Virgin Money UK : Clydesdale Bank PLC - 2022 Annual Report and consolidated financial statements

Annual report and consolidated financial statements

Clydesdale Bank PLC

For the year ended 30 September 2022

Company Number: SC001111

Clydesdale Bank PLC

Annual report and consolidated financial statements For the year ended 30 September 2022

Contents

Officers and professional advisers	2
Strategic report	3
Risk report	12
Report of the Directors	94
Statement of Directors' responsibilities	105
Independent auditor's report to the members of Clydesdale Bank PLC	106
Consolidated financial statements	114
Glossary	187
Abbreviations	193
Other information	194
Forward-looking statements	195

Overview

Clydesdale Bank PLC ('the Bank'), together with its subsidiary undertakings (which together comprise 'the Group'), operate under the Clydesdale Bank, Yorkshire Bank and Virgin Money brands. It offers a range of banking services for both retail and business customers through retail stores, lounges, business banking centres, direct and online banking, and brokers. It is the main operating subsidiary of its immediate parent, Virgin Money UK PLC. The results referred to in this annual report and accounts relate to the 12 months up to 30 September 2022.

Certain figures contained in this document, including financial information, may have been subject to rounding adjustments and foreign exchange conversions. Accordingly, in certain instances, the sum or percentage change of the numbers contained in this document may not conform exactly to the total figure given.

The forward-looking statements disclaimer can be found on page 195.

Officers and professional advisers

Board Chair	David Bennett
Senior Independent Non-	Tim Wade
Executive Director
Independent Non-	Geeta Gopalan
Executive Directors	Darren Pope
	Elena Novokreschenova
Non-Executive Director	Sara Weller CBE (appointed 3 October 2022)
Executive Director	David Duffy
	Clifford Abrahams
Group Company	Lorna McMillan
Secretary
Group General Counsel	James Peirson
and Purpose Officer
Registered office	30 St Vincent Place
	Glasgow
	G1 2HL
Independent auditors	Ernst & Young LLP
	25 Churchill Place
	Canary Wharf
	London
	E14 5EY

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Strategic report

The Directors of the Bank and its subsidiary undertakings (which together comprise 'the Group') present their Strategic report for the year ended 30 September 2022.

Principal activities

The Group operates a full service UK-focused retail and commercial banking business under the brand names 'Clydesdale Bank', 'Yorkshire Bank' and 'Virgin Money' across its core regional markets (Scotland, North East England, North West England, Yorkshire and the Humber) and selected national markets. The bank is a strong, low risk bank focused on providing residential mortgages, personal and business current accounts, savings, personal loans and credit cards, loans for small and medium businesses, and payment and transaction services.

Business review

Summary balance sheet as at 30 September

Customer loans

Other financial assets

Other non-financial assets

Total assets

Customer deposits

Wholesale funding

Other liabilities

Total liabilities

Ordinary shareholders' equity

Additional Tier 1 (AT1) equity

Equity

Total liabilities and equity

Summary income statement - underlying and statutory basis(1) for the year ended 30 September

Net interest income

Non-interest income

Total operating income

Total operating and administrative expenses

Operating profit before impairment losses

Impairment (losses)/credit on credit exposures

Underlying profit on ordinary activities before tax

Restructuring charges

Acquisition accounting unwinds

Legacy conduct

Other items

Statutory profit on ordinary activities before tax

Tax (expense)/credit

Statutory profit attributable to equity holders

2022	2021
£m	£m
72,558	71,990
17,544	15,035
1,908	2,191
92,010	89,216
(65,360)	(66,870)
(17,043)	(13,609)
(3,196)	(3,155)
(85,599)	(83,634)
(5,749)	(4,910)

1. (672)

(6,411) (5,582)

(92,010) (89,216)

2022	2021
£m	£m
1,592	1,415

160155

1,752 1,570

1. (901)

1. 669

1. 131

1. 800

1. (146)

1. (88)

1. (76)

1. (74)

1. 416

1. 116

1. 532

1. The summary income statement is presented on a statutory and underlying basis. Management exclude certain items from the Group's statutory position to arrive at an underlying performance basis. A reconciliation from the underlying results to the statutory basis is shown on page 5 and rationale for the adjustments is shown on page 188.

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Strategic report (continued)

Business review (continued)

We performed strongly in FY22, delivering higher statutory profit before tax, positive financial momentum and increased capital returns despite a challenging and uncertain backdrop. The Group has made significant strategic and financial progress as it drives towards becoming the UK's best digital bank. Since we set our targets a year ago the economic backdrop has changed significantly, with a lower GDP outlook, higher unemployment expectations, and higher cost of living set to impact the economy. Despite the more difficult near-term backdrop, our strategy remains the right one and I'm confident we are well placed to adapt to recent changes, while we continue to support our customers and deliver for all our stakeholders.

Well managed balance sheet

Overall lending balances returned to growth in the year finishing up 1% at £72.6bn. We achieved strong growth in our target segments of Unsecured and BAU Business lending, and returned the mortgage book to growth in the second half of the year. Deposit balances reduced 2% to £65.4bn but with relationship deposits increasing by 13%, to 53% of deposits, we continued to improve the mix of our deposit base, and optimise our cost of funds.

Robust credit quality maintained

The Group recognised an impairment charge of £52m (2021: £131m credit) during the year, driven by a prudent IFRS 9 scenario weighting that incorporates a conservative economic outlook and refreshed post model adjustments (PMAs). There are currently limited signs of credit concerns across our key portfolios and our arrears performance remains low and stable. We continue to monitor our customers closely for signs of financial difficulty and remain on hand to support customers.

Higher statutory profit before tax delivered

The execution of our strategy and improved backdrop has seen statutory profit before tax for the year strengthen to £590m (FY21: £416m), benefiting from increased pre-provision profit, continued benign impairments and lower costs. Underlying income increased 12% supported by higher interest rates over the course of the year, and strategic actions to grow in higher-yielding product lines, while continuing to optimise our funding mix with higher relationship deposits. Underlying operating costs of £914m increased 1% on the prior year, reflecting inflationary pressures and higher investment, offset in part by efficiency savings.

Robust capital, liquidity and funding position

During 2022, the Group maintained a strong capital position with a CET1 ratio (IFRS 9 transitional basis) of 14.9% (2021: 14.9%)

and a total capital ratio of 21.9% (2021: 21.9%). The Group therefore retains a significant CET1 management buffer in excess of its Capital Requirements Directive IV (CRD IV) minimum CET1 requirement of 6.3%.

Funding and liquidity

The Group has maintained a strong funding and liquidity position. The Group's liquidity surplus continues to comfortably exceed both regulatory requirements and our more prudent internal risk appetite metrics, ensuring a substantial buffer in the event of any outflows, with a Liquidity Coverage Ratio (LCR) of 138% as at 30 September 2022 (2021:149%). Net stable funding ratio (NSFR) was 136% at 30 September 2022 (2021: 134%).

Outlook

The Group is well positioned to deliver a digital-led future of profitable growth, greater cost-efficiency, improved customer service and sustainable shareholder returns as we target our ambition of becoming the UK's best digital bank. It is encouraging to see our strategy, and an improving rate environment, combining to drive stronger financial performance. Looking forward, we will continue to focus our efforts on improving customer experience and driving digitisation through the Group.

The macroeconomic outlook has become more uncertain over the course of the year. Following a positive recovery in expectations post-COVID, recent events have seen forecasts deteriorate. As we enter a more volatile environment, with higher inflation and rates, we are carefully monitoring for any impacts. We enter this phase with a prudently underwritten loan book, strong coverage, and a defensive asset mix. We are ready and able to continue supporting the customers, colleagues and communities we serve.

Overall, we have the right strategy and are executing on the key components that will underpin our delivery of improved returns and profitable growth over the coming years.

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