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Virgin Money Group Annual Report and Accounts 2014

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Virgin Money Group Annual Report and Accounts 2014 Virgin Money Group Annual Report and Accounts 2014 Everyone’s better off There’s money and there’s Virgin Money At Virgin Money, our ambition is to build a bank that makes everyone better off. Customers, colleagues, communities, corporate partners and our company. With a powerful brand, strong balance sheet, customer-focused culture and experienced Executive team, we are creating the UK’s leading challenger bank, delivering our different approach to banking to almost three million customers. In November 2014, Virgin Money listed on the London Stock Exchange raising additional equity capital of £150 million. Virgin Money Group Annual Report 2014 I 1 Table of Contents Strategic Report 2014 Highlights 2 Chairman’s Statement 8 Chief Executive’s Review 12 Market Overview 16 Business Model and Strategy 20 Delivering our Strategy 22 Delivering to our Stakeholders 26 Risk Overview 48 Financial Results Summary of Group Results 55 Business Unit Results 61 Governance Board of Directors 68 Virgin Money Executive 75 Directors’ Report 78 Corporate Governance Report 82 Directors’ Remuneration Report 117 Risk Management Report The Group’s Approach to Risk 146 Emerging Risks 149 Risk Governance 151 Stress Testing 155 Full Analysis of Risk Classes 157 Financial Statements Independent Auditor’s Report 216 Consolidated Financial Statements 220 Parent Company Financial Statements 293 Glossary 302 Cover image: Virgin Money Fireworks Concert 2014. The concert is held each year to celebrate the end of the Edinburgh International Festival. 2 I Virgin Money Group Annual Report 2014 2014 Highlights Results 2011-14 2014 2013 2012 20111 Growth Gross mortgage lending £bn 5.8 5.6 4.9 3.7 Mortgage balances £bn 21.9 19.6 16.8 13.9 Credit card balances £bn 1.1 0.8 – – Deposit balances £bn 22.4 21.1 18.0 16.2 Total customer loan balances Total assets £bn 26.5 24.6 21.8 19.6 grew by Quality 13% Cost of risk2 % 0.11 0.15 0.02 – Fully-loaded Common % 19.0 15.5 15.5 18.7 Equity Tier 1 capital ratio Leverage ratio % 4.1 3.8 3.6 4.0 Fully-loaded Loan-to-deposit ratio % 102.8 96.4 93.1 85.8 Common Equity Returns Tier 1 capital ratio Underlying total income £m 438.2 361.5 234.6 161.7 19.0% Underlying profit/(loss) £m 121.2 53.4 (2.5) (59.1) before tax Statutory profit before tax £m 34.0 185.4 160.2 23.5 Underlying Underlying net interest % 1.50 1.26 0.54 0.36 profit before tax margin increased 127% to Underlying cost:income ratio % 68.7 77.2 100.2 148.1 £121.2 million Underlying return on % 7.4 2.3 (1.1) (5.2) tangible equity Underlying basic earnings p 21.4 8.1 17.0 (33.9) per share 1 The 2011 results of Virgin Money Holdings (UK) plc have been presented as if Northern Rock plc had been part of the Group during 2011. 2 Cost of risk excludes benefit of debt sale of £8.9 million. Results These results have been prepared in accordance with International Financial Reporting Standards (IFRS). Where appropriate, certain aspects of the results are presented to reflect the Executive’s view of the Group’s underlying performance without distortions caused by non-recurring items that are not reflective of the Group’s ongoing business activities. The Group’s underlying results are presented on page 56 and a reconciliation of the Group’s statutory and underlying results is reported on page 57. Virgin Money Group Annual Report 2014 I 3 Strategic ReportStrategic Financial Results Governance Report Management Risk Statements Financial 2014 Highlights 2 Chairman’s Statement 8 Chief Executive’s Review 12 Market Overview 16 Business Model and Strategy 20 Delivering our Strategy 22 Delivering to our Stakeholders 26 Risk Overview 48 54 67 145 213 In 2014, we delivered strongly to all of our stakeholders, living up to our ambition to make everyone better off. Highlights include: Customers Colleagues Communities Overall Net Promoter Score increased to Almost Over +16 3,000 £88 million one of the highest scores of any UK bank, colleagues now work for Virgin Money, was donated to charities in demonstrating the strength of our customer with an industry-leading engagement 2014, including Gift Aid, through satisfaction and advocacy. score of 86%. Virgin Money Giving, our not-for- profit online donation service. Corporate partners Company Over Growth of 13,000 127% Intermediary Partners introduced mortgage in underlying profit before tax business to Virgin Money in 2014, and we to £121.2 million, with underlying were awarded the coveted Five Star Financial return on tangible equity increasing Adviser award for intermediary service. from 2.3% to 7.4%. Customers Company Colleagues Everyone’s better off Corporate Communities partners 4 I Virgin Money Group Annual Report 2014 Virgin Money Lounge, Glasgow Virgin Money Group Annual Report 2014 I 5 Strategic ReportStrategic Financial Results Governance Report Management Risk Statements Financial 2014 Highlights 2 Chairman’s Statement 8 Chief Executive’s Review 12 Market Overview 16 Business Model and Strategy 20 2014 Highlights: Delivering our Strategy 22 Delivering to our Stakeholders 26 Returns Risk Overview 48 54 67 145 213 £121.2m 1.50% Underlying Underlying profit before net interest 1.26% tax margin 127% 19% growth £53.4m growth 2013 2014 2013 2014 Underlying Underlying 7.4% total income return on and underlying tangible equity expenses £438.2m 21% growth in total £361.5m income 2013-14, 222% growth against 8% £301.2m expenses growth £279.2m 2.3% Income Expenses Income Expenses 2013 2014 2013 2014 Statutory profit before tax of £34.0 million in 2014, after Initial Public Offering Statutory transaction costs and payment of additional consideration for Northern profit Rock plc to HM Treasury following the Company’s successful listing on the before tax London Stock Exchange. This compares with a statutory profit before tax of £185.4 million in 2013. 6 I Virgin Money Group Annual Report 2014 2014 Highlights: Growth £5.8bn £21.9bn £22.4bn Mortgage balances Gross mortgage up 12% to £21.9bn. lending of £5.8bn, Deposit balances Net lending of £2.3bn, 4% higher than 2013, up 6% to £22.4bn, a market share of and a full-year market a market share of 10.2% share of 2.8% 1.4% Strong Strong asset funding growth position 35% £1.1bn 102.8% Gross mortgage Credit card balances Loan-to-deposit lending increased by of £1.1bn, an ratio of 102.8% at 35% in the second half increase of 41% on the end of 2014 of the year compared total balances held at to the first half the end of 2013 Virgin Money Lounge, London Virgin Money Group Annual Report 2014 I 7 Strategic ReportStrategic Financial Results Governance Report Management Risk Statements Financial 2014 Highlights 2 Chairman’s Statement 8 Chief Executive’s Review 12 Market Overview 16 Business Model and Strategy 20 2014 Highlights: Delivering our Strategy 22 Delivering to our Stakeholders 26 Quality Risk Overview 48 54 67 145 213 0.31% Mortgages over three months in arrears of 0.31% compared with latest industry average of 1.33% Excellent asset quality ow sg 1.46% Gla Virg ge, Credit card balances in Money Loun two or more payments in arrears of 1.46%, compared with latest industry average 19.0% of 2.64% Fully-loaded Basel III Common Equity Tier 1 ratio at the end of 2014 Reducing cost of Strong balance risk sheet position 11bps Cost of risk excluding 22.1% debt sale reduced 4.1% by 27% to 11bps in Leverage ratio at the Total capital ratio at the 2014 end of 2014 end of 2014 8 I Virgin Money Group Annual Report 2014 Chairman’s Statement Progress in 2014 2014 has been a landmark year for Virgin Money and, in my final year-end statement as Chairman, I would like to reflect not only on this year’s performance but also on the strong position the Group has created as it opens a new chapter as a listed business. When I became Chairman in October 2011, I believed we had Sir David Clementi a significant opportunity to grow Virgin Money, given our Chairman unique position as a strong, uncomplicated retail-only bank with the potential for organic growth at meaningful scale, unburdened by legacy issues. In 2014, we demonstrated just how strong this opportunity is. During the year, we saw good performance in our core mortgage and deposits business, with both balances and net interest margin growing strongly. We completed the build This is my last set of annual results as of our own credit card business, creating the opportunity for Chairman of Virgin Money. In January future product diversification and profitability growth, and we launched Virgin Money’s first current account. 2015, Glen Moreno joined the Board In November, we successfully completed our listing on the as an Independent Non-Executive London Stock Exchange. I am pleased that our Initial Public Director and Chairman Designate, and Offering (IPO) attracted such a broad range of high-quality he will take over from me as Chairman institutional investors. This report represents an opportunity for me to welcome all our new shareholders. later this year. Our IPO offers us not only the opportunity to accelerate I have been Chairman of Virgin Money materially the growth of our business, but also access to capital if necessary, cementing our position as one of the since 2011, and as I prepare to leave UK’s leading challenger banks. I am proud to look back at what has Our IPO crystallised an additional payment of £50.0 million to been achieved in a short period of HM Treasury.
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