Virgin Money Group Annual Report and Accounts 2016 Group Money Virgin VIRGIN MONEY GROUP ANNUAL REPORT AND ACCOUNTS 2016 Issued by Virgin Money Holdings (UK) plc. Registered office: Jubilee House, Gosforth, Newcastle upon Tyne NE3 4PL Registered in England and Wales no.03087587 THERE’S MONEY AND THERE’S VIRGIN MONEY At Virgin Money, our ambition is to build a bank that makes ‘everyone better off.’ Customers, colleagues, communities, corporate partners and our company. About us With a powerful brand, strong balance sheet, customer-focused culture and an experienced team, we have created a business which delivers our unique approach to banking and financial services to 3.3 million customers. Virgin Money Lounge, Sheffield 1 I Virgin Money Group Annual Report 2016 What's in this report? Strategic Report 2012-2016 Highlights 2 2016 Highlights and strategic priorities 4 Business overview 12 Chairman’s statement 14 Chief Executive’s review 18 Women in Finance Charter 26 Market overview 30 Business model and strategy 32 Delivering to our stakeholders 34 Risk overview 44 Financial results Summary of Group results 53 Divisional results 62 Governance Board of Directors 74 Virgin Money Executive 77 Corporate Governance Report 79 Directors’ Remuneration Report 105 Directors’ Report 126 Risk Management Report The Group’s Approach to Risk Management 133 Risk Management Framework 135 Emerging Risks 136 Risk Classes 139 Full Analysis of Risk Classes 140 Financial Statements Independent Auditors’ Report 195 Consolidated Financial Statements 202 Parent Company Financial Statements 257 Alternative Performance Measures 267 Glossary 268 Abbreviations 271 Shareholder Information 272 The 2016 Annual Report and Accounts incorporates the Strategic Report and the consolidated financial statements, both of which have been approved by the Board of Directors. On behalf of the Board Glen Moreno Chairman 27 February 2017 Cover image: Virgin Money Lounge, Fargate, Sheffield 2 I Virgin Money Group Annual Report 2016 2012 - 2016 Highlights 5 years of making 'everyone better off' In 2012, five years on from the beginning of the financial crisis, This has helped us deliver significant growth in shareholder public confidence and trust in the banking industry was at returns and a solid double-digit return on tangible equity. an all-time low. In that same year, Virgin Money started on As a result of the strength of the business and our continued a journey to make banking better with an ambition to make ability to manage costs and optimise operational leverage, we ‘everyone better off’ (EBO). remain well positioned to continue to grow in a wide range of Virgin Money acquired the loss-making Northern Rock market conditions. plc from HM Treasury in January 2012, and work began on We are proud of what we have achieved over the last five years creating a new force in UK banking. and we look forward to continuing our journey to make The business transformation began straightaway. We banking better for all of our stakeholders – the company, launched a customer manifesto, all Northern Rock branches customers, colleagues, corporate partners and the were turned into Virgin Money Stores and the integration of communities in which we work. the businesses was completed successfully. We returned the business to a solid footing by deploying our core competencies of risk management - focused on balance ny Cu pa st sheet and asset quality - product design and pricing, and m om o e C r multi-channel distribution. s We now have 3.3 million customers and our overall C C Net Promoter Score (NPS), the likelihood of customers o o l l r recommending us, has improved considerably to +29 since EVERYONE’S e p a o 2012, making us one of the leading UK retail banks for BETTER OFF g r a u customer satisfaction. t e e s p We created Virgin Money Lounges – spaces designed for a r customers to relax and for local communities to come tn e together. With a total footfall of around 50,000 per month rs s tie across all seven Virgin Money Lounges, they drive excellent Communi customer satisfaction ratings and an NPS of +86. We have helped tens of thousands of people get onto and move up the housing ladder and more than doubled mortgage balances to £29.7 billion. We have a thriving savings business and have grown deposit balances from £16.2 billion to £28.1 billion. We have also created a credit card business from scratch and now have £2.4 billion in customer balances. Virgin Money Giving, our not-for-profit online donation service, has helped fundraisers raise more than £500 million since it launched, and we set up the Virgin Money Foundation in 2015, an independent charitable foundation focused on housing, homelessness and youth employment. When we listed on the London Stock Exchange in 2014, we said that we would deliver a strategy founded on three fundamental and equally important principles: growth, quality and returns. Despite a number of headwinds, including the introduction of the bank tax surcharge and the lower for longer interest rate environment, we have continued to deliver strong asset growth, while maintaining our high-quality balance sheet and prudent risk appetite. Virgin Money Group Annual Report 2016 I 3 Strategic ReportStrategic Financial results Governance report management Risk statements Financial 2012-2016 Highlights 2 2016 Highlights and strategic priorities 4 Business overview 12 Chairman’s statement 14 Chief Executive’s review 18 Women in Finance Charter 26 Market overview 30 Business model and strategy 32 Delivering to our stakeholders 34 Risk overview 44 52 73 132 193 Eliud Kipchoge KEN, the winner of the Elite Men’s Race with second place athlete Stanley Biwott KEN just after crossing the line. Photo: Virgin Money London Marathon 4 I Virgin Money Group Annual Report 2016 2016 Highlights and strategic priorities Results 2012-16 2016 2015 2014 2013 2012 TOTAL CUSTOMER Growth LOAN BALANCES GREW BY Gross mortgage lending £bn 8.4 7.5 5.8 5.6 4.9 19% Mortgage balances £bn 29.7 25.5 21.9 19.6 16.8 Credit card balances £bn 2.4 1.6 1.1 0.8 – LOW COST OF Total assets £bn 35.1 30.2 26.5 24.6 21.8 RISK OF Deposit balances £bn 28.1 25.1 22.4 21.1 18.0 0.13% Quality Cost of risk % 0.13 0.12 0.07 0.15 0.02 COMMON EQUITY Common Equity Tier 1 capital ratio % 15.2 17.5 19.0 15.5 15.5 TIER 1 RATIO OF Total capital ratio % 20.4 20.2 22.1 18.6 19.1 15.2% Leverage ratio % 4.4 4.0 4.1 3.8 3.6 Returns LEVERAGE RATIO OF Underlying total income £m 586.9 523.5 438.1 365.1 233.8 4.4% Statutory total income £m 581.4 521.9 438.3 383.0 261.6 Underlying profit/(loss) before tax £m 213.3 160.7 104.7 43.6 (10.0) RETURN ON Statutory profit before tax £m 194.4 138.0 34.0 185.4 160.2 TANGIBLE EQUITY Net interest margin % 1.60 1.65 1.50 1.26 0.54 OF Cost: income ratio % 57.2 63.5 72.5 80.1 103.0 12.4% Return on tangible equity % 12.4 10.9 7.4 2.6 (1.2) Statutory basic earnings per share p 29.4 22.9 (0.4) 42.4 59.3 Underlying basic earnings per share p 32.7 26.8 18.5 5.6 (2.0) Alternative performance measures These results have been prepared in Underlying profit and total income are A number of other Alternative accordance with International Financial now presented excluding the fair value Performance Measures (APMs), in Reporting Standards (IFRS). Aspects of (losses)/gains on financial instruments, addition to underlying profit, are used in the results are adjusted for certain items, which reflect timing differences on fair the analysis and discussion of the Group’s which are listed below, to reflect how the value movements on derivatives where financial performance and position. APMs Executive assesses the Group’s underlying these are held to maturity. Prior periods do not have standardised definitions and performance presented have been adjusted, however may not be directly comparable to any the change has no material impact measures defined within IFRS. Details > IPO share based payments; on those periods. Further information of all APMs disclosed, including the > Strategic items; on the underlying results, including rationale for their use and their bases of reconciliations of the Group’s statutory calculation, are set out on page 267. > Simplification costs; and and underlying results, is reported on > Fair value (losses)/gains on page 54 and in note 2 to the consolidated financial instruments. financial statements. Virgin Money Group Annual Report 2016 I 5 Strategic ReportStrategic Financial results Governance report management Risk statements Financial 2012-2016 Highlights 2 2016 Highlights and strategic priorities 4 Business overview 12 Chairman’s statement 14 Chief Executive’s review 18 Women in Finance Charter 26 Market overview 30 Business model and strategy 32 Delivering to our stakeholders 34 Risk overview 44 52 73 132 193 In 2016, we delivered strongly to all of our stakeholders, living up to our ambition to make everyone better off. Highlights include: COMPANY AND SHAREHOLDERS Growth of Growth of 33% 41% in underlying profit before tax in statutory profit before tax to £213.3 million, with return to £194.4 million. on tangible equity increasing from 10.9% to 12.4%. Final Dividend Recommended final dividend payment of 3.5 pence per ordinary share. This will result in a total dividend for 2016 of 5.1 pence per ordinary share, an increase of 13% compared to 2015.