tax
Statutory profit/(loss) before tax adjusted for certain items as detailed on page 48.
Underlying return on assets
Underlying profit before tax (adjusted to deduct distributions to Additional Tier 1 securities) less tax
calculated using the statutory effective tax rate of the Group, divided by a simple average total assets.
Underlying total income
Statutory total income adjusted for a subset of certain items as detailed on page 48.
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.
Glossary
Virgin Money Group Annual Report 2017 I 263
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 where in-house collections and recoveries have been
exhausted. This involves the removal of the balance and associated provision from the balance sheet with
any remaining outstanding balance recognised as a loss. Charged-off accounts may be subject to debt-sale,
where by additional recoveries will be taken to profit or 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
Risk reduction 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)
Expected Credit Loss (IFRS 9)
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.
Expected Credit Losses are a provision held on the balance sheet for all financial instruments. Expected
Credit Losses may be recognised on either a 12 month or lifetime basis. The level will be determined by the
performance of individual assets, and take into consideration associated credit risk attributes, including a
significant increase in credit risk or any credit impairment. An expected credit loss may either be individual
or collective as a result of the raising of a charge against profit for the expected loss inherent in the lending
book. An expected credit loss may either be individual or collective.
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)
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.
Funding for Lending Scheme (FLS)
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 households and businesses by lowering interest rates and increasing access to credit.
Funding Risk
The inability to raise and maintain sufficient funding in quality and quantity to support the delivery of the
business plan.
Strategic ReportFinancial ResultsGovernanceRisk Management ReportFinancial StatementsOther Information
264 I Virgin Money Group Annual Report 2017
Glossary
Impaired Assets
Impairment Allowance (IAS 39)
Impairment Losses
Interest Rate Risk
Loans that are in arrears and where the carrying amount of the loan exceeds the expected recoverable
amount. All mortgage expired terms, fraud and operational risk loans are categorised as impaired irrespective
of the expected recoverable amount. Unsecured lending assets are treated as impaired at one day past due.
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.
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.
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)
Internal Liquidity Adequacy
Assessment Process (ILAAP)
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.
The ILAAP provides comprehensive documentation of the Bank’s Liquidity Risk Management framework,
including: identifying the key liquidity and funding risks to which Virgin Money is exposed; describing how
these risks are identified, monitored and measured and describing the techniques and resources used to
manage and mitigate these risks.
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 (IAS 39)
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, 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.
Mortgage Completion Spread
The balance weighted average effective interest rate on new mortgages advanced in the period less the cost
of associated fixed to 3 month Libor interest rate swaps.
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.
From a scale between 0 to 10, 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 one year, or liabilities with a
maturity of over one 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
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.
Virgin Money Group Annual Report 2017 I 265
Pillar 3
Probability of Default (PD)
Repurchase Agreements (Repos)
Risk Appetite
Risk-Weighted Assets
Securitisation
Sovereign Exposures
Standardised Approach
Stress Testing
Tier 1 Capital
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 six months of mortgage repayments or three 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).
The risk appetite sets limits on the amount and type of risk that the Group is willing to tolerate 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.
Virgin
Virgin Group Holdings Limited.
Virgin Money Trademark Licence
Agreement
The agreement under which Virgin Enterprises Limited (a subsidiary undertaking of Virgin Group Holdings
Limited) grants perpetual licence to Virgin Money to use the ‘Virgin’ and ‘Virgin Money’ trademarks.
i
F
n
a
n
c
a
i
l
S
t
a
t
e
m
e
n
t
s
O
t
h
e
r
I
n
f
o
r
m
a
t
i
o
n
Strategic ReportFinancial ResultsGovernanceRisk Management Report
266 I Virgin Money Group Annual Report 2017
Abbreviations
AGM Annual General Meeting
GDPR General Data Protection Regulation
MREL Minimum Requirements for Own
Funds and Eligible Liabilities
AIRB
Advanced Internal Ratings Based
GHG Greenhouse Gas
NIM Net Interest Margin
AT1
Additional Tier 1
BOE
Bank of England
HMRC Her Majesty’s Revenue & Customs
NPS Net Promoter Score
HPI
House Pricing Index
NSFR Net Stable Funding Ratio
CET1 Common Equity Tier 1 Capital
HQLA High Quality Liquid Assets
PCA
Personal Current Account
CRD
Capital Requirements Directive
IAS
International Accounting Standards
PD
Probability of Default
CRR
CVA
DTR
Capital Requirements Regulation
IASB
International Accounting Standards Board
PRA
Prudential Regulation Authority
Credit Valuation Adjustment
ICAAP Internal Capital Adequacy
Assessment Process
PSD2 Second Payment Services Directive
Disclosure Guidance and
Transparency Rules
IFRS
International Financial Reporting Standards
PwC
PricewaterhouseCoopers LLP
EBO
Everyone better off
ILAAP Individual Liquidity Adequacy
Assessment Process
RoTE Return on Tangible Equity
EAD
Exposure At Default
IPO
Initial Public Offering
RMBS Residential Mortgage Backed
Securities
EIR
EPS
Effective Interest Rate
IRRBB Interest Rate Risk in the Banking Book
RWAs Risk-weighted Assets
Earnings per share
ISA
Individual Savings Account
SID
Senior Independent Director
FCA
Financial Conduct Authority
ISDA
International Swaps and Derivatives
Association
SME
Small or Medium-sized Enterprise
FLS
FRC
FSCS
FTE
FTP
Funding for Lending Scheme
LIBOR London Inter-Bank Offered Rate
SPV
Special Purpose Vehicle
Financial Reporting Council
LCR
Liquidity Coverage Ratio
TFS
Term Funding Scheme
Financial Services Compensation
Scheme
LGD
Loss Given Default
TNAV Tangible Net Asset Value
Full Time Equivalent
LTIP
Long-Term Incentive Plan
TSYS Total System Services, Inc
Funds Transfer Pricing
LTV
Loan-to-Value
Shareholder Information
Virgin Money Group Annual Report 2017 I 267
Annual General Meeting (AGM)
The AGM will be held on 9 May 2018 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 2017
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
Number of
shares –
millions
Shareholdings
0.4
251.5
178.2
14.8
444.9
451
409
94
38
992
Number of
shares –
millions
Shareholdings
0.2
0.7
5.1
49.7
163.0
226.2
444.9
474
179
134
139
60
6
992
%
0.1
56.5
40.1
3.3
100.0
%
0.0
0.2
1.1
11.2
36.7
50.8
100.0
i
F
n
a
n
c
a
i
l
S
t
a
t
e
m
e
n
t
s
O
t
h
e
r
I
n
f
o
r
m
a
t
i
o
n
Strategic ReportFinancial ResultsGovernanceRisk Management Report
268 I Virgin Money Group Annual Report 2017
Shareholder Information
Registrar
The Group’s share register is maintained by Equiniti Limited. Equiniti is responsible for keeping the Group’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 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).
Equiniti 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.
Issued by Virgin Money Holdings (UK) plc.
Registered office: Jubilee House, Gosforth, Newcastle upon Tyne NE3 4PL
Registered in England and Wales no.03087587