Virgin Money UK PLC: Third Quarter 2024 Trading Update

David Duffy, Chief Executive Officer:

“Our strategy remains on track, with financial performance in line with guidance. We delivered continued growth in deposits and unsecured lending in Q3 and remain focused on developing innovative new products for customers and maintaining good momentum into Q4. The acquisition by Nationwide is progressing as anticipated with the recent CMA clearance, and we expect it to complete in the final quarter of the calendar year.”

Overview

Following a strong H1, the Group has delivered continued strategic progress during Q3 and financial performance in-line with the updated guidance given alongside H1. The Group continues to expect the proposed acquisition of the Company by Nationwide Building Society (‘Nationwide’) to complete in calendar Q4 2024. Subject to the proposed acquisition completing, the Group will recognise further transaction-related adjustments, but anticipates remaining well-capitalised as part of the larger Nationwide group.

Strategic Update

• UK CMA² has unconditionally cleared the proposed acquisition of VMUK by Nationwide following its Phase 1 investigation; proposed acquisition remains subject to other regulatory approvals
• Launched new fully digitised personal loans proposition in direct channels in July; expect to re- enter the open market for personal loans later this year
• Signed strategic partnership with Experian, which will improve VMUK’s digital customer experience for unsecured lending, leveraging Experian’s data, analytics and cloud-based technology
• Embedded second phase of Consumer Duty requirements, which came into effect in July, including full review of off-sale products and enhanced customer communications
• Financial crime prevention programme (FCPP) progressing as expected; implemented upgraded financial crime platform in July; deployed new machine learning models to improve fraud detection
• As noted at H1, the Group has deferred certain restructuring activity as part of its ongoing cost savings programme, in light of the proposed acquisition by Nationwide

Financial update to 30 June 2024

Customer lending lower in Q3; continued deposit inflows

• Customer loans 0.9% lower in Q3 at £72.0bn reflecting lower mortgage balances and broadly stable lending balances across target segments of business and unsecured lending combined
• Mortgages 1.1% lower in Q3 at £56.0bn, reflecting disciplined approach to trading to protect overall spreads, as well as the impact of higher redemptions given the rate environment
• Business lending 1.1% lower in Q3 at £9.2bn; delivered 5.5% growth YTD and pipeline remains strong; muted Q3 reflects seasonal effects of lower drawdowns and higher repayments versus Q2
• Unsecured lending 1.3% higher in Q3 at £6.8bn, driven by ongoing growth in credit card lending; delivered year-to-date unsecured growth of 4.6%
• Deposits 2.4% higher in Q3 at £69.8bn, reflecting strong ISA demand at the start of the new tax year; deposit mix remains broadly stable relative to FY23

Q3 NIM performing in-line with expectations

• Q3 NIM of 1.89% was lower versus H1 of 1.94% as expected, primarily reflecting a lower contribution from cards EIR adjustments, partially offset by the reinvestment rate of the structural hedge

Adjusted cost:income ratio higher in Q3, as guided at H1

• Adjusted expenses in Q3 modestly higher YoY, contributing to an adjusted CIR of 54% (Q3 23: 51%), reflecting cost headwinds from inflation and deferral of cost savings
• Notable expenditure of £32m, included £10m of restructuring costs, £10m related to the FCPP, £5m of transaction related costs and £7m of VMI³ expenses⁴

Asset quality remains solid, with stabilising arrears trends

• Overall credit quality remains solid; arrears trends stabilised during Q3, including a reduction in the credit cards arrears rate. The Group’s macroeconomic scenarios were unchanged during Q3
• Credit provisions reduced to £611m (H1 24: £616m), primarily reflecting lower lending balances; provision coverage of 84bps remained stable (H1 24: 84bps)
• Q3 impairment charge was £45m, equivalent to an annualised CoR of 25bps; YTD CoR of 26bps

Capital, funding and liquidity remains strong

• CET1 remains robust at 14.4% on an IFRS 9 transitional basis, with no further capital distributions announced, as previously guided
• For further detail on capital movements, please see the Group’s Q3 Pillar 3 document
• Funding and liquidity remains strong, including 12-month average LCR of 155% and 12-month average NSFR of 137%
• The strong funding position and deposit performance in Q3 enabled the Group to further reduce its TFSME outstandings by £1.1bn in Q3 to £3.95bn, with the LDR reducing to 103% (FY23: 109%)
• The Group redeemed the remaining £144m stub of its £250m 9.25% AT1 instrument in June; the Group is not planning any MREL or capital issuance this year, subject to the acquisition process

Outlook

Following VMUK’s Q3 performance, which was in-line with expectations, the Group re-iterates its FY24 guidance, which was last updated at H1 24. The Group also expects to recognise further transaction- related adjustments, subject to the completion of the proposed acquisition of the Company by Nationwide:

• Anticipate 5-10% growth across target lending segments of business and unsecured lending in FY24
• Expect NIM to be in the range of 190-195bps for FY24, with NIM lower in H2 vs. H1 primarily reflecting a lower contribution from cards EIR adjustments
• Adjusted cost:income ratio anticipated to be higher in H2 vs. H1, reflecting the latest outlook for income, inflation and deferred cost savings
• Incurred £10m of transaction costs to date, expected to be significantly higher during rest of year
• Continue to expect the cost of risk to be in the range 30-35bps for FY24
• As previously announced, the Board does not intend to announce any further share buybacks or dividends given the proposed acquisition of the Company by Nationwide
• Continue to expect statutory RoTE to be lower in H2 vs. H1

Nationwide acquisition

• The proposed acquisition remains subject to certain outstanding conditions, including the receipt of PRA and FCA approval and sanction by the Court
• We continue to expect the transaction to conclude in the final quarter of the calendar year
• Expect to recognise further transaction-related adjustments, including TMLA⁵ exit fee and day-1 accounting harmonisation changes; expect to remain well capitalised as part of Nationwide Group

¹Adjusted to exclude notable items, including transaction costs and the new Bank of England Levy in FY24

²Competition and Markets Authority

³Virgin Money Investments

⁴Given fully consolidated accounting following the buy-out in April; there was also £6m of notable income recognised during Q3 relating to VMI income

⁵Virgin Money licences certain rights to use the “Virgin Money” brand from Virgin Enterprises pursuant to a brand licence agreement between Virgin Money and Virgin Enterprises, to which Virgin Money became a party on 18 June 2018 (the “TMLA”)

The Company further announces that a copy of the Q3 Pillar 3 Disclosures 2024 will shortly be available to view on the Company’s website at: https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/. A copy of the document has been submitted to the National Storage Mechanism and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism Link opens in a new window

Announcement authorised for release by Lorna McMillan, Group Company Secretary.

Forward looking statements

The information relates to Virgin Money UK PLC and its subsidiaries, which together comprise the “Group”.

The information in this document may include forward looking statements, which are based on assumptions, expectations, valuations, targets, estimates, forecasts and projections about future events. These can be identified by the use of words such as 'expects', 'aims', 'targets', 'seeks', 'anticipates', 'plans', 'intends', 'prospects' 'outlooks', 'projects', ‘forecasts’, 'believes', 'estimates', 'potential', 'possible', and similar words or phrases. These forward looking statements, as well as those included in any other material discussed at any presentation, are subject to risks, uncertainties and assumptions about the Group and its securities, investments and the environment in which it operates, including, among other things, the development of its business and strategy, any acquisitions, combinations, disposals or other corporate activity undertaken by the Group, trends in its operating industry, changes to customer behaviours and covenant, macroeconomic and/or geopolitical factors, the repercussions of the outbreak of coronaviruses (including but not limited to the COVID-19 pandemic), changes to its board and/ or employee composition, exposures to terrorist activity, IT system failures, cyber-crime, fraud and pension scheme liabilities, risks relating to environmental matters such as climate change including the Group’s ability along with the government and other stakeholders to measure, manage and mitigate the impacts of climate change effectively, changes to law and/or the policies and practices of the Bank of England, the Financial Conduct Authority and/or other regulatory and governmental bodies, inflation, deflation, interest rates, exchange rates, tax and national insurance rates, changes in the liquidity, capital, funding and/ or asset position and/or credit ratings of the Group, future capital expenditures and acquisitions, the repercussions of the UK's exit from the European Union (EU) (including any change to the UK’s currency and the terms of any trade agreements (or lack thereof) between the UK and the EU), Eurozone instability, Russia’s invasion of Ukraine, the conflict in the Middle East, any referendum on Scottish independence, and any UK or global cost of living crisis or recession.

In light of these risks, uncertainties and assumptions, the events in the forward looking statements may not occur. Forward looking statements involve inherent risks and uncertainties. Other events not taken into account may occur and may significantly affect the analysis of the forward looking statements. No member of the Group or their respective directors, officers, employees, agents, advisers or affiliates gives any representation, warranty or assurance that any such projections or estimates will be realised or that actual returns or other results will not be materially lower than those set out in this document and/or discussed at any presentation. All forward looking statements should be viewed as hypothetical. No representation or warranty is made that any forward looking statement will come to pass. Whilst every effort has been made to ensure the accuracy of the information in this document or oral or written material discussed or distributed at any presentation, the Group and their directors, officers, employees, agents, advisers and affiliates do not take any responsibility for such information or to update or revise it. Such information is subject to change. They will not be liable for any loss or damages incurred through the reliance on or use of it. No representation or warranty, express or implied, as to the truth, fullness, fairness, merchantability, accuracy, sufficiency or completeness of the information in this document or the materials used in and/ or discussed at, any presentation is given.

Certain industry, market and competitive position data contained in this document and the materials used in and/ or discussed at, any presentation, comes from official or third party sources. There is no guarantee of the accuracy or completeness of such data. While the Group reasonably believes that each of these publications, studies and surveys has been prepared by a reputable source, no member of the Group or their respective directors, officers, employees, agents, advisers or affiliates have independently verified the data. In addition, certain industry, market and competitive position data contained in this document and the materials used in and/ or discussed at, any presentation, comes from the Group’s own internal research and estimates based on the knowledge and experience of the Group’s management in the markets in which the Group operates. While the Group reasonably believes that such research and estimates are reasonable and reliable, they, and their underlying methodology and assumptions, have not been verified by any independent source for accuracy or completeness, and are subject to change. Accordingly, undue reliance should not be placed on any of the industry, market or competitive position data contained in this document and the materials used in and/ or discussed at, any presentation.

The information, statements and opinions contained in this document do not constitute or form part of, and should not be construed as, any public offer under any applicable legislation or an offer to sell or solicitation of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments. The distribution of this document in certain jurisdictions may be restricted by law. Recipients are required by the Group to inform themselves about and to observe any such restrictions. No liability to any person is accepted in relation to the distribution or possession of this document in any jurisdiction. The information, statements and opinions contained in this document and the materials used in and/ or discussed at, any presentation are subject to change.

Certain figures contained in the information, including financial information, may have been subject to rounding adjustments and foreign exchange conversions. Accordingly, in certain instances, the sum or percentage change of the numbers contained in the information may not conform exactly to the total figure given.

No statement in this announcement is intended as a profit forecast, profit estimate or quantified benefit statement for any period and no statement in this announcement should be interpreted to mean that earnings per share for Virgin Money for the current or future financial years would necessarily match or exceed the historical published earnings or earnings per share for Virgin Money or the Group.