2018 Half-Year Results

THE INFORMATION CONTAINED WITHIN THIS ANNOUNCEMENT IS DEEMED BY VIRGIN MONEY TO CONSTITUTE INSIDE INFORMATION AS STIPULATED UNDER THE MARKET ABUSE REGULATION NO 596/2014. UPON THE PUBLICATION OF THIS ANNOUNCEMENT VIA REGULATORY INFORMATION SERVICE, THIS INSIDE INFORMATION IS NOW CONSIDERED TO BE IN THE PUBLIC DOMAIN.

2018 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 2018.

Statutory basis

Statutory information is set out in the condensed consolidated half-year financial statements section of this announcement.

Underlying basis

In order to present a more meaningful view of business performance for 2018, the results of the Group are presented on an underlying basis, which excludes:

· Strategic items; and

· Fair value gains/losses on financial instruments.

Reconciliations of the Group's statutory and underlying results are reported on pages 3 and 9 and in note 2 to the condensed consolidated half-year financial statements.

Alternative performance measures

A number of alternative performance measures (APMs), in addition to underlying profit, are used in the analysis and discussion of the Group's financial performance and position. APMs do not have standardised definitions and may not be directly comparable to any measures defined within International Financial Reporting Standards (IFRS). Details of all APMs, including the rationale for their use and their bases of calculation, are set out on page 66.

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; the ability to access sufficient sources of capital, liquidity and funding when required; changes to Virgin Money's credit ratings; the ability to derive cost savings; 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, the exit by the UK from the European Union (EU) and the potential for one or more other countries to exit the Eurozone or EU, and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; 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, including as a result of the exit by the UK from the EU, 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 EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; the extent of any future impairment charges or write-downs caused by, but not limited to, 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 of 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.

Note: The information in this announcement relates to Virgin Money as a standalone business and does not take into account the impact of the offer for Virgin Money from CYBG PLC which was announced on 18 June 2018.

Virgin Money Holdings (UK) plc - Registered in England and Wales (Company No. 03087587). Registered Office: Jubilee House, Gosforth, Newcastle upon Tyne NE3 4PL.

CONTENTS

VIRGIN MONEY GROUP: RESULTS FOR THE HALF-YEAR TO 30 JUNE 2018

Financial highlights

Business update

Jayne-Anne Gadhia, Chief Executive said:

"I am delighted to report that our customer-focused strategy of growth, quality and returns continued to drive strong financial and operational performance during the first half of the year. We also made good progress in delivering on our strategic initiatives.

"As a result of our disciplined approach to growth across our core markets and rigorous management of our cost base, underlying profit before tax was up 10 per cent to £141.6 million, our cost:income ratio improved to 49.9 per cent and our return on tangible equity was strong at 14.2 per cent.

"We continue to maintain a strong balance sheet, as shown in our common equity tier 1 ratio of 16.3 per cent. This benefited from recent changes to our capital models to ensure they fully reflected the excellent credit quality of our lending portfolios.

"Our SME savings franchise gathered real momentum and is on track to deliver £500 million of new deposits by the end of 2018. Our partnership with Virgin Atlantic has got off to a flying start and the development of our digital banking platform is progressing well.

"We remain focused on providing our customers with good value, straightforward products and an overall Net Promoter Score (NPS) of +37 continues to make Virgin Money one of the best-rated UK retail banks for customer satisfaction.

"I am delighted that we have continued to improve our gender pay gap, which reduced by a further 9 per cent over the last year. We remain committed to achieving 50:50 gender balance throughout the company by the end of 2020.

"The recommended offer made by CYBG for Virgin Money in June reflects confidence in our strategy, our track record of delivery and the complementary models of the two businesses and will accelerate the delivery of our strategic objectives."

SUMMARY INCOME STATEMENT

1 The impairment charge in the half-year to 30 June 2018 reflects impairment charges on an expected credit loss basis in accordance with IFRS 9. The comparative figures reflect impairment charges on an incurred credit loss basis, as previously reported under IAS 39.

CONSOLIDATED BALANCE SHEET

KEY METRICS

1 The cost of risk in the half-year to 30 June 2018 reflects impairment charges on an expected credit loss basis in accordance with IFRS 9. The comparative figures reflect impairment charges on an incurred credit loss basis under IAS 39, as previously reported in 2017.

Key ratios are presented on an underlying basis except where stated. Capital ratios include verified profit for H1 2018.

RECONCILIATION TO STATUTORY PROFIT

CHIEF EXECUTIVE'S STATEMENT

Executive summary

I am delighted to report that our customer-focused strategy of growth, quality and returns continued to drive strong financial and operational performance during the first half of the year. We also made good progress in delivering on our strategic initiatives.

As a result of our disciplined approach to growth across our core markets and rigorous management of our cost base, underlying profit before tax was up 10.1 per cent to £141.6 million. Our cost:income ratio improved to 49.9 per cent, from 53.9 per cent, and our cost of risk remained low at 0.16 per cent. Taken together this delivered a return on tangible equity of 14.2 per cent.

Our SME savings franchise gathered real momentum and is on track to deliver £500 million of new deposits by the end of 2018. Our partnership with Virgin Atlantic has got off to an excellent start with a better than expected customer response to the launch of our new frequent flyer cards. We announced our joint venture with Aberdeen Standard Investments (ASI) in March 2018 with the intention to grow funds under management from 2019 and the development of our digital banking platform is progressing well.

During the period we repaid our remaining Funding for Lending Scheme (FLS) balances in full, using our final drawing from the Term Funding Scheme (TFS). Our inaugural MREL1 eligible Medium Term Note issuance in April demonstrated the strength of our franchise. Over £900 million of investor demand resulted in a better than expected price for the £350 million of notes which we issued.

1 Minimum Requirements for Own Funds and Eligible Liabilities

In March we submitted an application for a reduction in our mortgage risk-weights to the Prudential Regulation Authority (PRA), reflecting the excellent credit quality of our mortgage portfolio. The PRA have approved these model changes and the reduction in risk-weights resulted in a material increase in our common equity tier 1 (CET1) ratio to 16.3 per cent. Our total capital ratio was 21.1 per cent and our leverage ratio was 3.8 per cent at the end of the first half.

As a result of our strong performance, the Board has declared an interim dividend of 2.3 pence per ordinary share in respect of the half-year, which is up 21 per cent from the first half of 2017.

After considering the interests of shareholders and other stakeholders, in June the Board agreed a recommended all-share offer to be made by CYBG PLC for Virgin Money. The recommended offer reflects confidence in our strategy and the complementary strengths of the two businesses, and will accelerate the delivery of our strategic objectives.

Operating environment

According to the Office for National Statistics (ONS), UK gross domestic product (GDP) grew by 0.2 per cent in the three months to May, continuing the recent pattern of modest growth. The UK unemployment rate improved to 4.2 per cent, the lowest since 1975, and a 2.7 per cent increase in wage growth meant pay growth started to exceed inflation after a period of falling below it.

The strength of the UK labour market, wage growth and ongoing low mortgage rates continued to underpin mortgage approvals and the UK housing market, all of which are positive for our business and consumers. The Bank Base Rate is expected to rise over the coming years but increases are expected to be at a gradual pace and to a limited extent.

Although the economic environment, including the impact of the UK leaving the European Union, remains uncertain, the strength of our franchise, our customer-focused strategy and our commercial agility give us the flexibility to adapt to possible changes in the operating environment.

Business performance

Our customer-focused strategy of growth, quality and returns continued to drive strong business performance and our overall Net Promoter Score (NPS) of +37 maintained our position as one of the best-rated UK retail banks for customer satisfaction.

The ongoing competition in the mortgage market and differential between front and back book margins has, as expected, impacted our banking net interest margin. As a result of this, we have managed growth with a focus on maintaining the right margin and asset quality. To mitigate some of the competitive pressures we continued to invest in our franchise to deliver new products, support our intermediary partners and further develop our customer proposition. We achieved a gross lending market share of 2.2 per cent to the end of May and mortgage balances grew by 1.2 per cent to £34.1 billion, compared to market growth of 0.6 per cent. Asset quality continued to be a real strength with only 0.12 per cent of all mortgage assets three or more months in arrears.

Our credit card book continued to perform strongly. A full and in depth analysis of customer behaviours as at 30 June was undertaken, which included the 49,000 customers who have come off their zero per cent promotion period during the first half of the year. This analysis resulted in a net adjustment to reduce total income by £7.8 million across the whole portfolio to reflect those behaviours over the seven year modelling period. £5.4 million of the total represents income previously recognised and £2.4 million represents the present value of income not yet earned.

Our partnership with Virgin Atlantic has got off to an excellent start with a better than expected customer response driving high quality new customer acquisition and increased levels of retail spend. Balance growth in the market was broadly flat during the first half of the year while we grew balances to £3.1 billion, up by 3.8 per cent since the end of 2017. On an IFRS 9 basis, our credit card book had a cost of risk of 187 basis points and arrears emergence remained low.

Customers continued to recognise the value of our savings proposition as demonstrated by growth of deposit balances to £31.4 billion in the first half of the year. We attracted £1.5 billion of net ISA flows, which represented a 19 per cent market share of new ISA inflows to the end of May, surpassing net ISA flows for both 2016 and 2017. The strength of our savings franchise was recognised by winning Best Bank Savings Provider at the 2018 Moneyfacts Awards and we were able to deliver competitive pricing for customers' savings while further reducing our weighted average cost of funds.

We opened a new Lounge in Cardiff in June and welcomed 441,000 visitors across our eight Lounges in the first six months of the year, up 18 per cent compared to first half of 2017. The Lounges complement our Stores, which continue to attract around a quarter of overall deposits.

Our Financial Services business line contributed £21.4 million of total income in the first half of 2018, an increase of 20 per cent supported by growth in funds under management to £3.7 billion. In our insurance business we continued to focus on profitable segments of the aggregator market. Insurance income increased by 70 per cent to £3.4 million as a result of a significant increases in sales of travel and life insurance, which both benefitted from renegotiated agreements with our commercial partners.

Differentiated business model continues to drive our ambition to make 'everyone better off'

The contribution to the communities in which we work is a fundamental part of Virgin Money's business model and strategy. Over 14,500 charities have registered with Virgin Money Giving, our not-for-profit online donation service, and more than £660 million has been donated to charities through the service since its launch in 2009, including almost £57 million in the first half of 2018.

The Virgin Money Foundation, which tackles social and economic disadvantage in the North East and beyond, has now provided over £5.5 million of awards to benefit good causes since launching in 2015. The Foundation launched its first grants programme to support charitable organisations across Norfolk with £500,000 in new funding in the first half of the year. This funding is aimed at developing new initiatives and enterprises focused on regenerating deprived communities in the area.

Gender Pay Gap

We are very supportive of the UK government initiative to improve equality through collecting and reporting gender pay data. At April 2018, our mean gender pay gap had reduced by 9 per cent compared with 2017, to 29.7 per cent. We remain committed to achieving 50:50 gender balance (within a 10 per cent tolerance) throughout the company by the end of 2020 and as we make further progress towards this our gender pay gap will continue to reduce.

Outlook

Our central planning scenario for the rest of the year assumes a continuation of resilient economic conditions. We expect to deliver continued strong performance for the full year including a CET1 ratio of around 15.5 per cent, before the benefit, estimated at around 40 basis points, expected to arise from the proposed joint venture with Aberdeen Standard Investments. We continue to deliver on our 2018 guidance and now anticipate a banking net interest margin for the full year 2018 of around 162 basis points, recognising continued pressure on mortgage spreads and our card income adjustment. All other guidance for 2018 remains unchanged and we look forward to the second half of the year with confidence, as we continue to drive strong returns for our shareholders.

Jayne-Anne Gadhia CBE

Chief Executive

25 July 2018

FINANCIAL REVIEW

Overview: Stable asset quality, continued focus on costs and disciplined growth delivered a further increase in profitability

In the first half of 2018 we experienced strong credit performance and continued to maintain a high quality balance sheet.

We managed asset growth to protect returns in a competitive environment. The robust performance of our savings franchise underpinned our growth and helped us to deliver a banking net interest margin of 164 basis points and net interest income growth of 5.1 per cent. Total income increased by 4.8 per cent on H1 2017 as we delivered positive momentum in other income.

Further improvements in operating leverage and effective cost management resulted in a 3.1 per cent reduction in costs. This reduction in costs resulted in the cost:income ratio reducing by 4.0 percentage points on H1 2017, to 49.9 per cent. The cost of risk of 0.16 per cent continued to evidence our commitment to prime lending segments.

Taken together, we delivered an underlying profit before tax of £141.6 million, 10.1 per cent higher than H1 2017. As a result, return on tangible equity improved to 14.2 per cent, from 13.3 per cent in the first half of 2017.

Balance sheet growth

1 At 31 December 2017 these included Funding for Lending Scheme (FLS) drawings of £1.9 billion which were held off balance sheet, but were available for repo and hence counted towards liquidity resources. FLS drawings were repaid in full during February 2018.

Lending was carefully managed to protect returns in the first half of 2018, with growth in loans and advances to customers of 1.2 per cent since year end.

Mortgage balances grew to £34.1 billion as we balanced our share of gross lending with our focus on returns. Volumes accelerated in the second quarter as we broadened our mortgage product offering. As a result, we entered the second half with a mortgage pipeline of £2.2 billion compared to £1.4 billion at year end.

Credit card balances grew to £3.1 billion during the half, including diversification of our portfolio with the successful launch of our new Virgin Atlantic credit cards.

Lending was funded by continued growth in our retail deposit franchise. Total customer deposits grew to £31.4 billion at 30 June 2018, with particularly strong performance in cash ISAs.

We took further steps to diversify our funding base with the launch of our new SME deposit accounts in the first half of 2018. Balances stood at over £160 million as at 30 June 2018, and we are on track to reach £500 million of new balances by the end of the year.

We repriced £1.5 billion of existing deposits in the first half of 2018, following on from significant repricing activity in 2017. This enabled us to reduce our cost of funds further and helped to offset margin pressure from lower asset spreads.

As a result of our strong performance in retail deposits, the loan-to-deposit ratio reduced to 118.3 per cent at 30 June 2018, down from 119.1 per cent the end of 2017. This is in line with our guidance for a gradual reduction to below 115 per cent in the medium term.

We continued to optimise the mix and duration of our funding base in the first half of 2018. TFS drawings totalled £6.4 billion at the closure of the scheme at the end of February 2018. TFS drawings in the first two months of the year were used to repay outstanding FLS balances in full.

In wholesale funding, having secured investment grade credit ratings for Virgin Money Holdings from Fitch and Moody's, in April we completed our inaugural MREL eligible Medium Term Note issuance of £350 million. The strength of investor demand enabled us to achieve a better price than our initial expectations.

Our regulated covered bonds programme is now established alongside our existing RMBS franchise, enabling further diversification of our funding in the future.

The Group maintained its strong liquidity position throughout the first half of 2018. At the balance sheet date high quality liquid assets stood at £5.3 billion. The repayment in full of off-balance sheet FLS drawings with our final TFS drawing, which is held on balance sheet, resulted in an increase of £2.0 billion in on balance sheet liquidity. At 176 per cent, our liquidity coverage ratio (LCR) remained significantly above the regulatory minimum of 100 per cent.

Income benefitted from growth in asset balances and optimisation of funding costs

1 On an underlying basis.

Net interest income increased by 5.1 per cent to £303.1 million. This was driven by growth in loans and advances to customers of 7.2 per cent over the past year which more than offset the reduction in banking net interest margin.

The pressure on banking net interest margin from lower mortgage spreads was partially offset by further optimisation of our funding base, through both improved deposit spreads and the benefit from TFS funding, and by our decision to moderate mortgage balance growth in the competitive market environment.

Our credit card book continued to perform strongly. A full and in depth analysis of all customer behaviours as at 30 June was undertaken, which included the 49,000 customers who have come off their zero per cent promotion period in the first half of the year. This analysis resulted in a net adjustment to reduce total income by £7.8 million across the whole portfolio to reflect those behaviours over the seven year modelling period. £5.4 million of the total represents income previously recognised and £2.4 million represents the present value of income not yet earned.

As a result, banking net interest margin was 164 basis points in the first half of 2018.

Other income increased 3.1 per cent compared to the prior period, largely due to stronger trading in our fee generating Financial Services business lines.

Operational efficiency improved with tightly controlled costs and increased investment

1 On an underlying basis.

Total costs remained tightly controlled, reducing by 3.1 per cent. Set against total income growth of 4.8 per cent this produced positive JAWS of 7.9 per cent and reduced the cost:income ratio by 4.0 percentage points, to 49.9 per cent.

This performance reflected the continued benefit of our scalable platform and disciplined cost management across the business.

In addition to our revenue expenditure, we continued to invest in the business with £44.1 million (H1 2017: £36.3 million) of capital expenditure. This supported the customer proposition, systems and processes in the core bank as well our strategic initiatives which included the continued build of the digital bank.

Impairments reflected a benign environment and rigorous credit risk management

1 The cost of risk figures for the half-year to 30 June 2018 reflect impairment charges on an expected credit loss basis in accordance with IFRS 9. The comparative figures reflect impairment charges on an incurred credit loss basis under IAS 39.

2 The figures for 31 December 2017 are as at 1 January 2018 to reflect IFRS 9; please see note 19 of the condensed consolidated half-year financial statements for further detail.

3 Secured lending is classified as in arrears where the customer's payment shortfall exceeds 1 per cent of the current monthly contractual payment amount. For unsecured lending, customers are classified as in arrears at one day past due.

Credit performance remained strong in the first half of 2018, reflecting our established risk appetite framework, ongoing focus on underwriting rigour and the origination of high credit quality customers and prime assets.

The cost of risk for mortgages on an IFRS 9 basis reduced to less than 0.01 per cent. This performance reflected our robust underwriting standards and the benign economic environment, leading to a continued low level of defaults. The percentage of mortgages over three months in arrears was 0.12 per cent at 30 June 2018 (31 December 2017: 0.12 per cent).

The impairment charge for credit cards grew from £20.8 million in the first half of 2017 to £29.5 million in the first half of 2018. £4.7 million of the £8.7 million increase was as a result of the change to reporting under IFRS 9 with the balance reflecting growth in the portfolio.

Provisions as a percentage of balances in arrears increased to 63.4 per cent (1 January 2018: 58.6 per cent) as we retained appropriate coverage of balances at risk of loss.

The proportion of loans classified as stage 2 under IFRS 9 has increased slightly over the half, reflecting the seasoning of our portfolios as the rate of asset growth slowed compared to prior periods. 90.6 per cent of stage 2 loans are up to date. IFRS 9 transitional disclosures are available in note 19 to the condensed consolidated half-year financial statements.

The proportion of credit-impaired assets as a percentage of total loans and advances remained low at 0.6 per cent as at 30 June 2018 (1 January 2018: 0.5 per cent).

Underlying profit before tax to statutory profit before tax reconciliation

Note: The reconciliation of the Group's statutory and underlying results are reported above and in note 2 to the condensed consolidated half-year financial statements.

In 2018 the items affecting underlying performance relate to two categories: costs incurred as a result of strategic developments and the non-cash movement in the fair value of financial instruments. Further detail is given below:

> Strategic items

We incurred strategic investment costs of £11.6 million in the first half of 2018. This included a £10.0 million non-recurring cost to support the launch of Virgin Atlantic financial services products. The remainder related to the development of our digital banking platform.

> Fair value gains/(losses) on financial instruments

Fair value gains and losses on financial instruments reflect the results of hedge accounting and the fair value movements on derivatives in economic hedges to the extent that they either do not meet the criteria for hedge accounting or give rise to hedge ineffectiveness. Where these derivatives are held to maturity, fair value movements recorded in this heading represent timing differences that will reverse over their lives and therefore excluding these from underlying profit better represents the underlying performance of the Group. Where derivatives are terminated prior to maturity, this may give rise to fair value movements that do not reverse.

> IPO share based payments

These costs related to share based payment charges triggered by our successful IPO in 2014. 2017 was the last year in which such charges were incurred.

Taxation

In the first half of 2018, the Group recognised a corporation tax charge of £33.7 million. The effective tax rate was 26.5 per cent.

Continued strong progression in returns

1 Return on assets on a statutory basis, excluding AT1 coupons and other exceptional items, was 0.43 per cent in the first half of 2018, compared to 0.45 per cent in in the first half of 2017.

Income growth and continued operational leverage, combined with our rigorous approach to underwriting and asset quality, have enabled us to deliver attractive returns in the first half of 2018.

Return on tangible equity increased to 14.2 per cent in the first half of 2018 from 13.3 per cent in the first half of 2017. Return on assets was stable at 0.43 per cent in H1 2018.

Tangible net asset value per share was 297 pence, 13 pence higher than as at 30 June 2017. This figure includes the day one impact from IFRS 9. Transitional disclosures upon adoption of IFRS 9 are available in note 19 to the condensed consolidated half-year financial statements. Without that impact, tangible net asset value per share would have been a further 8 pence per share higher at 305 pence as at 30 June 2018.

Capital strength whilst investing in the future

Capital ratios

Our capital ratios improved significantly during the first half of 2018 as a result of continued growth in capital resources set against a reduction in risk-weighted assets (RWAs). This led to a 2.5 percentage point increase in our CET1 ratio to 16.3 per cent, and a 3.0 percentage point increase in our total capital ratio to 21.1 per cent.

The leverage ratio at 30 June 2018 was 3.8 per cent which reflected the growth in our lending portfolios and higher levels of on balance sheet liquidity as FLS was repaid in full.

Capital resources

During the first half of 2018 we generated profit attributable to equity shareholders of £81.0 million, an increase of 3.7 per cent when compared to the same period in 2017.

This profit flowed into capital resources and after allowing for investment, dividends and movements in regulatory items this generated a net increase in CET1 capital in the first half of £50.1 million which was in turn used to support customer lending.

Risk-weighted assets

We received approval for improvements to our AIRB models which reduced mortgage risk-weight density at 30 June 2018 to 12.9 per cent from 17.7 per cent. These improvements, after taking into account growth in balances, resulted in mortgage RWAs at 30 June 2018 of £4.4 billion, a £1.4 billion reduction compared to £5.8 billion at 31 December 2017.

Credit card credit risk RWAs increased to £2.4 billion, principally in line with balance growth as our credit card RWAs are calculated using the standardised approach.

Other RWAs increased to £1.3 billion, driven by increased operational risk RWAs which were recalibrated during the first half of the year to reflect the growth in average income over the past three years, in line with the standardised approach.

Total RWAs at 30 June 2018, after mortgage risk-weight model improvements, were 12.2 per cent lower than at 31 December 2017 at £8.1 billion.

Capital requirements

Our 2018 Supervisory Review and Evaluation Process ("SREP") took effect from 5 July 2018 (see page 31 for further details). If this outcome had been effective at 30 June 2018 our minimum regulatory requirements for CET1 and total capital would have been 9.9 per cent and 15.8 per cent respectively. The minimum applicable leverage requirement recommended by the EBA remains at 3.0 per cent.

We therefore have significant headroom at 30 June 2018 against our minimum regulatory requirements (6.4 percentage points above minimum CET1 ratio; 5.3 percentage points above minimum total capital and 0.8 percentage points above expected minimum leverage ratio at 30 June 2018) to support investment in our strategic objectives and future growth.

Dividend

The Board has recommended a 21.1 per cent increase in the interim dividend to 2.3 pence per ordinary share, reflecting the performance of the business and our confidence in our future plans.

Conclusion

In the first half of 2018 we delivered continued strong financial performance. Our focus on maintaining a high quality balance sheet and strong credit quality, along with further cost improvement has resulted in improved returns for our shareholders across RoTE, earnings per share and tangible net asset value. This has been achieved with further diversification of our funding base and deposit franchise, and with continued focus on investment in our strategic initiatives. The PRA's agreement to a reduction in mortgage risk-weight density creates significant headroom to redeploy capital in support of further growth.

Peter Bole

Chief Financial Officer

25 July 2018

BUSINESS LINE HIGHLIGHTS

MORTGAGES AND SAVINGS

We provide mortgages, savings and current accounts to almost 1.8 million customers. Mortgages are sold primarily through our intermediary partners and retail deposits are largely originated through our direct to consumer digital channel and store network.

Our Mortgage and Savings business line is an important revenue driver for the Group, contributing 66.0 per cent of total income in the first half of 2018.

Half-year highlights

· net interest income increased by 8.6 per cent to £224.9 million largely driven by growth in mortgage balances over the past year;

· we continued to invest in the mortgage franchise to deliver new products, support our intermediary partners and develop our customer proposition, all within our existing portfolio risk appetite. This enabled us to optimise margins and mitigate some of the competitive pressures in the mortgage market;

· lower funding costs partially offset the pressure on spreads in the mortgage market. As a result we delivered a NIM of 1.32 per cent in the Mortgage and Savings business, compared to 1.34 per cent in H1 2017;

· mortgage balances grew by £0.4 billion in the half as we moderated gross lending to £2.8 billion (H1 2017: £4.3 billion), focusing on growing assets at the right margin and quality;

· we successfully retained 72 per cent of customers with maturing fixed rate or tracker mortgage products, consistent with prior periods;

· credit quality remained strong, with the cost of risk below 0.01 per cent (H1 2017: 0.01 per cent);

· three month plus arrears are 0.12 per cent compared to the latest industry average of 0.81 per cent;

· mortgage risk-weight model changes were implemented resulting in risk-weights that better reflect the excellent credit quality of our mortgage portfolio. The average risk-weight reduction of 27 per cent arising from these changes more than offset an underlying increase in mortgage risk-weights; and

· deposit balances increased to £31.4 billion and we continued to retain 86 per cent of maturing fixed rate deposit balances.

Mortgages key developments

We offer customers a range of residential and buy-to-let mortgages in the prime secured lending market supported by excellent customer service. Mortgages are sold predominantly through our intermediary partners, supplemented by direct distribution.

In the first half we have:

· expanded our reach into new customer segments with the launch of a portfolio landlord proposition, new 7 and 10 year fixed rate products and the extension of Shared Ownership lending nationwide;

· increased the proportion of new mortgage applications from direct customers to 13.3 per cent, from 10.4 per cent in the first half of 2017;

· increased our mortgage NPS in the first half of 2018 to +49, 7 points higher than our mortgage NPS for 2017, driven by positive service experiences;

· achieved a 4.5 out of 5 rating for our service in real-time feedback on our website from intermediary partners; and

· maintained our high quality mortgage book, with an average portfolio LTV of 57.1 per cent (31 December 2017: 55.8 per cent).

Savings key developments

We offer retail customers a range of competitively-priced instant access and fixed term savings products. These are also available as ISAs and distributed primarily through our digital channels supplemented by our stores and contact centres. We attract and retain customers with enduring good value offers and excellent service.

During the first half we enhanced our proposition and broadened our reach with the launch of SME deposit products and the introduction of new savings options for retail customers while making improvements to our customer journeys:

· stores accounted for 23.3 per cent of new inflows in the first half (H1 2017: 20.8 per cent) supported by new technology, additional marketing and training;

· we repriced £1.5 billion of existing deposits in the first half of 2018, following the repricing of £15 billion of deposits in 2017;

· we surpassed net ISA flows for 2016 and 2017, achieving £1.5 billion of net flows which represented a 19 per cent share of ISA inflows to the end of May;

· our ISA proposition was recognised by winning Best Cash ISA provider at both the Moneyfacts and Savings Champion Awards;

· we have seen a strong response to our new variable and fixed rate SME deposit proposition. SME balances ended the half at over £160 million;

· in June we expanded our partnership with Virgin Atlantic by launching an innovative savings account where customers earn Flying Club miles in place of interest, the first and only savings account in the UK to offer such a feature; and

· the strength of our overall savings franchise was recognised by winning Best Bank Savings Provider at the Moneyfacts Awards.

Performance summary - Mortgages and Savings

Key balance sheet items

1 Excluding fair value of portfolio hedging

CREDIT CARDS

We provide credit card products, predominantly online, to 1.3 million customers. Our portfolio is a mix of balance transfer and retail credit cards, and our offering continues to develop with the launch of our Virgin Atlantic affinity products in the first half of 2018.

Our Credit Cards business line contributed 26.1 per cent of total income in the first half of 2018.

Half-year highlights

· credit card balances increased to £3.1 billion at 30 June 2018, an increase of 3.8 per cent since the end of 2017 benefitting from the diversification of our portfolio through our new Virgin Atlantic proposition. Excluding the day one IFRS 9 adjustment of £44.8 million the growth was 5.4 per cent;

· net interest income stood at £78.2 million after an adjustment to the portfolio effective interest rate of £7.8 million reflecting the latest behavioural information (see page 7 in the Financial Review and note 1 to the condensed consolidated half-year financial statements for further details). Prior to that adjustment, net interest income had grown by 5.5 per cent reflecting balance growth;

· other income increased by 16.5 per cent to £11.3 million, driven by higher interchange and foreign exchange income, reflecting increased retail volumes and a higher mix of retail accounts;

· impairments increased reflecting growth in balances combined with the impact of earlier recognition of losses under IFRS 9. There was no underlying deterioration in performance, reflecting the strong credit quality of the book as unsecured 2 month plus arrears levels remained low at 0.93 per cent (31 December 2017: 0.88 per cent). The reported cost of risk was 1.87 per cent under IFRS 9; and

· our customer indebtedness scores remained better than the market average, driven by strong affordability and affluence established at the point of underwriting. The profile of newly acquired customers was unchanged.

Key developments

· we successfully launched a range of Virgin Atlantic credit cards, with a stronger than expected customer response driving high quality new customer acquisition and increased levels of retail spend;

· we issued over 37,000 new Virgin Atlantic cards, reflecting strong customer demand. A significant proportion of Virgin Atlantic customers are choosing a card with an annual fee, supporting other income;

· as expected, the credit quality of the new Virgin Atlantic card customers is superior to that of the existing portfolio, reflecting the more affluent nature of the customer base; and

· 193,000 new accounts were opened in total in H1 2018 (H1 2017: 150,000), of which 64 per cent were retail-led (H1 2017: 42 per cent), with spend per active account 10 per cent higher than H1 2017.

Performance summary - Credit Cards

Key balance sheet items

FINANCIAL SERVICES

The Financial Services business line offers customers investments and pensions, insurance and currency products and services. We work in partnership with a number of specialist organisations to deliver these products, which generate attractive returns and consume low levels of capital.

Our Financial Services business line contributed 6.2 per cent of total income in the first half of 2018.

In the first half we continued to enhance our propositions in this business line and announced our forthcoming joint venture with Aberdeen Standard Investments.

Half-year highlights

· total funds under management at 30 June 2018 were £3.7 billion, 6.2 per cent higher than 30 June 2017;

· investments and pensions income increased by 13.9 per cent on the same period in 2017 to £18.0 million;

· insurance and other income increased by 70.0 per cent on the same period in 2017 to £3.4 million due to significant increases in sales of travel and life insurance, which both benefitted from renegotiated agreements with our commercial partners;

· new travel insurance policy sales were up 27 per cent on H1 2017 reflecting our ability to offer more competitive, value-accretive pricing under a revised agreement with our partner MAPFRE; and

· we achieved 6,500 life insurance sales in the first half, compared to 4,000 sales in H2 2017, an increase of over 60 per cent following the launch of our new proposition during H1 2017.

Key developments

· in March we announced a new partnership with Aberdeen Standard Investments for investments and pensions, which we expect will deliver growth in assets under management; and

· the first new products under this partnership are expected to be offered to customers in 2019.

Performance summary - Financial Services

Key balance sheet items

CENTRAL FUNCTIONS

Our Central Functions provide shared support services to each of our business lines. These services include Information Technology and Property, together with functions such as Risk, Finance, Treasury, Human Resources and the Group's Executive. It is not our policy to allocate operating costs to each business line, as we manage operating costs across the business as a whole. This has the benefit of more effective cost management.

This part of our business contributed 1.7 per cent of total income in the first half of 2018 from the sale of treasury assets and debt securities sold by our Treasury function.

Half-year highlights

· other income in the first half of 2018 decreased by £3.9 million compared to the first half of 2017. H1 2017 included a gain of £6.1 million from the sale of Vocalink shares. Excluding this gain, other income increased by £2.2 million, largely due to higher income from sales of treasury assets; and

· total costs remained tightly controlled, reducing by 3.1 per cent as we continued to focus on the realisation of benefits through our scalable platform and disciplined cost management across the business. The increase in staff costs was due to project related activity, including investment in the digital bank.

Key developments

· risk-weights in this business line have increased by 16.8 per cent predominantly due to an increase in the liquidity portfolio following replacement of off-balance sheet FLS treasury bills with on-balance sheet liquidity.

Performance summary - Central Functions

Key balance sheet items

Operating costs

1 On an underlying basis.

RISK MANAGEMENT REPORT

As a UK retail bank we are focused on serving domestic customers. We are subject to risks arising from macro-economic conditions in the UK, geopolitical uncertainty, market conditions and new structural and regulatory changes which will come into force over the next few years. Our ongoing focus on maintaining a strong retail deposit franchise, building an SME deposit offering, and growing high-quality lending portfolios is supported by clearly defined risk appetite and a robust approach to both financial and non-financial risk management.

The Board-approved risk appetite reflects our tolerance for risk in pursuit of our strategic objectives. It is designed to achieve an appropriate balance between risk and reward. Risk appetite is embedded in the business through delegation of authority from the Board to the Executive. Our risk management approach is fully aligned with Board risk appetite, regulatory requirements and industry good practice.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks faced by the Group are summarised below. Except where noted, there has been no significant change to the description of these risks or key mitigating actions disclosed in the Group's 2017 Annual Report and Accounts (pages 36 to 39), with any quantitative disclosures updated below.

Credit risk

Credit risk is the risk of loss resulting from a borrower or counterparty failing to pay amounts due. We provide residential and buy-to-let mortgages and credit cards to customers across the UK. There is a risk that any adverse changes in the macro-economic environment and/or the credit quality or behaviour of borrowers results in additional impairment losses, thereby reducing profitability.

Wholesale exposures arise through operational exposures, our liquid asset portfolio and the use of derivative instruments to manage interest rate risk.

Market risk

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

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 remains a key focus for the Group. During 2018, the Group will become a direct member of all relevant UK inter-bank payment systems.

Conduct risk and compliance

Conduct risk and compliance is defined as the risk that the Group's operating model, culture or actions result in unfair outcomes for customers. This could give rise to regulatory sanction, material financial loss or reputational damage if the Group fails to design and implement operational processes, systems and controls and maintain compliance with all applicable regulatory requirements.

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 stakeholders or from an inability to adapt to external developments.

Financial risk is focused primarily on credit concentration risk, which is managed for retail and wholesale credit exposures at portfolio, product and counterparty levels.

Financial performance can be impacted by adverse changes in customer behaviour. Customer behaviour is monitored monthly and reviewed quarterly at cohort, product and portfolio levels.

Funding and liquidity risk

Funding risk represents the inability to raise and maintain sufficient funding in quality and quantity to support the delivery of the business plan.

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.

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 deployed inefficiently across the Group.

CREDIT RISK MANAGEMENT

Overview

The Group's credit risk exposures are categorised as retail (secured and unsecured) and wholesale. As at 30 June 2018, the total credit risk exposures of the Group totalled £43.5 billion, comprising secured loans and advances to customers of £34.1 billion (78.3%), unsecured loans and advances to customers of £3.2 billion (7.4%) and wholesale exposures of £6.2 billion (14.3%).

Adoption of IFRS 9

The Group adopted IFRS 9 'Financial Instruments' on 1 January 2018, which supersedes IAS 39 'Financial Instruments: Recognition and Measurement'. This new accounting standard has three key areas of change: impairment, classification and measurement, and hedge accounting.

Impairment

The impairment requirements of IFRS 9 affect the Group's retail and wholesale portfolios and introduce an expected credit loss (ECL) assessment, resulting in earlier recognition of credit losses.

ECL is calculated as the product of Probability of Default, Exposure at Default and Loss Given Default for each account, which are defined as:

· Probability of Default (PD) is an estimate of the likelihood of the account defaulting over either 12 months or the lifetime of the account.

· Exposure at Default (EAD) is the amount the Group expects the customer account to represent at the point of default.

· Loss Given Default (LGD) is the amount of loss that will be incurred in the event of default.

IFRS 9 also requires that multiple forward-looking macro-economic scenarios are incorporated into the ECL calculation.

A three stage categorisation is used for assessing impairment under IFRS 9. This is outlined in the table below.

Further information regarding IFRS 9, including transition disclosures, can be found in note 19 to the condensed consolidated half-year financial statements.

The illustrative reconciliation of the IAS 39 retail impairment allowance at 31 December 2017 to the IFRS 9 retail ECL at 1 January 2018 is shown in the table below.

The reconciling items in the table above represent:

Latent risk and other calibration differences: Under IFRS 9, an ECL is recognised for every financial asset, on either a 12 month or lifetime basis. This reconciling item removes the provision held under IAS 39 for losses which had been incurred, but not specifically identified at the reporting date, and adjustments arising from other calibration differences under IFRS 9.

12 month ECL: IFRS 9 recognises a 12 month ECL on all performing loans classified as stage 1. Under IAS 39, an impairment provision would only have been recognised against these accounts to the extent there were observable indicators of impairment.

Lifetime ECL: IFRS 9 recognises a lifetime ECL on all loans that have experienced a significant increase in credit risk. Under IAS 39, an impairment provision would only have been recognised against these accounts to the extent there were observable indicators of impairment.

Undrawn balances: IFRS 9 requires an impairment allowance to be recognised on undrawn balances, where IAS 39 did not. For credit cards, the impact of undrawn exposure on ECL is captured as part of the EAD estimate, and recognised within the ECL calculation.

Multiple economic scenarios: IFRS 9 requires that multiple forward-looking macro-economic scenarios are incorporated into the ECL calculation. Details of the macro-economic scenarios used at 1 January 2018 and 30 June 2018 can be found in note 19 to the condensed consolidated half-year financial statements.

The following table explains the changes in the loss allowance between 1 January 2018 and 30 June 2018.

Further information can be found in note 6 to the condensed consolidated half-year financial statements on page 49.

Classification and measurement

The classification and measurement requirements of IFRS 9 require financial assets to be classified into one of three measurement categories: fair value through other comprehensive income, fair value through profit or loss and amortised cost. Classification is based on the objectives of the entity's underlying business model for managing its financial assets and the contractual cash flow characteristics of the instrument.

Unless otherwise stated, the comparatives presented are the balance sheet position under IFRS 9 at 1 January 2018, and under IAS 39 at 31 December 2017.

Loans and advances to customers

The Group's mortgage portfolio is secured on residential and buy-to-let properties and represented 91.3% of total loans and advances to customers at 30 June 2018. Residential lending grew by 0.5% (£137.4 million) during the first half of 2018 and credit quality remained strong. Buy-to-let loans grew by 4.1% (£259.6 million) to £6.6 billion. This is a contained section of the portfolio that represents 19.4% of total secured loans (1 January 2018 and 31 December 2017: 18.9%).

The Group's credit card portfolio represented 8.7% of total loans and advances to customers at 30 June 2018 (1 January 2018 and 31 December 2017: 8.4%). Unsecured credit card lending increased by £169.3 million during the first six months of 2018 to £3.2 billion and the quality of new business remained strong. New lending was well within the approved policy, lending and concentration limits.

Gross retail credit risk exposures by IFRS 9 stage allocation

Information regarding the Group's retail credit risk exposures at 30 June 2018 and 1 January 2018, including corresponding impairment allowances and coverage ratios, can be found in the tables below. Information regarding the 31 December 2017 position on an IAS 39 basis can be found in the 2017 Annual Report and Accounts which is available on the Group's website.

Credit-impaired assets and impairment allowances

Total credit-impaired assets increased by £28.4 million in the first half of 2018, and the proportion of credit-impaired assets as a percentage of total loans and advances to customers remained low at 0.6% as at 30 June 2018 (1 January 2018: 0.5%).

Secured credit-impaired loans as a proportion of total secured loans have increased marginally to 0.6% (1 January 2018: 0.5%), with balances increasing by £23.9 million to £187.5 million as at 30 June 2018. This is due to a reduction in interest only expired terms being offset by an increase in fraud balances. The fraud balances account for less than 0.2% of the portfolio, have an average LTV of 64.4%, and are managed at an account level. Provisioning for fraud reflects the expected credit loss associated with each individual account.

Secured impairment allowances increased from £12.1 million to £12.8 million during the first six months of 2018. House Price Index (HPI) reductions in some regions of the UK and book growth were partially offset by favourable arrears performance.

Unsecured credit-impaired loans as a proportion of total unsecured loans has remained stable at 1.0% (1 January 2018: 1.0%), with balances increasing by £4.5 million to £33.9 million as at 30 June 2018. This is primarily due to expected seasoning of the portfolio.

In line with the growth in new lending, unsecured impairment allowances increased by £8.2 million during the first six months of the year.

Assets classified as stage 2

The tables below present stage 2 loans and advances to customers by number of days past due at 30 June 2018 and 1 January 2018.

Stage 2 loans as a proportion of total loans and advances to customers have increased to 5.4% (1 January 2018: 4.9%), with balances increasing by £232.7 million to £2,016.6 million as at 30 June 2018. In assessing whether an account is classified as stage 2, the Group considers a series of quantitative, qualitative and backstop criteria. As a consequence, certain fully performing loans will be captured in stage 2 through the Group's internal debt management processes. These accounts are closely monitored.

In relation to mortgages, the movement is primarily due to an increase in accounts that, while fully performing, have experienced PD deterioration since origination. The majority of these accounts are mature interest only accounts. As the remaining term of the mortgage reduces, the PD increases, irrespective of credit quality, due to increased likelihood of default. The average LTV of these accounts is 45.3% and the resultant expected credit loss is low. The average lifetime PD for secured accounts classified as stage 2 is 7.0%.

In relation to credit cards, the movement is primarily due to an increase in accounts subject to internal account management activity, which is reflective of expected seasoning of the portfolio.

The Group held 15 repossessed properties as at 30 June 2018 (31 December 2017: ten).

Collateral held as security

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

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

2 New business includes lending since 1 January 2018.

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

2 New business includes lending since 1 January 2017.

The average indexed LTV of the overall mortgage portfolio increased marginally by 1.3 percentage points as at 30 June 2018, reflecting new business growth and negative HPI movements observed in some regions during the first six months of the year. The average indexed LTV is well within the current Group portfolio risk appetite limit of 70%.

Forbearance

The value of forbearance stock totalled £202.1 million at 30 June 2018, representing a 14.6% (£25.7 million) increase during the first six months of the year.

Secured

At 30 June 2018, £185.8 million (1 January 2018: £161.2 million) of retail secured loans and advances were subject to forbearance. The increase is primarily due to a series of definitional changes following a review of forbearance activity and the data capture process. These changes have been applied from 1 January 2018. Secured loans with a payment arrangement in place increased due to the definition now capturing accounts in both overpayment and underpayment arrangements.

Secured forbearance as a percentage of stock is below 0.6% of the portfolio. Loans which are forborne are grouped with other assets with similar risk characteristics and assessed collectively for impairment. The loans are not considered as credit-impaired unless they meet the Group's definition of a credit-impaired asset.

Unsecured

At 30 June 2018, total retail unsecured loans and advances benefiting from forbearance totalled £16.3 million (1 January 2018: £15.2 million).

A breakdown of secured and unsecured forbearance is shown below.

Wholesale credit risk

Wholesale credit risk exposures increased by £2.1 billion during the first six months of the year to £6.2 billion at 30 June 2018, primarily due to increased deposits at the Bank of England. This reflects the replacement of off-balance sheet liquidity from the Bank of England's Funding for Lending Scheme (FLS) with on-balance sheet liquidity. The table below shows the wholesale credit risk exposures of the Group.

1 Other assets relates to debt securities at amortised cost (previously debt securities classified as loans and receivables under IAS 39.)

The Group has increased its holdings of high-quality wholesale assets during the period including supranational, covered bond and RMBS investments. Wholesale credit risk exposures are assessed by reference to credit rating. There were no wholesale credit exposures classified as credit-impaired at 30 June 2018, 1 January 2018 or 31 December 2017.

An impairment allowance of £0.2 million as at 30 June 2018 (1 January 2018: £0.2 million; 31 December 2017: £nil) is recognised in relation to loans and advances to banks.

Full disclosure of the Group's portfolio of liquid assets can be found on page 30.

FUNDING AND LIQUIDITY MANAGEMENT

Overview

The Group is funded predominantly through retail customer deposits. During the first six months of 2018, the Group maintained a strong presence in the retail savings market. Total customer deposits increased by £637.2 million in the first half of 2018 and represented 72.6% of the Group's funding at 30 June 2018. The Group's retail funding demonstrated stability throughout the first six months of 2018 with fixed rate ISA origination driving new product growth. Retention performance was in line with expectation. Refinancing risk concentrations are controlled within portfolio risk appetite limits.

The Group adopts a prudent wholesale funding strategy which meets a series of balance sheet metrics which limit concentration and refinancing risk exposures. The Bank of England's Term Funding Scheme (TFS) closed in February 2018. Prior to its closure, the Group made further drawings of £2.2 billion to repay all remaining FLS funding, taking total TFS drawings to £6.4 billion as at 30 June 2018. Repayment of the TFS lending is scheduled to be completed in a controlled manner, ahead of the contractual maturity date. The Group completed its inaugural MREL-eligible Medium Term Note issuance of £350 million in April 2018. This represents 0.8% of total funding as at 30 June 2018.

Group funding sources

The Group's loan-to-deposit ratio decreased to 118.3% during the first half of 2018 from 119.1% at 31 December 2017.

The table below shows the Group's funding position.

Analysis of total wholesale funding by residual maturity

Secured loans relate to the Group's drawings from the Bank of England's TFS. The increase is due to additional drawings during the first six months of the year to repay remaining FLS funding. The Group manages funding concentration risk arising from wholesale maturities through Board-approved risk appetite which limits the amount of funding refinancing over a 90-day period and requires the early accumulation of liquidity ahead of refinancing events.

Encumbered assets

The Group's assets are used to support collateral requirements for central bank operations, third party re-purchase agreements, swap transactions, securitisation and balances at central banks. Assets set aside for such purposes are classified as 'encumbered and pledged assets' and cannot be used for other purposes. The tables below show the total asset encumbrance position of the Group at 30 June 2018, 1 January 2018 and 31 December 2017.