Virgin Money UK : Clydesdale Bank PLC – 2021 Interim Financial Report

CLYDESDALE BANK PLC

INTERIM FINANCIAL REPORT

SIX MONTHS TO 31 MARCH 2021

Clydesdale Bank PLC is registered in Scotland (company number: SC001111) and has its registered office at 30 St Vincent Place, Glasgow, G1 2HL.

BASIS OF PRESENTATION

Clydesdale Bank PLC (the 'Bank'), together with its subsidiary undertakings (which together comprise 'the Group') operate under the Clydesdale Bank, Yorkshire Bank, B and Virgin Money brands. This release covers the results of the Group for the six months ended 31 March 20 21.

Statutory basis: Statutory information is set out within the interim condensed consolidated financial statements.

Underlying basis: The results are adjusted to remove certain items that do not promote an understanding of historical or future trends of earnings or cash flows, which enables a more meaningful comparison of the Group's underlying performance. A reconciliation from the underlying results to the statutory basis

is shown on page 3 and rationale for the adjustments is shown on page 83.

Certain figures contained in this document, including financial information, may have been subject to rounding adjustments an d foreign exchange conversions. Accordingly, in certain instances, the sum or percentage change of the numbers contained in this document may no t conform exactly to the

total figure given.

FORWARD-LOOKING STATEMENTS

The information in this document may include forward-looking statements, which are based on assumptions, expectations, valuations, targets, estimates,

forecasts and projections about future events. These can be identified by the use of words such as 'expects', 'aims', 'target s', 'seeks', 'anticipates', 'plans', 'intends', 'prospects', 'outlooks', 'projects', 'forecasts', 'believes', 'estimates', 'potential', 'possible', and similar wo rds or phrases. These forward-looking

statements, as well as those included in any other material discussed at any present ation, are subject to risks, uncertainties and assumptions about the Group and its securities, investments and the environment in which it operates, including, among other things, the development of i ts business and strategy, any acquisitions, combinations, disposals or other corporate activity undertaken by the Group (including but not limited to the integration of the business of Virgin Money Holdings (UK) PLC and its subsidiaries into the Group), trends in its operating industry, changes to customer beha viours and covenant, macroeconomic and/or geopolitical factors, the repercussions of the outbreak of coronaviruses (including but not limited to the COVID -19 outbreak), changes to its Board and/or employee composition, exposures to terrorist activity, IT system failures, cybercrime, fraud and pension scheme liabilities, changes to law and/or the policies and practices of the Bank of England (BoE), the Financial Conduct Authority (FCA) and/or other regulatory and governmental bo dies, inflation, deflation, interest rates, exchange rates, changes in the liquidity, capital, funding and/or asset position and/or credit ratings of the Group, f uture capital expenditures and acquisitions, the repercussions of the UK's exit from the European Union (EU) (including any change to the UK's currency and the terms of any trade agreements (or lack thereof) between the UK and the EU), Eurozone instability, and any referendum on Scottish independence.

In light of these risks, uncertainties and assumptions, the events in the forward-looking statements may not occur. Forward-looking statements involve inherent risks and uncertainties. Other events not taken into account may occur and may significantly affect the analysis of the forwa rd-looking statements. No member of the Group or their respective directors, officers, employees, agents, advisers or affiliates gives any assurance that any such projections or estimates will be realised or that actual returns or other results will not be materially lower than those set out in this d ocument and/or discussed at any presentation. All forward- looking statements should be viewed as hypothetical. No representation or warranty is made that any forward -looking statement will come to pass. No member of the Group or their respective directors, officers, employees, agents, advisers or affiliates undertakes any obligation to update or revise any such forward- looking statement following the publication of this document nor accepts any responsibility, liability or duty of care whatso ever for (whether in contract, tort or otherwise) or makes any representation or warranty, express or implied, as to the truth, fullness, fairness, merchantability, accuracy, sufficiency or completeness of, the information in this document.

The information, statements and opinions contained in this document do not constitute or form part of, and should not be construed as, any public offer u nder any applicable legislation or an offer to sell or solicitation of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.

Interim financial report

For the six months ended 31 March 2021

Contents
Business and financial review	1
Risk management	4
Risk overview	5
Credit risk	11
Financial risk	39
Statement of Directors' responsibilities	56
Independent review report to Clydesdale Bank PLC	57
Financial statements	58
Interim condensed consolidated income statement	58
Interim condensed consolidated statement of comprehensive income	59
Interim condensed consolidated balance sheet	60
Interim condensed consolidated statement of changes in equity	61
Interim condensed consolidated statement of cash flows	62
Notes to the interim condensed consolidated financial statements	63
Additional information	83

Business and financial review

Principal activities

The Group operates a full service UK-focused retail and commercial banking business under the brand names 'Clydesdale Bank', 'Yorkshire Bank', 'B' and 'Virgin Money'. 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 busine sses, and payment and transaction services.

Business review

Summary balance sheet as at 31 March

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

Net interest income

Non-interest income

Total operating income

Total operating and administrative expenses

Operating profit before impairment losses

Impairment losses on credit exposures

Underlying profit on ordinary activities before tax

Integration and transformation costs

Acquisition accounting unwinds

Legacy conduct

Other items

Statutory profit/(loss) on ordinary activities before tax

Tax credit/(expense)

Statutory profit/(loss) attributable to equity holders

As at

31 Mar 2021 30 Sep 2020

£m£m

72,19772,443

15,88415,608

2,1342,256

90,215 90,307

(68,537) (67,511)

(13,290) (14,224)

(3,226) (3,582)

(85,053) (85,317)

(4,490) (4,318)

(672)(672)

(5,162) (4,990)

(90,215) (90,307)

6 months to	6 months to	12 months to
31 Mar 2021	31 Mar 2020	30 Sep 2020
£m	£m	£m
677	702	1,352
65	118	187
742	820	1,539
(460)	(465)	(914)
282	355	625
(39)	(232)	(501)
243	123	124
(49)	(61)	(139)
(47)	(57)	(113)
(71)	-	(26)
(6)	(9)	(19)
70	(4)	(173)
39	35	(18)
109	31	(191)

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Business and financial review (continued)

Summary

The Group had a strong first half . We doubled underlying profit compared to last year and returned to statutory profit. The quality of our loan book remained resilient in the period, and we've continued to support customers, look after our colleagues and commu nities, while safeguarding the bank. We've made significant strategic progress to transform the Group into a leading digital bank and our rebranding is largely complete. We've launched a range of innovative and compelling Virgin Money personal and business products as well as differentiated loyalty offers, which are showing signs of early success. Our Environmental, social and governance (ESG) strategy continues to gain momentum across the business including developing sustainability -linked business loans and a green mortgage product as we look to further embed sustainability across everything we do . This lays the foundation for efficient, sustainable growth of deep, long-lasting customer relationships.

We are cautiously optimistic about the improving outlook as the impact of the vaccination programme in the UK continues to see upgrades to economic expectations. We're continuing to manage through what is still an uncertain economic backdrop, but the Group is well placed, with a strong balance sheet and through continued strategic delivery we have a clear path to long -term, improved sustainable returns.

Balance sheet summary

The Group maintained a conservative balance sheet position with stable credit provisions totalling £721m (FY20: £735m). The G roup remained cautiously positioned in H1 with a resilient balance sheet, and defensive portfolios comprising 81% low -risk mortgages, 12% business lending and 7% in our high quality affluent unsecured book. During the half, prudent balance management held lending volumes stable at £72.2bn in the period. Deposit balances rose 1.5% to £68.5bn driven by 12% growth in relationship deposits as retail customers saved more and businesses opted to maintain higher levels of liquidity given the uncertain economic backdrop.

Profit and loss summary

Against a tough external backdrop, the Group delivered an underlying profit of £243m, a significant improvement compared to last year. Net interest income of £677m (H1 2020: £702m) was lower due to the lower rate environment. Subdued non -interest income of £65m was 45% lower than H1 2020 driven by the non-repeat of gilt sales, the impact of the high cost of credit review and lower activity levels. Operating costs were 1% lower compared to H1 2020 . The reduction in impairment charges was significant, falling 83% compared to H1 2020 to £39m driving a more than doubling of underlying profit before tax.

The Group also returned to statutory profit in the period delivering £70m before tax after deducting £173m of exceptional items, including £49m of restructuring charges, £47m of acquisition accounting unwind, £71m of conduct primarily relating to payment protection insurance (PPI) and £6m of other charges.

Capital

Our Common Equity Tier 1 (CET1) ratio of 15.4% as at 31 March 2021 retains a significant buffer to our Capital Requirements Directive IV (CRD IV) regulatory requirement of 9.2% and provides sufficient capacity to deliver our strategy.

Funding and liquidity

The Group's liquidity surplus continues to comfortably exceed ou r regulatory minimum and internal risk appetite, with a Liquidity Coverage Ratio (LCR) of 151% as at 31 March 2021 (30 September 2020: 140%).

Outlook

Over the first half of the year, we've deliberately controlled growth as we managed carefully through the pandemic and our overriding priorities remain the health and economic well-being of our customers, colleagues and communities while safeguarding our bank. We've had a strong first half, achieving a number of strategic milestones, including subs tantially completing the rebranding activity of all physical channels, delivering innovative new propositions across all key customer sets and there's more to come in the second half as we launch additional propositions and continue improving the digital c ustomer experience. As we exit from COVID-19 restrictions, we aim to do so with high momentum in our strategic delivery and all the foundations in place to support sustai nable future growth based on deep customer relationships.

Key performance indicators

The Directors do not rely on key performance indicators at the individual subsidiary level. The performance of the Group is i ncluded in the Interim Financial Report of Virgin Money UK PLC. The business is managed within the Virgin Money UK PLC Group and the results are consistent with the Group's status as a fully integrated and wholly owned subsidiary of the Virgin Money UK PLC G roup. For this reason, the Company's Directors believe that providing further indicators for the Group itself would not enhance an understanding of the development, performance or position of the Group.

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