# Virgin Money UK a good operating performance in challenging conditions

- Link: https://www.directorstalkinterviews.com/virgin-money-uk-a-good-operating-performance-in-challenging-conditions/412799294
- Published: 2019-11-28T07:25:43+00:00
- Author: Giles Arbor

> **David Duffy, Chief Executive Officer:**
> “In the first year of our newly combined business, we have delivered a good operating
> performance in challenging conditions and made great progress on the integration
> and rebrand to Virgin Money.
> Our statutory result was significantly affected by additional PPI provisions, 
> driven by the unprecedented surge in PPI information requests in August, along
> with anticipated Virgin Money acquisition-related costs.
> Our customer divisions have performed well – we have delivered a further c.£2bn
> in net lending to support UK SMEs and consumers, attracted c.£3bn in customer 
> deposits, and made marked improvements to our customer experience.
> We achieved all the required approvals in 2019 to enable us to operate as one 
> bank, with one brand, and are ready to deliver our strategy to disrupt the status
> quo with brilliant customer service and unique Virgin Money products. In December
> we are launching Virgin Money’s first digital personal current account and three
> new Virgin Money concept stores. A unique loyalty and rewards programme for customers
> featuring a number of Virgin Group companies will follow in 2020, along with the
> launch of our brand new Virgin Money business account.”

**VIRGIN MONEY UK (LON: VMUK) Key financial highlights**

·    Resilient operating performance in a challenging environment – NIM of 1.66%
in line with guidance and 6% reduction in underlying costs to £942m; pre-provision
operating profit improved +1% in 2019

·    Underlying profit of £539m down 7% due to higher impairments from IFRS 9 adoption
and normalisation

·    Transformation on track – £53m of run rate net cost savings achieved; on track
for c.£200m FY22 target

·    Statutory loss after tax of £194m due to legacy conduct costs and restructuring&
acquisition costs; Q4 PPI provision of £385m is within the Group’s previous guidance
range

·   Robust capital position with CET1 ratio of 13.3%; provides capacity to execute
our strategy and deliver all of the targets announced at our Capital Markets Day(
CMD) in June

·  Dividend suspended for FY19 in light of additional PPI provisions; the Board 
will reconsider dividends for FY20 in line with normal practice

**Delivering our strategic priorities**

·   **Pioneering Growth** – strong growth in lending and deposits in line with our
strategy – above market asset growth in Business (+4.5%) and Personal (+16%), and
disciplined growth in Mortgages (+1.7%); good growth in lower-cost relationship 
deposits (+7%) across both Business and Personal

·   **Delighted Customers & Colleagues** – improved Group NPS of +37 (2018: +34),
with B digital banking service NPS of +52, and customer experience enhancements 
such as the new Virgin Money credit card app, our JV with Salary Finance offering
workplace personal lending and an energy switching partnership with GoCompare; colleague
engagement score of 76% despite major change agenda

·   **Super Straightforward Efficiency** – significant progress made in the first
year of the Virgin Money integration; all 6.6m customers can now be served under
the Virgin Money brand after successful completion of the FSMA Part VII process

·   **Discipline & [Sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news)**–
robust capital position supports delivery of CMD strategy and targets; cost of risk
of 21bps was stable through the year and we maintained our prudent underwriting 
approach

**Significant new developments for customers as our full rebrand is launched**

·    First ever Virgin Money digital current account ready to launch in December,
built on our innovative FinTech-friendly digital platform

·    First three new concept Virgin Money stores will also open in December

·    New Digital Disruption Hub in Newcastle will accelerate customer experience
and digital functionality improvements from January 2020 in support of our target
for Top 3 CMA service quality rankings

·   Plans to launch a unique personal rewards and loyalty programme leveraging the
wider Virgin Group and a business banking proposition in 2020 are progressing well

 ·    FY20 guidance in line with medium-term strategic and financial targets

**Full Year 2019 financial results summary**

**Above market growth in Business and Personal; good growth in relationship deposits**

·    Customer lending growth of 2.9% to £73.0bn, all within our existing risk appetite:

–     Business lending growth of 4.5% to £7.9bn; supported by originations of £2.2bn
during 2019

–     Personal lending growth of 16.1% to £5.0bn driven by high-quality Virgin Money
credit card growth, new balances from our Salary Finance partnership and an improved
online personal loan proposition

–     Mortgage lending growth of 1.7% to £60.1bn, maintaining market share at c.
4% in line with strategy

·    Deposit growth of 4.6% to £63.8bn, with 7.1% growth in lower-cost relationship
deposits to £21.3bn

·    Robust asset quality with a cost of risk of 21bps stable through 2019 but increased
on FY18 (15bps) largely due to the adoption of IFRS9 and normalisation

**Resilient operating performance; statutory loss due to conduct, restructuring &
acquisition costs**

·      Statutory loss after tax of £194m reflects legacy conduct costs and restructuring&
acquisition costs

·      Additional PPI provisions of £385m taken in Q4 (FY18: £415m); c.9% information
request complaint conversion rate

·      Underlying profit of £539m is 7% lower YoY due to higher impairments; pre-
provision operating profit increased 1%:

–     FY19 NIM of 1.66% in line with guidance (Q4: 1.60%) reflecting competitive
market conditions

–     Non-interest income reduced 10% primarily due to a £12m lower contribution
from our Investments business and £9m of hedging-related adverse fair value movements

–     Costs down 6% to £942m in line with guidance; cost:income ratio of 57% and
positive jaws of 3%

·      Underlying Return on Tangible Equity (RoTE) of 10.8% (FY18: 11.0%)

**Integration on track with great progress made during the year**

·      Integration is progressing well with FSMA Part VII banking business transfer
completed in October 2019; can now begin the integration of our customer propositions
and platforms, and commence our rebrand

·      Run rate net cost savings of £53m delivered; on track for c.£200m net cost
savings target by FY22

·      £156m of restructuring costs includes accelerated office closures and redundancies;
c.£360m estimate for FY19-21 remains

·      Acquisition costs of £189m comprises £102m of one-off costs and £87m of acquisition
accounting unwind

**Robust capital position supports execution of strategy and delivery targets; ordinary
dividend suspended**

·      CET1 ratio of 13.3% reflects legacy conduct and restructuring & acquisition
costs (FY18: 15.1%)

·      Ordinary dividend suspended for FY19; progressive and sustainable dividend
ambition remains and the Board will reconsider dividends for FY20 in line with normal
practice

·      CET1 ratio above medium-term operating level of c.13%; retains a significant
buffer to CRD IV regulatory requirement of 11.0%, supports delivery of CMD strategy
and targets

·      TNAV per share of 249.2p; down 10.8p vs FY18 due to PPI

**Capital Markets Day strategy on track and all targets re-affirmed**

·      Guidance for FY20:

–     NIM of c.160-165bps

–     Underlying operating costs of <£900m

–     CET1 ratio operating level of c.13%

·    CMD strategy remains on track with all targets re-affirmed, including: modest
improvement in NIM by FY22, <£780m FY22 operating costs and statutory RoTE of >12%
by FY22

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