2015 Half-Year Results

VIRGIN MONEY GROUP

2015 HALF-YEAR RESULTS

News Release

BASIS OF PRESENTATION

This report covers the results of Virgin Money Holdings (UK) plc together with its subsidiaries ('Virgin Money, Virgin Money Group or the Group') for the half-year ended 30 June 2015.

Statutory basis

Statutory information is set out in the Financial Statements section of this announcement.

Underlying basis

In order to present a more meaningful view of business performance, the results of the Group and business units are presented on an underlying basis.

Forward looking statements

This document contains certain forward looking statements with respect to the business, strategy and plans of Virgin Money Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Virgin Money Group's or its directors' and/or management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; inflation, deflation, interest rates and policies of the Bank of England, the European Central Bank and other G8 central banks; fluctuations in exchange rates, stock markets and currencies; changes to Virgin Money's credit ratings; changing demographic developments, including mortality and changing customer behaviour, including consumer spending, saving and borrowing habits; changes in customer preferences; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes; natural and other disasters, adverse weather and similar contingencies outside Virgin Money's control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war or hostility and responses to those acts; geopolitical, pandemic or other such events; changes in laws, regulations, taxation, accounting standards or practices; regulatory capital or liquidity requirements and similar contingencies outside Virgin Money's control; the policies and actions of governmental or regulatory authorities in the UK, the European Union, the US or elsewhere; the implementation of the EU Bank Recovery and Resolution Directive and banking reform, following the recommendations made by the Independent Commission on Banking; the ability to attract and retain senior management and other employees; the extent of any future impairment charges or write-downs caused by depressed asset valuations, market disruptions and illiquid markets; market relating trends and developments; exposure to regulatory scrutiny, legal proceedings, regulatory investigations or complaints; changes in competition and pricing environments; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and the success of Virgin Money in managing the risks of the foregoing.

Any forward-looking statements made in this document speak only as of the date they are made and it should not be assumed that they have been revised or updated in the light of new information of future events. Except as required by the Prudential Regulation Authority, the Financial Conduct Authority, the London Stock Exchange plc or applicable law, Virgin Money expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this document to reflect any change in Virgin Money's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

CONTENTS

VIRGIN MONEY: RESULTS FOR THE HALF-YEAR TO 30 JUNE 2015

Financial Highlights

Continued growth in mortgage, credit card and retail deposit balances

· Mortgage balances increased to £23.6 billion, up 8 per cent from FY 2014.

· Gross mortgage lending of £3.6 billion, 44 per cent higher than H1 2014. Net lending of £1.7 billion in H1 2015.

· Gross lending market share of 3.8 per cent and net lending market share of 20.5 per cent at the end of May 2015, the last month for which data is available.

· Credit card balances stood at £1.1 billion at H1 2015, after the successful migration of the credit card business in March 2015.

· Retail deposit balances increased to £22.8 billion, up 3 per cent from FY 2014.

Maintained focus on a high-quality balance sheet, underpinned by strong capital ratios and a prudent risk appetite

· Mortgage loans over three months in arrears of 0.25 per cent compared with the latest industry average of 1.3 per cent.

· Card balances two or more payments in arrears of 1.59 per cent.

· Cost of risk flat compared to H2 2014 at 12 basis points.

· Fully-loaded Common Equity Tier 1 ratio of 18.7 per cent at H1 2015.

· Total capital ratio of 21.7 per cent at H1 2015.

· Leverage ratio of 4.1 per cent at H1 2015.

New developments during the first half of the year

· 675,000 credit card accounts successfully migrated to Virgin Money's own platform in March 2015.

· Full national roll-out of the Virgin Essential Current Account completed.

· Three new investment funds launched offering improved customer choice.

· Wholesale funding diversified through successful issuance of £300 million Medium Term Notes and £750 million of Residential Mortgage Backed Securities.

Reconciliation to statutory profit is shown on page 4

Jayne-Anne Gadhia, Chief Executive Officer said:

"I am pleased to report a 37 per cent increase in underlying profit for the first half of 2015. This was driven by balance sheet growth, strong improvement in our net interest margin and effective cost management.

We continued to increase our share of the mortgage market while protecting the quality of our book. Gross mortgage lending increased by 44 per cent to £3.6 billion in the first half of the year, representing a 3.8 per cent market share of gross lending and a 20.5 per cent share of net lending to the end of May.

In our credit card business we successfully completed the migration of the credit cards acquired from MBNA to our own platform and launched our new range of cards to customers. This puts us in a strong position to grow our credit card business to our target of £3 billion of credit card balances by the end of 2018.

We remain focused not only on delivering growth but also generating sustainable returns to shareholders. As such, we are pleased to announce that, after taking into consideration our strong performance in the first half of the year and the growth prospects of the company, the Board has declared an interim dividend of 1.4 pence per share."

UNDERLYING BASIS - CONSOLIDATED INCOME STATEMENT

CONSOLIDATED BALANCE SHEET

KEY RATIOS

1 Defined as impairment charges divided by average gross balances for the given period, excluding debt sale in H2 2014

² H1 2014 has been normalised to take into account primary capital raised on IPO

³ Annualised

Key ratios are presented on an underlying basis except where stated

RECONCILIATION TO STATUTORY PROFIT

CHIEF EXECUTIVE'S STATEMENT

In the first half of 2015 Virgin Money reported a 37 per cent increase in underlying profit as a result of delivering on all elements of our strategy of growth, quality and returns.

We continued to increase our share of the mortgage market while protecting the quality of our book. Gross mortgage lending increased by 44 per cent to £3.6 billion in the first half of the year. We delivered a 3.8 per cent market share of gross lending and a 20.5 per cent share of net lending to the end of May, the last month for which data is available.

We successfully completed the migration of the credit cards acquired from MBNA to our own platform and launched our new range of cards to customers. This puts us in a strong position to grow our credit card business to our target of £3 billion of credit card balances by the end of 2018.

Our marketing campaigns reached more than three quarters of the UK population six or more times during the period and spontaneous awareness grew 4 per cent in a market where the challenger bank average fell by 2.5 per cent.

We are particularly pleased that after taking into consideration our strong performance in the first half of the year, which delivered earnings per share of 8.6 pence, and the growth prospects of the company, the Board has declared an interim dividend of 1.4 pence per ordinary share.

Results overview

We continue to deliver a strong financial performance. Underlying profit before tax increased by 37 per cent compared to the first half of 2014 to £81.8 million driven mainly by strong growth in our mortgage business, continued high asset quality and effective management of costs within the business.

Underlying net interest income grew by 27 per cent to £220.3 million as a result of increased volumes and an improvement in net interest margin of 22 basis points to 165 basis points.

Underlying total income increased by 19 per cent compared to the first half of 2014 to £254.4 million.

Underlying cost growth was flat compared to the second half of 2014 and limited to 11 per cent compared to the first half of 2014, despite continued investment in the business and increased business volumes. Our cost:income ratio improved to 62.2 per cent from 66.7 per cent in the first half of 2014.

Asset quality remained strong and stable with a cost of risk flat compared to year end 2014 at 12 basis points.

The improvement in our return on tangible equity (RoTE) from 7.6 per cent at the end of the first half of 2014 to 10.2 per cent at the end of the first half of 2015, excluding FSCS timing effects, is a result of our continued focus on growth, quality and returns.

As a result of the new 8 per cent tax surcharge on banks' UK profits from January 2016, announced by the Chancellor of the Exchequer in his summer budget, we now expect a short delay in the delivery of mid-teens return on tangible equity.

We continue to manage our balance sheet within our prudent risk appetite with a view to maintaining its quality and efficiency. Our fully-loaded Common Equity Tier 1 (CET1) ratio was 18.7 per cent at the end of the first half of 2015. Our total capital ratio was 21.7 per cent and our leverage ratio was 4.1 per cent at 30 June 2015.

Mortgages

We delivered gross mortgage lending of £3.6 billion in the first half of the year. This is 44 per cent higher than in the first half of 2014. Our net mortgage lending increased materially to £1.7 billion from £0.7 billion in H1 2014, reflecting increased gross lending and strong retention performance. This represented a market share of 20.5 per cent of the net lending market to the end of May, the last month for which data is available. Mortgage balances grew by 8% from 31 December 2014 to £23.6 billion.

The mortgage market was very competitive during the first half of the year, putting pressure on asset spreads. We have addressed this by deepening our intermediary relationships and broadening our asset mix within our existing prudent risk appetite, substituting a portion of low loan-to-value residential mortgages, which is the area of most intense competition, with an increased volume of low loan-to-value buy-to-let business. As a result, we achieved an average completion spread of around 200 basis points in the first half of the year.

Our mortgage business remains high-quality, with an average loan-to-value of new lending of 66.9 per cent and a portfolio loan-to-value of 56.5 per cent. Buy-to-let lending stands at 16.2 per cent of the total portfolio and is in line with the overall market.

We do not expect any material impact on our business relating to the new tax regulations for buy-to-let landlords. We are not exposed to a high proportion of buy-to-let business and the regulations will be phased in over four years from April 2017.

Savings

We continued to manage the cost and volume of deposits successfully. As a result funding costs reduced in the first half of the year. Savings increased by 3 per cent from 31 December 2014 to £22.8 billion.

Funding

In April 2015 we issued £300 million of senior unsecured debt, our debut issuance under our Medium Term Note (MTN) programme. This enhances our funding mix to support growth and diversifies our investor base. In addition, we have an established Residential Mortgage Backed Securities (RMBS) programme with a strong reputation, from which we raised a further £750 million in June. As we develop our wholesale funding programmes our mix of wholesale will rise but will remain relatively low as a proportion of overall funding. Increased wholesale funding has materially reduced our weighted average cost of funds during H1 2015.

Credit cards

During the first half of the year we made significant strides with our credit card business, including successfully migrating over 675,000 customer accounts from MBNA to our own platform. The platform has been developed in partnership with leading systems provider TSYS and gives us full control of our credit card business.

Following the successful migration in March, credit card balances stood at £1.1 billion at 30 June 2015, representing a 1.8 per cent share of the £60 billion cards market. New business since migration has been strong and we remain on track to meet our target of £3 billion of credit card balances by the end of 2018.

The financial performance of the card business has also been strong at both a new business and portfolio level.

In the autumn the Financial Conduct Authority (FCA) will produce the preliminary findings of their credit card market study. We believe our platform, capability and scale mean that we are sufficiently nimble to respond to any required changes with practical ease and limited economic impact.

Current accounts, insurance and investment

The Virgin Essential Current Account (ECA) is now available across our network of 75 Stores following the full national roll-out which completed in March 2015. The ECA gives us a proven current account platform ahead of the conclusion of the Competition and Markets Authority's (CMA) review into Current Accounts which is expected in early 2016.

We launched our new simple life insurance product in partnership with Friends Life in March and have recently entered into a new marketing agreement as we grow this business. Income in our insurance business increased by 5 per cent compared to the first half of 2014, and the development of our new motor and home insurance proposition in partnership with Ageas is well advanced and will launch in the second half of the year.

In investments, we launched three new funds during the first half of the year, increasing the number of passively managed funds in our range to five. The new funds provide our customers with more choice and give us the opportunity to grow our funds under management.

Development of our insurance and investment business lines gives us the opportunity to grow our non-interest income from the second half of 2015 onwards.

Marketing and brand

Over the first half of the year, we continued to invest in our marketing campaign "There's money and there's Virgin Money" as a core part of our strategy to reinforce our differentiation from our competitors. 

Our campaigns reached more than three quarters of the UK population six or more times during the period, and our digital strength was exemplified by over six million views of our content online and through social media. 

As a result of our marketing efforts, sales visits to our website increased by 8 per cent, customer numbers grew to 2.9 million from 2.8 million at year end and spontaneous awareness grew 4 per cent in a market where the challenger bank average fell by 2.5 per cent. Our Lounge footfall grew by 7 per cent and for the second consecutive year Virgin Money was voted the Coolest Brand in Financial Services.

Regulation

We continue to work with the relevant authorities on the introduction of regulations connected to the Financial Services (Banking Reform) Act 2013, which will result in the ring-fencing of retail and commercial banking operations to separate them from investment banking activities. Given that we are a UK focused retail bank, we believe that our entire business will be within the ring fence when it comes into effect at the beginning of 2019.

Colleagues

Virgin Money recognises the value of diversity across our colleagues, who together bring a broad range of skills and experience to our business. We are committed to increasing diversity at all levels and that commitment is reflected in our Board Diversity and Inclusion Policy. We aim to lead by example and strive to ensure that those who work for our business reflect the customers we serve, enabling us to provide a relevant, practical and personal banking service. Our gender balance at 30 June was 45 per cent male to 55 per cent female.

Our latest colleague engagement survey was conducted in July and we look forward to sharing the results in the autumn.

Culture

Our desire to build a strong culture within our business, based around our ambition to make 'everyone better off' (EBO), means that we place an emphasis on long-term thinking which we believe creates sustainable profit growth. Given the lessons learned in the banking sector over the past decade, we believe our EBO approach is critical to our ongoing success.

Community

During the first half of the year we established the Virgin Money Foundation which will launch in the second half of the year and will focus initially on projects in the North East of England.

Virgin Money Giving continues to grow and in the first half of the year has raised £57.7 million (including Gift Aid) for charities.

Through our investment in our enterprise education programme, "Make £5 Grow", and our sponsorship of the "Fiver Challenge", our brand has reached nearly 40,000 primary school children from more than 600 schools across the UK in the first six months of the year.

External environment, economy and housing market

Economic fundamentals in the UK continue to help underpin the housing market, despite uncertainty in domestic and international financial markets.

Consumer confidence is supported by near record numbers of people in work, a low rate of unemployment (5.6 per cent) and rising real incomes. The pace of earnings growth has increased in recent months and is now about 3 per cent higher than a year ago. This is the strongest performance for several years. Lower energy and food costs mean that consumer prices remain broadly the same as a year ago.

Growth in the number of households continues to outstrip the supply of new housing. While the Government is committed to a raft of initiatives to support growth in home ownership and house building, these may take some time to have an appreciable impact in meeting the current shortfall in housing supply. Continued increases in house prices appear likely whilst an imbalance between supply and demand remains.

The introduction of the Mortgage Market Review (MMR) in 2014 and intervention by the FPC on income multiples has had a small dampening effect on overall transaction growth. The buy-to-let market has continued to grow to meet the demands for private rented accommodation. The market expectation is for gradual base rate rises which should provide a catalyst for customers to re-mortgage without triggering an affordability shock. We therefore believe that conditions are supportive of steady and sustainable growth in housing transactions.

The Bank of England's latest credit survey reports an increase in mortgage demand in the second quarter of 2015 and expectations of a further increase in Q3. This is in line with CACI data that tracks weekly mortgage application data. According to the Bank of England, lender approvals for house purchases have been on an improving trend during the first half of 2015 and surpassed year-earlier levels in the past few months. All this market data now points to a gradual growth in activity in the near-term and the Council of Mortgage Lenders now forecasts that housing transactions will grow by 2 per cent and that gross lending volumes will increase by 10 per cent next year.

Outlook and guidance

Virgin Money has performed strongly in the first half of the year with mortgage growth, net interest margin and RoTE all performing ahead of expectations.

Competition in the mortgage market, reflected in asset spread compression, remains a headwind in the second half of the year. We will protect spread by a continued focus on managing volumes.

The credit card business is now fully operational on Virgin Money's own platform and new business has been strong since the successful migration. This means we are well positioned to meet our target of £3 billion of credit card balances by the end of 2018.

We remain confident that will deliver a full-year net interest margin slightly ahead of our guidance of up to 160 basis points in 2015.

Cost flexibility remains an opportunity to drive returns in the medium term. We will continue to deliver on our cost efficiency targets and are well positioned to achieve a cost:income ratio of no more than 50% as planned in 2017.

The unexpected addition of the bank surcharge is expected to slow our progress to mid-teens returns on tangible equity and we now expect to achieve this by the end of 2017.

Current account, digital and SME development give us significant potential and opportunity to drive the growth of the business.

We have the brand, the capability and the flexibility to adapt to market conditions and to pursue new opportunities and, importantly, we have the capital to support our growth ambitions.

I am delighted that we have delivered strongly against the objectives set out at IPO and believe that the dividend the Board has declared today is evidence of this.

Jayne-Anne Gadhia, CBEChief Executive

CHIEF FINANCIAL OFFICER'S REVIEW OF FINANCIAL PERFORMANCE

The financial metrics in this section are presented on an underlying basis unless labelled as statutory

Overview: Strong growth in profitability and return on equity

In the first half of 2015 Virgin Money delivered continued growth in the balance sheet, maintained high asset quality and improved profitability.

Mortgage balances increased by 8 per cent to £23.6 billion and retail savings by 3 per cent to £22.8 billion. Cards balances were broadly flat at £1.1 billion as origination was minimised during preparations for the successful migration of customer accounts to Virgin Money's own platform.

Income increased by 19 per cent to £254.4 million driven by mortgage lending and an improvement in net interest margin (NIM) to 165 basis points from 143 basis points. Operational efficiency continued to improve with the cost:income ratio decreasing to 62.2 per cent from 66.7 per cent. This trading performance combined with continued high asset quality generated a 37 per cent increase in profits before tax to £81.8 million.

Statutory profit before tax grew from £6.7 million in the first half of 2014 to £55.0 million. This was driven by improved profitability and the non-recurrence of one-off costs from the Initial Public Offering.

The results set out above increased the return on tangible equity to 10.2 per cent from 7.6 per cent in the first half of 2014.

Earnings per share increased to 8.6 pence.

Total income

Total income was £254.4 million, 19 per cent higher than in the first half of 2014. Strong growth in net interest income was partially offset by the expected reduction in other income.

Net interest income increased by 27 per cent to £220.3 million in the first half of 2015. This reflected the improved net interest margin as well as the increase in mortgage balances.

Other income was lower primarily due to the planned reduction in fee income from the ending of the credit card agreement with MBNA in November 2014. There was also a reduction in gains arising from asset sales in Treasury. Those reductions were partially offset by a 9 per cent increase in total income from the current account, insurance and investments business which was driven mainly by growth in funds under management and pension sales.

The improvement in net interest margin to 1.65 per cent in the first half of 2015 was driven by a reduction in retail cost of funds which more than offset asset pricing pressures.

Costs

Costs increased by 11 per cent to £158.3 million from £142.5 million in the first half of 2014. This increase was mainly due to the build out of the operating platform and increased headcount during 2014.

Compared to the second half of 2014, total costs registered a slight reduction as a result of a continued focus on cost management and from the benefits of reductions in costs in the credit card platform.

Total income increased by £29.7 million from the second half of 2014 while costs decreased by £0.4 million. As a result, in the first half of 2015 the cost:income ratio improved by 8.4 percentage points to 62.2 per cent from 70.6 per cent in the second half of 2014.

Impairment

¹ Excluding the impact of the sale of charged off balances in H2 2014

The impairment charge for mortgages reduced by 20 per cent compared with the second half of 2014, despite the growth in the mortgage book. This reflected the continued high asset quality of the loan portfolio and the low level of defaults. The cost of risk for mortgages, or the impairment charge expressed as a percentage of average loans and advances, decreased to 0.01 per cent in the first half of 2015.

The impairment charge for credit cards increased to £12.7 million from £11.4 million in the second half of 2014. This principally reflected the growth in customer balances in the cards business following the acquisition of £359.3 million of card balances in November 2014. The cost of risk for credit cards decreased by 13 basis points against the second half of 2014 to 2.29 per cent.

Combining the impairment charges for mortgages and credit cards, total cost of risk increased by 1 basis point to 12 basis points from 11 basis points in the first half of 2014.

Provisions as a percentage of impaired loans and advances increased to 37.0 per cent from 24.5 per cent at 30 June 2014, driven by a reduction in impaired balances following improved arrears performance. Mortgage provisions plus excess expected mortgage losses as a percentage of impaired loans also increased to 64.1 per cent from 49.1 per cent at 30 June 2014.

Returns on assets and tangible equity

¹ Excluding FSCS timing effects

The return on tangible equity increased to 10.2 per cent in the first half of 2015 from 7.9 per cent in the second half of 2014 and 7.6 per cent in the first half of 2014. The return on assets grew by 12 basis points to 0.40 per cent in the first half of 2015 from 0.28 per cent in the first half of 2014. This was due to improved net interest margin driving profitability faster than total asset growth. These are annualised measures and in calculating them the FSCS charge has been smoothed evenly over the year whereas the entire FSCS levy is recognised in April each year under the applicable accounting standard.

Statutory profit

Statutory profit before tax of £55.0 million for the first half of 2015 grew from £6.7 million in the first half of 2014. This was due to a £22.1 million increase in profit and the non-recurrence of exceptional costs incurred in 2014 including the additional Northern Rock consideration. The additional costs recognised in the statutory profit before tax are set out below.

Underlying profit to statutory profit reconciliation

Additional Northern Rock consideration

The terms agreed in respect of the acquisition of Northern Rock on 1 January 2012 included an amount payable to HM Treasury in the event of a successful, profitable IPO or sale of Virgin Money between 2012 and 2016. In the first half of 2014, with preparations for the IPO having commenced, an additional £26.0 million was recognised to reflect the increased likelihood of this amount becoming payable.

Strategic items

In the first half of 2015, the Group incurred strategic transaction costs of £4.8 million relating primarily to the investment in the credit card platform. 

FSCS levy

The FSCS levy in the first half of 2015 amounted to £15.5 million, a reduction of £1.1 million compared to 2014. While Virgin Money's share of protected deposits grew year on year, the reduction in the element of the FSCS levy relating to recovery of amounts previously paid out in respect of failed institutions more than offset the increase in the element relating to the Group's share of protected deposits.

Taxation

In the first half of 2015, the Group was subject to an effective tax rate of 22 per cent and recognised a £12.1 million corporation tax charge.

Balance sheet

Capital ratios and risk-weighted assets

Risk-weighted assets (RWAs) grew by 5 per cent to £5,420.1 million at the end of the first half, primarily due to increased mortgage lending being partially offset by a change in the Advanced Internal Ratings Based (AIRB) model which was agreed with the Prudential Regulation Authority (PRA). The change was implemented to account for the growth in the House Price Index (HPI) beyond historic peak property prices in 2007. The change more accurately reflects an up to date view of the value of the secured property and therefore allows the Group to recognise the benefit of strong house prices in the downturn LGD. This contributed a significant reduction in RWAs of £354 million during the first half of the year.

The Group continued to be well capitalised to support its continued growth with a Common Equity Tier 1 ratio of 18.7 per cent, a total capital ratio of 21.7 per cent and a leverage ratio of 4.1 per cent.

Funding and liquidity

1 Level 1 + 2a + 2b. See Risk Management Report for definition. These include Funding for Lending drawings which are held off balance sheet but are available for repo and hence count towards liquidity resources.

During 2015 loans and advances to customers increased by £1,612.4 million to £24,705.5 million and customer deposits grew by £606.1 million to £22,971.8 million. Virgin Money has a strong and diversified funding base with funding provided by retail deposit customers representing 88.3 per cent of total funding.

The Group aims to manage its balance sheet so that customer asset growth is broadly matched with sustainable retail deposit growth. This is monitored through the loan-to-deposit ratio which is actively managed to ensure compliance with Board approved metrics. The loan-to-deposit ratio was 107.3 per cent at 30 June 2015, compared to 102.8 per cent at 31 December 2014. This reflects the increase in wholesale funding balances in the first half of 2015 as the Group took advantage of attractive opportunities in the capital markets to increase its balance sheet efficiency.

Under its Global MTN programme Virgin Money successfully completed a debut issuance and there was a further RMBS issued from the established Gosforth programme. Both issues were oversubscribed and upsized. These securities diversified funding sources in line with the aim of wholesale funding providing up to 20 per cent of total funding and also provided term funding at a cost lower than retail funding of equivalent size.

In addition to non-retail funding on the balance sheet, the Group also accessed the Government's Funding for Lending Scheme (FLS), with £450 million drawn during the first half of the year to support lending growth and liquidity. Total drawings from the FLS at 30 June 2015 were £2.7 billion. All FLS drawings remain off balance sheet and are therefore not included in the table above.

The Group's liquidity position remains strong, with high quality liquid assets of £4,056.5 million at 30 June 2015 (31 December 2014: £4,235.9 million). High quality liquid assets represent more than 5 times wholesale funding with a maturity of less than one year, providing a substantial buffer in the event of extended market dislocation.

The Liquidity Coverage Ratio (LCR) will become the Pillar 1 standard for liquidity in the UK from October 2015 and the PRA has the ability to impose firm specific liquidity requirements. European legislation specifying the definition, calibration, calculation and phase-in of the LCR in 2015 was published in October 2014. Virgin Money is confident that it will meet its obligations under these revised requirements.

Conclusion

Virgin Money continues to deliver a strong financial performance. During the first half of the year income grew as mortgage lending increased and funding costs fell, more than offsetting lower yields on mortgage lending. Overall, the business delivered growth in the balance sheet, sustained high asset quality, significantly improved profitability and maintained strong capital ratios to support continued growth.

Virgin Money remains focused not only on delivering growth but also generating sustainable returns to shareholders. Taking into account the strong performance of the business in the first half of the year, which delivered earnings per share of 8.6 pence, the Board has declared an interim dividend of 1.4 pence per ordinary share.

Lee Rochford

Chief Financial Officer

DIVISIONAL HIGHLIGHTS

The financial metrics in this section are presented on an underlying basis unless labelled as statutory

MORTGAGES AND SAVINGS PERFORMANCE

Virgin Money provides mortgages and savings to around 1.5 million customers, with mortgages sold primarily through its intermediary partners and savings sold primarily direct to customers through its digital channel.

Performance summary

Mortgages

Virgin Money offers a wide range of mortgage products supported by excellent service, primarily through its intermediary partners and supplemented by direct distribution. Product development for mortgages is focused on extending its market coverage into stronger yielding sectors, whilst maintaining its prudent risk appetite. Virgin Money will continue to strengthen its intermediary proposition to build upon its existing intermediary relationships.

Virgin Money achieved a 3.8 per cent share of the gross mortgage market to the end of May 2015.

The mortgage book grew by 8 per cent during the first half of 2015 driven by strong new gross lending of £3.6 billion. Combined with strong customer retention, net lending of £1.7 billion in the first half of the year delivered a 20.5 per cent market share to the end of May, the last month for which data is available. This lending growth was achieved at an average completion spread of around 200 basis points.

The quality of the mortgage book remains strong. Loans over three months in arrears were 0.25 per cent of the book at the end of H1 2015 compared with the latest industry average of 1.3 per cent, according to the Council of Mortgage Lenders. The average loan-to-value of the book was 56.5 per cent in the first half of 2015 and the split of loans was 83.8 per cent residential and 16.2 per cent buy-to-let.

In the first half of the year, Virgin Money helped more people to get on the property ladder through continued development of First Time Buyer and New Build propositions, including a number of enhancements to its lending policy.

Maintaining and building on the high-quality service proposition is a key area of focus in Virgin Money's mortgage business, and the launch of new intermediary commitments during the first half of the year has been positively received by intermediary partners. The quality of intermediary service was recognised by winning the "Best Service from a Buy-to-Let Lender" award at the Business Moneyfacts Awards, as well as the prestigious "Best Lender for Partnership" at the Legal & General Mortgage Club Awards.

Virgin Money has seen a 15 point improvement in its intermediary Net Promoter Score to +40 from +25.

Savings

Virgin Money's savings products are simple and transparent, with no hidden catches. It avoids 'teaser' products with bonus rates which subsequently fall to sub-market levels and provoke customer churn. Instead customer retention is encouraged with enduring, good value offers. Virgin Money continues to offer a broad range of easy access and fixed term products, with no channel bias, both as ISAs and stand-alone products.

Savings book growth was managed carefully across the first half of the year and included the introduction of a new defined access saver product, broadening our range of variable savings products and offering competitive rates for customers. Total savings balances grew by 3 per cent during the first half of the year to £22.8 billion.

ISA performance was particularly strong in the first half of the year, with Virgin Money taking a 10 per cent share of net inflows in the Cash ISA market to the end of May. This resulted in our Cash ISA market share increasing to 3.3 per cent at the end of May compared to 3.0 per cent at the end of the 2014. Virgin Money also won a "Your Money Best Cash ISA Award" for the third year running.

Funding costs reduced during the first half of the year, offsetting lower yields on mortgage lending, due to continued focus on managing savings pricing while continuing to provide customers with competitive and good value returns.

CREDIT CARDS PERFORMANCE

During the first half of 2015 Virgin Money successfully migrated over 675,000 customer accounts from MBNA to its own credit card platform.

Performance summary

The successful migration of customer accounts to Virgin Money's own platform was completed in March 2015, giving full control of the credit card business and enabling it to grow the business through simple, transparent products supported by strong risk management and excellent service. The credit card manufacturing capability was developed in partnership with leading credit card systems provider TSYS.

Credit card balances were maintained at £1.1 billion at the end of the half-year, representing a 1.8 per cent share of the £60 billion credit card market. The business remains on track to grow towards its target of £3 billion of balances by the end of 2018.

The capability of the new platform allows Virgin Money to respond to market conditions more quickly and better align its products to customers' needs. Continued presence in the balance transfer market and a broadened product range of seven products in the first half of the year covered three key customer needs: debt consolidation, borrowing and everyday spending. The distribution of cards was expanded across a range of aggregators during the first half of the year. The new Sex Pistols card designs, drawing on Virgin's heritage, were launched and have been very successful in driving awareness of the card range.

CURRENT ACCOUNTS, INSURANCE AND INVESTMENTS PERFORMANCE

Virgin Money offers a leading basic current account and works with a range of partners to provide insurance, investments and pension products.

Performance summary

Current account

The full national roll-out of the Virgin Essential Current Account (ECA) was completed in March 2015 with the account now available through all 75 Stores. The ECA gives Virgin Money a proven current account platform ahead of the conclusion of the CMA review into current accounts which is expected in early 2016.

In June Virgin Money entered a long-term agreement to issue contactless-enabled MasterCard debit cards to its customers. Access to MasterCard's technology and expertise positions Virgin Money well in terms of future digital and mobile payments innovation.

Virgin Money continues to challenge the barriers to entry and the anti-competitive nature of the current account market - particularly the free-if-in-credit model and lack of fair access to the payments infrastructure. While these conditions persist, Virgin Money has limited its participation in the market and continues to build capability in order to be ready to leverage future opportunities.

Insurance

Virgin Money's insurance strategy is based on a partnership model. It seeks partners who share its commitment to straightforward and transparent products. Virgin Money builds on their capabilities with its brand and marketing expertise to access profitable sectors whilst moderating financial risk.

The insurance business performed well during the first half of the year with income up 5 per cent from H1 2014. This was driven mainly by life insurance and travel insurance where 178,000 new policies were written in H1 2015.

The financial metrics in this section are presented on an underlying basis unless labelled as statutory

New travel insurance products were launched in June to improve its competitive position, broaden its proposition and improve cover for customers.

Virgin Money launched its new life insurance product in partnership with Friends Life in March and has recently commenced a new marketing agreement as it grows this business.

The launch of a new home and motor proposition, in conjunction with strategic partner Ageas, is nearing completion. These new products will support growth plans and further strengthen the customer focused insurance services model. Ageas, which is a leading provider of award-winning insurance solutions to around nine million customers, will support Virgin Money by providing sales, servicing, administration and claims management support.

Investment and pensions

In the first half of 2015, investment and pension income was £15.9 million, a 10 per cent increase over the same period in 2014. Total funds under management were £3,084 million at the end of the first half of 2015, a 1 per cent increase from the end of 2014, following strong retention and the launch of three new funds in February.

Almost 40 per cent of Virgin Money's funds under management support customer pensions, the sales of which increased by 19 per cent during H1 2015.

In April Virgin Money completed a project to ensure compliance with the pension reforms, including the ability for pension savers to access their funds as cash from the age of 55. The pension vesting process was also changed to include information about the Government-backed PensionWise guidance service, and the creation of an Independent Governance Committee (IGC). The newly formed IGC will oversee work place pension schemes, and work with Virgin Money to ensure the schemes offer value for money and continue to serve the interests of members.

CENTRAL FUNCTIONS PERFORMANCE

Virgin Money's central functions provide shared support services to each of the business lines. These services include Information Technology and Property together with central functions such as Risk, Finance, Treasury, Human Resources and the Group's Executive. It is not the policy of the Group to allocate the cost of these shared functions to each business line.

Costs are allocated to the main business divisions, with the remainder of overheads in central functions.

Performance summary

Virgin Money has an extensive investment programme to support its ambition to expand its product range and distribution capability.

During the first half of the year, it built upon its digital and mobile capability to develop customer propositions for both direct and indirect channels. Virgin Money also continued to invest in mortgage operations, both to improve efficiency and to prepare for upcoming regulatory changes as a result of the Mortgage Credit Directive.

Central Functions attributable expenses were held flat to the second half of 2014 through focus on disciplined cost management while the business grows to scale.

RISK MANAGEMENT REPORT

The mortgage book has shown strong growth in the first half of the year, increasing by 8 per cent. This represents an increased market share to 3.8 per cent of gross lending to the end of May. 

There was a marginal shift in the mix of new business towards a higher LTV, represented by a 2.4 per cent increase in the proportion of new loans having LTVs greater than 75 per cent. This is largely driven by the new mortgages written under the Government's Help to Buy equity and guarantee schemes. There has also been an increase in low LTV buy-to-let lending within risk appetite and in line with growth in this market segment.

The proportion of residential interest-only lending has reduced from 24.7 per cent at 31 December 2014 to 21.9 per cent at 30 June 2015. Mortgage balances remains high-quality, with reducing 3+ arrears from 0.31 per cent of the book at year end to 0.25 per cent at the half-year, well below the CML industry average of 1.30 per cent.

The first six months of the year saw the migration of over 675,000 customer credit card accounts from MBNA to its own platform. This was successfully completed and impairments have remained stable throughout the period.

Wholesale credit risk is well managed. Credit quality has remained strong, with no credit risk exposures which are past due or impaired.

The diversification of funding sources during the first half of 2015 has improved balance sheet efficiency. In April, Virgin Money made a successful debut issue of £300 million of senior unsecured MTN funding. Issuing senior unsecured debt enhances the funding mix and further diversifies the investor base. In addition, £750 million of RMBS funding was issued in June and the use of the Bank of England FLS facility was continued. This has resulted in greater utilisation of limits for encumbrance and an increase in the loan-to-deposit ratio to 107.3 per cent from 102.8 per cent. Wholesale refinancing is managed within tight refinancing limits. 

All of this has been achieved within risk appetite and whilst maintaining a stable overall risk profile.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks faced by the Group are summarised below, along with key mitigating actions.

Credit Risk

Virgin Money provides residential and buy-to-let mortgages and credit cards to customers across the UK. There is a risk that any adverse changes in the economic and market environment and/or the credit quality or behaviour of borrowers results in additional impairment losses thereby reducing profitability.

Virgin Money maintains a liquid asset portfolio and hedges exposure to interest rate risk through derivative instruments to manage liquidity and market risk. These positions are wholesale exposures.

Mitigating Actions

· Credit risk is managed through risk appetite and risk limits reflected in approved credit policy. 

· 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 is undertaken annually to support each planning round.

· Credit risk metrics are benchmarked against competitors and industry averages.

· Credit risk arising from derivative and from securities financing transactions is mitigated by collateralising exposures on a daily basis.

Market Risk

Market risk is the risk that unfavourable market moves lead to a reduction in earnings or value. Virgin Money does not trade or make markets. Interest rate risk is the only material category of market risk for the Group.

Mitigating Actions

· Market risk is managed through Board approved risk appetite limits and policy.

· Virgin Money mitigates exposures through the use of natural offsets and derivatives.

· Stress and scenario testing is undertaken annually to support each planning round.

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, cybercrime and information security remain a key focus for Virgin Money.

Mitigating Actions

· Risk appetite focused on maturing the control environment and therefore managing operational risk.

· A programme of investment in security infrastructure to mitigate threats including cyber attack.

· Continued investment in and development of risk management frameworks, systems and processes.

· Monitoring of external events impacting other financial services companies to inform its stress testing.

Conduct Risk and Compliance

Conduct risk is the risk that its operating model, culture or actions result in unfair outcomes for customers.

Compliance risk is the risk of regulatory sanction, material financial loss or reputational damage if the organisation fails to design and implement operational processes, systems and controls such that it can maintain compliance with all applicable regulatory requirements.

Mitigating Actions

· Effective and timely Board response to changes in the regulatory environment to ensure compliance is maintained.

· Customer is placed at the heart of decision-making by ensuring fair outcomes through comprehensive risk assessment and testing.

· Continued investment in and development of risk management frameworks, systems and processes.

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 its 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.

Mitigating Actions

· Board focus on ensuring alignment of business development and planning with risk appetite.

· Investment in processes, systems, recruitment and training to support new business developments.

· Robust risk and project management disciplines to ensure that implementation is delivered safely.

· Active focus on asset origination and portfolio management to eliminate inappropriate concentration risk.

· Regular validation and review of models.

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.

Mitigating Actions

· Board approved risk appetite and funding and liquidity policy defining a limit structure.

· Liquid resources maintained in adequate quantity and quality to meet estimated outflows.

· A prudent mix of funding sources is maintained with a maturity profile set in risk appetite and policy limits.

· Stress and scenario testing is undertaken annually to support each planning round.

Capital Risk

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.

Mitigating Actions

· Board approved risk appetite and capital management policy.

· Capital management procedures that are designed to ensure that Virgin Money operate within risk appetite.

· Ability to accumulate additional capital through profit retention or by raising equity. 

· Management of the demand for capital through management actions.

CREDIT RISK MANAGEMENT

Overview

· Impairment provisions increased 15 per cent to £35.3 million in the first half of this year to 30 June 2015.

· Impairment provisions coverage as a percentage of loans and advances to customers increased to 0.14 per cent as at 30 June 2015 compared to 0.13 per cent at 31 December 2014.

· There were no wholesale impairment provisions as at 30 June 2015.

The following categorisations are used for segmenting the portfolio.

Loans and advances to customers

The mortgage portfolio has grown by 8 per cent during the first half of 2015. In particular, buy-to-let balances have continued to increase, rising by £698.2 million (22.3 per cent) over the reporting period. This movement is reflective of Virgin Money's appetite and the growth of the buy-to-let market.

The unsecured portfolio has been managed as planned in the first half of the year to ensure safe migration from MBNA to Virgin Money's fully operational card platform in March 2015.

Wholesale Credit Risk

The Group's wholesale credit risk exposures have reduced as balance sheet efficiency improved. Wholesale credit exposures are assessed by reference to credit rating. All of Virgin Money's wholesale exposures are investment grade and classified as low risk. There were no wholesale credit exposures past due not impaired as at 30 June 2015 and at 31 December 2014.

Impaired balances and provisions

¹ A fair value adjustment of £5.9 million was made to the purchase price to take account of the losses already incurred on these assets.

¹ A fair value adjustment of £5.9 million was made to the purchase price to take account of the losses already incurred on these assets.

Retail Credit Risk

Impaired Assets

Total impaired assets improved by £8.4 million during the first six months of 2015. There was a £10.2 million reduction in impaired loans in the secured portfolio, reflecting an improvement in arrears performance. This was offset by an increase of £1.8 million in the unsecured portfolio, following the migration of credit cards onto Virgin Money systems.

Impairment provisions

Secured impairment allowances have increased by £0.4 million in the first half of the year. A reduction in impaired balances following improved arrears performance has resulted in an increase in the proportion of impairment provision to impaired balances. 

Unsecured impairment allowances have increased by £4.3 million in the half-year following the migration of credit cards onto Virgin Money systems.

Loans and advances which are past due and not impaired

The balance of mortgages which are past due and not impaired totalled £182.6 million at 30 June 2015. This improvement of 8.8 per cent (£17.6 million) compared to 31 December 2014 is attributable to reduced arrears observed in the first six months of 2015. These assets now represent 0.8 per cent of secured balances (31 December 2014: 0.9 per cent).

All unsecured assets which are past due are treated as impaired.

1 Assets categorised as past due and not impaired are those where the expected recoverable amount exceeds the carrying amount.

1 Assets categorised as past due and not impaired are those where the expected recoverable amount exceeds the carrying amount.

The stock of repossessions remained stable over the reporting period, representing 18 cases at 30 June 2015.

Period end and average LTVs across the retail mortgage portfolios are shown in the table below.

1 All new completions between 90% and 95% LTV, and the majority of new lending above 85% LTV are permitted under the Help to Buy loan guarantee

scheme. Mortgages written under the Help to Buy Guarantee Scheme provide Virgin Money with a guarantee from the Government to cover a proportion of net losses in the event of possession.

2 The average loan-to-value of stock and new business is balance weighted.

1 All new completions between 90% and 95% LTV, and the majority of new lending above 85% LTV are permitted under the Help to Buy loan guarantee scheme. Mortgages written under the Help to Buy Guarantee Scheme provides Virgin Money with a guarantee from the Government to cover a proportion of net losses in the event of possession.

2 The average loan-to-value of stock and new business is balance weighted.

Average indexed LTVs on the book have increased by 0.8 per cent during the reporting period, reflecting the subdued house price movements reported in the first quarter of 2015 for most UK regions. Average LTV for new business has remained consistent at 66.9 per cent.

Forbearance

The value of forbearance stock totalled £259.9 million at 30 June 2015, representing a 7.3 per cent (£20.5 million) reduction on 31 December 2014. The treatment of forbearance on secured and unsecured loans is detailed below.

Secured

At 30 June 2015, £248.1 million (31 December 2014: £267.5 million) of retail secured loans and advances were subject to forbearance.

The impairment assessment of retail secured loans subject to forbearance is performed on a collective basis. Loans which are forborne are grouped with other assets with similar risk characteristics and assessed collectively. The loans are not considered as impaired loans unless they meet the Group's definition of an impaired asset.

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. The underlying behavioural scorecards consider many different characteristics of customer behaviour both static and dynamic, from internal sources and also from credit bureau data, including characteristics that may identify when a customer has been in arrears on products held with other firms. Hence, these models take a range of potential indicators of customer financial distress into account.

Mortgage fraud cases are assessed on an individual basis, with expected recoveries used to assess the amount of provision required.

Unsecured

At 30 June 2015, total retail unsecured loans and advances benefitting from forbearance totalled £11.8 million (31 December 2014: £12.9 million).

The impairment assessment of retail unsecured loans and advances subject to forbearance is performed on a collective basis. The approach used is based on roll rates for various behavioural and arrears status segments, measuring the likelihood of default and the probability of charge-off given default. 

Unsecured fraud cases are assessed on an individual basis, with 100 per cent of the exposure held as a provision.

The outputs of secured and unsecured models are routinely monitored and challenged. The models are run monthly meaning that current market conditions and customer processes are reflected in the output. Where the risks identified are not captured in the underlying models, appropriate additional provisions are made.

A breakdown of secured and unsecured forbearance is shown below:

1 The December 2014 forbearance balance has been restated to reflect a change in the definition to include customers categorised as in hardship and on a payment plan or who are vulnerable.

FUNDING AND LIQUIDITY MANAGEMENT

Overview

· Virgin Money is predominantly funded through customer deposits. During 2015, the Group maintained a strong presence in the retail savings market. The focus of retail funding was fixed rate ISAs, growing 31.2 per cent in the first six months of the year. The behavioural stability of Virgin Money's funding has improved due to attrition in easy access deposits being offset by new term deposits.

· Wholesale funding is used to diversify sources of funding, extend tenor and optimise funding costs. The Group has continued to diversify its sources of wholesale funding, issuing a debut note from its Global MTN programme, through the well established Gosforth RMBS programme and additional drawings from the Bank of England FLS facility. The volume of encumbered assets has increased as a result of RMBS issuance and additional FLS drawings. 

Grexit

The ongoing uncertainty in Greece's future has caused some disruption to the markets. Virgin Money is proactively monitoring the impact of the situation on markets, business flows and customers on a daily basis. The Group has completed its planned wholesale issuances for 2015 and has no direct exposure to the Greek or other peripheral sovereigns or financial institutions.

Group funding sources

The Group's loan-to-deposit ratio has increased to 107.3 per cent at 30 June 2015, in line with risk appetite, compared with 102.8 per cent at 31 December 2014.

Analysis of total wholesale funding by residual maturity

The 2015 Gosforth RMBS issuance and increased FLS drawings have lengthened the average tenor of wholesale funding more than the offsetting pay down from earlier RMBS.

Encumbered assets

Virgin Money'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. 

1 Loans and advances to customers consist of collateral pledged to the Bank of England and securitised mortgage pools.

2 Other encumbered assets' are assets that cannot be used for secured funding due to legal or other reasons. These include cash reserves supporting secured funding structures.

3 Unencumbered assets which are classified as 'available as collateral' are readily available to secure funding or to meet collateral requirements. Loans and advances to customers are classified as 'available as 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 and are not readily available for use.

5 These include Treasury Bills received by the Group through FLS which are not recognised on the balance sheet which the Group is permitted to re-pledge.

1 Loans and advances to customers consist of collateral pledged to the Bank of England and securitised mortgage pools.

2 Other encumbered assets' are assets that cannot be used for secured funding due to legal or other reasons. These include cash reserves supporting secured funding structures.

3 Unencumbered assets which are classified as 'available as collateral' are readily available to secure funding or to meet collateral requirements. Loans and advances to customers are classified as 'available as 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 and are not readily available for use.

5 These include Treasury Bills received by the Group through FLS which are not recognised on the balance sheet which the Group is permitted to re-pledge.

Virgin Money's total level of asset encumbrance increased to 27.7 per cent at 30 June 2015 compared with 26.2 per cent at 31 December 2014. Encumbrance of assets predominantly arises from the use of the Gosforth RMBS programme and Bank of England FLS liquidity facility.

The Group manages the volume of available unencumbered collateral to meet the requirements arising from both current and future secured funding transactions. During 2015, Virgin Money's unencumbered loans and advances to customers increased by £1,015 million due to loan origination.

Liquidity portfolio

The Group maintains a portfolio of liquid assets in accordance with risk appetite. Liquid assets are held predominantly in high-quality unencumbered securities issued by the UK Government or supranationals and deposits with central banks. Liquid assets meet 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 intended to cover more extreme stress events and provide flexibility in terms of liquidity management.