Summary for the year ended 30 September	2019 £m	2018 £m	ChangE
Underlying net interest income	1,433	1,457	(2)%
Non-interest income	206	228	(10)%
Total underlying operating income	1,639	1,685	(3)%
Net interest margin (NIM)	1.66%	1.78%	(12)bps
Average interest-earning assets	86,362	81,934	5%

Average balance sheet	2019	2018
Interest-earning assets
Mortgages	60,288	1,551	2.57	57,960	1,557	2.69
Business lending⁽¹⁾	7,542	314	4.17	7,311	288	3.94
Personal lending	4,670	359	7.69	4,360	298	6.84
Liquid assets	12,298	98	0.79	11,007	62	0.56
Due from other banks	1,564	13	0.86	1,296	6	0.42
Swap income/other	-	(11)	n/a	-	(38)	n/a
Total average interest-earning assets	86,362	2,324	2.69	81,934	2,173	2.65
Total average non-interest-earning assets	3,545			3,167
Total average assets	89,907			85,101

Interest-bearing liabilities
Current accounts	11,570	(19)	(0.16)	11,555	(12)	(0.11)
Savings accounts	24,366	(214)	(0.88)	22,265	(143)	(0.64)
Term deposits	22,877	(370)	(1.62)	22,847	(364)	(1.60)
Wholesale funding	19,427	(288)	(1.48)	16,783	(197)	(1.17)
Total average interest-bearing liabilities	78,240	(891)	(1.14)	73,450	(716)	(0.98)
Total average non-interest‑bearing liabilities	6,590			6,379
Total average liabilities	84,830			79,829
Total average equity	5,077			5,272
Total average liabilities and average equity	89,907			85,101
Net interest income		1,433	1.66		1,457	1.78

For the year ended 30 September	2019 £m	2018 £m	Change
Personnel expenses	365	423	(14)%
Depreciation and amortisation expenses	111	121	(8)%
Other operating and administrative expenses	466	454	3%
Total underlying operating and administrative expenses	942	998	(6)%
Underlying cost:income ratio (CIR)	57%	59%	(2)%pts

	2019	2018
Gross cost of risk	1	45	333	27	1	36	250	20	7
Specific provision releases and recoveries				(6)				(5)	(1)
Net cost of risk				21				15	6

	2019 £m	2018 £m
Underlying profit on ordinary activities before tax	539	581
Exceptional items
- Restructuring costs	(156)	-
- Acquisition costs	(189)	(39)
- Legacy conduct	(433)	(396)
- Other items	(26)	(62)
Pro forma (loss)/profit on ordinary activities before tax	(265)	84
Add/(deduct) Virgin Money Holdings (UK) PLC pre-acquisition loss/(profit)⁽¹⁾	33	(248)
Statutory loss on ordinary activities before tax	(232)	(164)
Tax credit	38	19
Statutory loss for the year	(194)	(145)

	2019	2018	Change
Underlying Return on Tangible Equity (RoTE)	10.8%	11.0%	(0.2)%pts
Tangible Net Asset Value (TNAV) per share	249.2p	260.0p	(10.8)p

As at 30 September	2019	2018	Change
Mortgages	60,079	59,074	1.7%
Business	7,876	7,538	4.5%
Personal	5,024	4,327	16.1%
Total customer lending	72,979	70,939	2.9%

Relationship deposits⁽¹⁾	21,347	19,938	7.1%
Non-linked savings	20,197	17,175	17.6%
Term deposits	22,243	23,851	(6.7)%
Total customer deposits	63,787	60,963	4.6%

Risk Weighted Assets (RWAs)	24,046	22,943	4.8%
of which Mortgages	8,846	8,794	0.6%
of which Business	7,124	6,604	7.9%
of which Personal	4,042	3,463	16.7%
Wholesale funding	18,506	18,675	(0.9)%
of which Term Funding Scheme (TFS)	7,342	8,637	(15.0)%
Loan to Deposit Ratio (LDR)	114%	116%	(2)%pts
Liquidity Coverage Ratio (LCR)	152%	161%	(9)%pts

As at 30 September	2019	2018	Change
CET1 ratio	13.3%	15.1%	(1.8)%pts
Total capital ratio	20.1%	20.6%	(0.5)%pts
MREL ratio	26.6%	24.1%	2.5%pts
UK leverage ratio	4.9%	5.1%	(0.2)%pts

	2019
Opening CET1 ratio	10.5%
IRB accreditation impact	3.5%
IRB pro forma CET1 ratio	14.0%
Virgin Money acquisition impact	1.1%
Opening Combined Group pro forma CET1 ratio (pre-IFRS 9 impact)	15.1%
IFRS 9 transitional impact (bps)	(2)
Opening Combined Group pro forma CET1 ratio as of 1 October 2018 (post-IFRS 9 impact)	15.1%
Generated (bps)	234
RWA growth (bps)	(65)
Investment spend (bps)	(65)
AT1 distributions (bps)	(27)
Underlying capital generated (bps)	77
Restructuring and acquisition costs (bps)	(84)
Legacy conduct (bps)	(172)
FY2018 ordinary dividends paid (bps)	(19)
Other (bps)	18
Net capital absorbed (bps)	(180)
Closing CET1 ratio	13.3%

Business and financial review

Chief Financial Officer's review

Outlook and guidance

The political and economic outlook remains highly uncertain. With the inevitable volatility arising from an impending General Election and lack of clarity as to the final shape of any Brexit arrangements, the UK's near-term economic prospects remain hard to forecast. Although sentiment has improved as the threat of a no-deal Brexit has receded, GDP growth may remain muted and we are prepared for an outcome in which other key economic indicators decline.

Our strategy was designed to mitigate a muted economic outlook and the evident industry pressures, with a focus on leveraging the significant self-help opportunities available to us from reshaping our balance sheet and becoming more cost-efficient through deduplication, platform integration and digital transformation.

Despite the short-term external challenges, we remain confident in the prospects for the Group and we are reaffirming all of the targets we set at our CMD. We continue to believe that the delivery of our strategy and targets will deliver increased shareholder value as measured by the achievement of a statutory RoTE of >12% by FY2022, CET1 capital generation of >100bps per annum by FY2022 and an ordinary dividend ambition that is progressive and sustainable, moving towards a c.50% payout ratio over time.

In the near term, we foresee continuing industry pressures and economic uncertainty, but our self-help strategy is well placed to mitigate these. While 2020 will be a year of continued integration activity and associated costs, it will also see some exciting developments launched for our customers, now that the FSMA Part VII banking business transfer process is complete.

Our Net Interest Margin (NIM) for FY2020 is expected to be in a range of between 1.60% and 1.65%. Pressure from back book repricing in our mortgage portfolio will ease in FY2020 as our front book versus back book variance narrows. We will also start to see benefits from further growth in margin accretive lending and lower-cost relationship deposits, although pressures from wholesale funding costs and TFS repayment will continue.

On costs, we will continue working towards our net cost savings target of c.£200m by FY2022 and expect the Group's underlying operating expenses to be less than £900m in FY2020. This will be underpinned by the delivery of further integration and digitisation initiatives, but will be partly offset by continued cost inflation and ongoing investment.

On capital, we intend to operate in line with our CET1 ratio operating level of c.13%. Underlying capital generation will be used to fund the capital consumption from restructuring and acquisition costs, but we will also look to take further opportunities to optimise our RWAs as we reshape the balance sheet.

While it was necessary to suspend our dividends in 2019 due to the unexpected legacy conduct charge, we remain committed to our dividend ambition and the Board will reconsider dividends in line with normal practice in FY2020.

Lending and deposit growth will continue as set out at the CMD, with above system growth in Business and Personal, while Mortgages will grow in line with the market. On deposits, we expect a high single-digit CAGR in our relationship deposits, underpinned by the launch and development of the digitally-enabled Virgin Money Personal Current Account at the end of 2019.

Finally, we will participate in the Bank of England's annual cyclical scenario (ACS) stress tests for the first time in 2020. We have begun preparatory work which will be completed next year, with the published results expected in late 2020.

In summary, the year ahead promises to be another busy but exciting period as we execute our strategy in support of delivering on our ambition to disrupt the status quo.

Ian Smith

Group Chief Financial Officer

27 November 2019

Business and financial review

Overview of Group results - Pro forma basis

Summary income statement - underlying and pro forma basis⁽¹⁾

	2019 £m	2018 £m	Change %
Underlying net interest income	1,433	1,457	(2)
Non-interest income	206	228	(10)
Total underlying operating income	1,639	1,685	(3)
Underlying operating and administrative expenses	(942)	(998)	(6)
UK Bank levy	(5)	-
Underlying operating profit before impairment losses	692	687	1
Underlying impairment losses on credit exposures	(153)	(106)	44
Underlying profit on ordinary activities before tax	539	581	(7)
- Restructuring costs	(156)	-
- Acquisition costs	(189)	(39)	385
- Legacy conduct	(433)	(396)	9
- Other items⁽²⁾	(26)	(62)	(58)
Pro forma (loss)/profit on ordinary activities before tax	(265)	84	n/a

(1) The summary income statement is presented on an underlying and pro forma basis as explained in the Basis of Presentation.

(2) Other includes a £30m charge in relation to SME transformation, including preparations to participate in the RBS Incentivised Switching Scheme, £18m of consent solicitation costs relating to the change in obligor of senior debt from Virgin Money Holdings (UK) PLC to CYBG PLC, a charge of £11m for Guaranteed Minimum Pension (GMP) equalisation in the Group's defined benefit scheme, £5m of legacy restructuring and separation costs, and £1m of expenses relating to the transition of Virgin Money Unit Trust Managers (VMUTM) into the joint venture. Offsetting this is a £35m gain on the partial disposal of VMUTM and a £4m gain recognised on the disposal of the Group's VocaLink share.

Summary balance sheet - pro forma basis

As at 30 September	2019 £m	2018 £m	Change %
Customer loans	72,979	70,939	2.9
Other financial assets	16,391	16,202	1.2
Other non-financial assets	1,629	1,407	15.8
Total assets	90,999	88,548	2.8

Customer deposits	63,787	60,963	4.6
Wholesale funding	18,506	18,675	(0.9)
Other liabilities	3,685	3,726	(1.1)
Total liabilities	85,978	83,364	3.1

Ordinary shareholders' equity	4,106	4,312	(4.8)
AT1 equity	915	450	103.3
Non-controlling interests	-	422
Equity	5,021	5,184	(3.1)

Total liabilities and equity	90,999	88,548	2.8

Business and financial review

Overview of Group results - Pro forma basis

Key Performance Indicators⁽¹⁾

	12 months to 30 Sep 2019	12 months to 30 Sep 2018	Change
PROFITABILITY
Net interest margin	1.66%	1.78%	(12)bps
Underlying RoTE	10.8%	11.0%	(0.2)%pts
Underlying CIR	57%	59%	(2)%pts
Underlying return on assets	0.54%	0.56%	(2)bps
Underlying EPS⁽²⁾	28.1p	29.8p	(1.7)p

As at	30 Sep 2019	30 Sep 2018	Change

ASSET QUALITY
Impairment charge to average customer loans (cost of risk)	0.21%	0.15%	6bps
Total provision to customer loans	0.53%	0.51%	2bps
Indexed LTV of mortgage portfolio⁽³⁾	57.2%	57.3%	(0.1)%pts

Regulatory Capital
CET1 ratio⁽⁴⁾	13.3%	15.1%	(1.8)%pts
Tier 1 ratio	17.1%	18.3%	(1.2)%pts
Total capital ratio	20.1%	20.6%	(0.5)%pts
MREL ratio	26.6%	24.1%	2.5%pts
CRD IV leverage ratio	4.3%	4.6%	(0.3)%pts
UK leverage ratio	4.9%	5.1%	(0.2)%pts
TNAV per share⁽⁵⁾	249.2p	260.0p	(10.8)p

Funding and Liquidity
Loan to deposit ratio (LDR)	114%	116%	(2)%pts
Liquidity coverage ratio (LCR)	152%	161%	(9)%pts
Net stable funding ratio (NSFR)	128%	126%	2%pts

(1) For a definition of each of the KPIs, refer to 'Measuring financial performance - glossary' on pages 106 to 108. The KPIs include statutory, regulatory and alternative performance measures.

(2) For pro forma purposes, the weighted average number of ordinary shares in issue assumes that the 540,856,644 share issuance arising on the acquisition of Virgin Money was completed on 1 October 2017, and excludes own shares held.

(3) LTV of the mortgage portfolio is defined as mortgage portfolio weighted by balance. The Clydesdale Bank PLC portfolio is indexed using the MIAC Acadametrics indices at a given date, while the Virgin Money portfolio is indexed using the Markit indices.

(4) The pro forma CET 1 ratio at 30 September 2018 reflects the impact of the acquisition of Virgin Money and IRB accreditation.

(5) The pro forma total number of ordinary shares in issue used in the TNAV per share calculation for the comparative periods is the number of ordinary shares in issue on 15 October 2018 following the acquisition of Virgin Money (excluding own shares held). This has been applied across all periods for comparability purposes.

Business and financial review

Overview of Group results - Statutory basis

The following tables present the Group on a statutory basis. That is, they include the results of Virgin Money from the date of acquisition on 15 October 2018. The acquisition has had a significant impact on the Group's statutory results and financial position as shown below. Therefore, we believe that it is more helpful to consider the more readily comparable pro forma information set out on the previous pages.

Summary income statement

For the year ended 30 September	2019 £m	2018 £m	Change %
Net interest income	1,514	851	78
Non-interest income	235	156	51
Total operating income	1,749	1,007	74
Operating and administrative expenses	(1,724)	(1,130)	53
UK bank levy	(5)	-
Operating profit/(loss) before impairment losses	20	(123)	(116)
Impairment losses on credit exposures⁽¹⁾	(252)	(41)	515
Statutory loss on ordinary activities before tax	(232)	(164)	41
Tax credit	38	19	100
Statutory loss after tax	(194)	(145)	34

(1) Impairment losses on credit exposures for the current period are calculated on an expected credit loss (ECL) basis under IFRS 9, which the Group adopted on 1 October 2018, and includes the IFRS 9 impairment impact on acquired assets (£103m charge). For all other periods, impairment losses are calculated under the incurred loss basis as required by IAS 39.

The Group has recognised a statutory loss after tax of £194m (30 September 2018: loss of £145m). The increased loss reflects additional costs relating to the acquisition of Virgin Money Holdings (UK) PLC in addition to further significant conduct charges. As outlined at the CMD, the Group has a clear path to narrowing the difference between underlying and statutory profit over the next three years as we put legacy conduct behind us and restructuring and acquisition costs reduce over time.

Summary balance sheet

As at 30 September	2019 £m	2018 £m	Change %
Customer loans	72,979	33,281	119
Other financial assets	16,391	9,234	78
Other non-financial assets	1,629	941	73
Total assets	90,999	43,456	109

Customer deposits	63,787	28,854	121
Wholesale funding	18,506	8,095	129
Other liabilities	3,685	3,321	11
Total liabilities	85,978	40,270	114

Ordinary shareholders' equity	4,106	2,736	50
AT1 equity	915	450	103
Equity	5,021	3,186	58

Total liabilities and equity	90,999	43,456	109

Business and financial review

Overview of Group results - Statutory basis

Key Performance Indicators⁽¹⁾

	12 months to 30 Sep 2019	12 months to 30 Sep 2018	Change
Profitability
Statutory return on tangible equity (RoTE)	(6.8)%	(6.9)%	0.1%pts
Statutory cost to income ratio (CIR)	99%	112%	(13)%pts
Statutory return on assets	(0.23)%	(0.34)%	0.11%pts
Statutory basic loss per share	(17.9)p	(19.7)p	1.8p

As at	30 Sep 2019	30 Sep 2018	Change

Regulatory capital
CET1 ratio	13.3%	10.5%	2.8%pts
Tier 1 ratio	17.1%	12.7%	4.4%pts
Total capital ratio	20.1%	15.9%	4.2%pts
MREL ratio	26.6%	19.8%	6.8%pts
CRD IV leverage ratio	4.3%	5.6%	(1.3)%pts
UK leverage ratio	4.9%	6.5%	(1.6)%pts
Tangible net asset value (TNAV) per share	249.2p	262.3p	(13.1)p

Funding and liquidity
Loan to deposit ratio (LDR)	114%	115%	(1)%pts
Liquidity coverage ratio (LCR)	152%	137%	15%pts
Net stable funding ratio (NSFR)	128%	119%	9%pts

(1) For a definition of each of the KPIs, refer to 'Measuring financial performance - glossary' on pages 106 to 108. The KPIs include statutory, regulatory and alternative performance measures.

Business and financial review

Overview of Group results - Statutory basis

Reconciliation of statutory to pro forma results

The statutory basis presented within this section reflects the Group's results as reported in the financial statements, incorporating Virgin Money Holdings (UK) PLC from 15 October 2018. The pro forma basis includes the consolidated results of Virgin Money Holdings (UK) PLC as if the acquisition had occurred on 1 October 2018. The underlying results reflect the Group's results prepared on an underlying basis as presented to the CEO, Executive Leadership Team and Board. These exclude certain items that are included in the statutory results, as management believes that these items are not reflective of the underlying business and do not aid meaningful period-on-period comparison. The table below reconciles the statutory results to the pro forma results, and full details on the adjusted items to the underlying results are included on page 108.

	Statutory basis		Include Virgin Money pre-acquisition results		Pro forma basis
	2019 £m	2018 £m	1 Oct to 15 Oct 2018 £m	2018 £m	2019 £m	2018 £m
Net interest income	1,514	851	22	606	1,536	1,457
Non-interest income⁽¹⁾	235	156	9	75	244	231
Total operating income	1,749	1,007	31	681	1,780	1,688
Operating and administrative expenses	(1,724)	(1,130)	(60)	(368)	(1,784)	(1,498)
UK bank levy	(5)	-	-	-	(5)	-
Operating profit/(loss) before impairment losses	20	(123)	(29)	313	(9)	190
Impairment losses on credit exposures	(252)	(41)	(4)	(65)	(256)	(106)
(Loss)/profit on ordinary activities before tax	(232)	(164)	(33)	248	(265)	84

Restructuring costs					156	-
Acquisition costs					189	39
Legacy conduct					433	396
Other items					26	62
Underlying profit on ordinary activities before tax					539	581

(1) 'Fair value gains and losses on financial instruments' were previously treated as an adjustment to underlying profit within the Virgin Money accounts but have been reclassified to underlying non-interest income in line with the Group's presentation.

Business and financial review

Overview of Group results - Statutory basis

Reconciliation of pro forma to underlying results

The underlying results presented within this section reflect the Group's results prepared on an underlying basis as presented to the CEO, Executive Leadership Team and Board. These exclude certain items that are included in the pro forma results, as management believes that these items are not reflective of the underlying business and do not aid meaningful period on period comparison. The tables below reconcile the pro forma results to the underlying basis, and full details on the adjusted items are included on page 108:

2019 income statement	Statutory results £m	Include Virgin Money pre-acquisition results £m	PrO forma results £m	Restructuring costs £m	acquisition costs £m	legacy conduct £m	Other £m	Underlying basis £m
Net interest income	1,514	22	1,536	-	(103)	-	-	1,433
Non-interest income	235	9	244	-	-	-	(38)	206
Total operating income	1,749	31	1,780	-	(103)	-	(38)	1,639
Total operating and administrative expenses before impairment losses	(1,724)	(60)	(1,784)	156	189	433	64	(942)
UK bank levy	(5)	-	(5)	-	-	-	-	(5)
Operating profit/(loss) before impairment losses	20	(29)	(9)	156	86	433	26	692
Impairment losses on credit exposures	(252)	(4)	(256)	-	103	-	-	(153)
(Loss)/profit on ordinary activities before tax	(232)	(33)	(265)	156	189	433	26	539
Financial performance measures
RoTE	(6.8)%	(0.7)%	(7.5)%	3.5%	4.3%	9.9%	0.6%	10.8%
CIR	99%	1%	100%	(10)%	(5)%	(26)%	(2)%	57%
Return on assets	(0.23)%	(0.03)%	(0.26)%	0.15%	0.19%	0.43%	0.03%	0.54%
Basic EPS	(17.9)p	(1.7)p	(19.6)p	9.3p	11.2p	25.7p	1.5p	28.1p

2018 income statement	Statutory results £m	Include Virgin Money pre-acquisition results £m	Pro forma results £m	acquisition costs £m	Legacy conduct £m	Other £m	Underlying basis £m
Net interest income	851	606	1,457	-	-	-	1,457
Non-interest income	156	75	231	-	-	(3)	228
Total operating income	1,007	681	1,688	-	-	(3)	1,685
Total operating and administrative expenses before impairment losses	(1,130)	(368)	(1,498)	39	396	65	(998)
Operating (loss)/profit before impairment losses	(123)	313	190	39	396	62	687
Impairment losses on credit exposures	(41)	(65)	(106)	-	-	-	(106)
(Loss)/profit on ordinary activities before tax	(164)	248	84	39	396	62	581
Financial performance measures
RoTE	(6.9)%	6.4%	(0.5)%	0.9%	9.1%	1.5%	11.0%
CIR	112%	(23)%	89%	(2)%	(24)%	(4)%	59%
Return on assets	(0.34)%	0.38%	0.04%	0.04%	0.41%	0.07%	0.56%
Basic EPS	(19.7)p	18.4p	(1.3)p	2.4p	24.8p	3.9p	29.8p

Risk Management

Credit risk

The Group's approach to and management of risk is defined in the Group's Risk Management Framework (RMF). Integral to the RMF is the identification of principal risks, the process by which the Group sets its risk appetite which is the nature and extent of risk it is willing to assume to achieve its strategic objectives. The framework identifies nine principal risks: operational risk; people risk; financial risk; credit risk; technology risk; regulatory and compliance risk; conduct risk; financial crime risk; and strategic and enterprise risk.

The Group's risks are continually reassessed and reviewed through a horizon scanning process, with escalation and reporting to the Board. The horizon scanning process fully considers all relevant internal and external factors, and is designed to consider and capture those risks which are current but have not yet fully crystallised, as well as those which are expected to crystallise in future periods. These risks include, but are not limited to, geopolitical and macroeconomic environment; competition; regulatory change; and climate change. These risks and the overall risk landscape are regularly monitored by both Executive and Board Risk Committees.

Further detail on the Group's risks and how they are managed is available in the 2019 Annual Report and Accounts.

Credit risk is the risk that a borrower or counterparty fails to pay the interest or capital due on a loan or other financial instrument. Credit risk manifests itself in the financial instruments and/or products that the Group offers, and those in which the Group invests (including, among others, loans, guarantees, credit-related commitments, letters of credit, acceptances, inter-bank transactions, foreign exchange transactions, swaps and bonds). Credit risk can be found both on-balance sheet and off‑balance sheet.

Key credit metrics

	As at
	30 Sep 2019 (audited) £m	1 Oct 2018⁽¹⁾ (unaudited) £m	30 Sep 2018⁽¹⁾ (audited) £m
Impairment provisions held on credit exposures
Business lending	147	150	136
Mortgage and Personal lending	215	74	59
	362	224	195

	For the YEAR ended
	30 Sep 2019 (audited) £m	1 Oct 2018⁽¹⁾ (unaudited) £m	30 Sep 2018⁽¹⁾ (audited) £m
Underlying impairment charge on credit exposures
Business lending	25	N/a	15
Mortgage and Personal lending	123	N/a	26
	148	N/a	41
Asset quality measures:
Underlying impairment charge⁽²⁾ to average customer loans (cost of risk)	0.21%	N/a⁽³⁾	0.12%
90+ days past due (DPD) plus impaired assets to customer loans	N/a	N/a	0.91%
Stage 3 assets to customer loans	1.09%	1.77%	N/a
Total provision to customer loans	0.50%	0.68%	0.61%
Specific provision to impaired assets	N/a	N/a	35.50%
Stage 3 provision to Stage 3 loans	14.32%	14.55%	N/a

(1) These exclude the impact of the acquisition of Virgin Money Holdings (UK) PLC with September 2018 figures presented on an IAS 39 basis.

(2) Inclusive of gains/losses on assets held at fair value and elements of fraud loss but excludes the acquisition accounting impact on impairment losses shown on page 108.

(3) An underlying impairment charge was not calculated as at 1 October 2018 and therefore this metric cannot be calculated for that date.

Risk Management

Credit risk

A number of the Group's key credit metrics are no longer applicable as a result of the change to an IFRS 9 basis of calculating expected credit losses (ECLs) and have been replaced with metrics appropriate to the revised basis as shown in the table above.

The increase in underlying impairment charge from £41m to £148m primarily reflects a higher charge on our personal exposures which includes the charge relative to the acquired credit cards portfolio. The charge relative to business and mortgage exposures has also increased. The cost of risk, at 21bps, is reflective of a return to normalisation, however it remains below our expectation of a long-term loss rate of 30bps.

Asset quality measures remain resilient, reflective of the focus on responsible credit decisions and controlled risk appetite. The level of Stage 3 assets remains modest against a growing book. This reflects the credit quality of the portfolios, supported by the low interest rate environment. The ratio of total provisions to customer loans at 0.50% is reflective of a well-collateralised portfolio, supported by the increase in the size of the mortgage portfolio which proportionately requires a lower provision coverage and is a key driver of the overall reduction.

Reconciliation of the impairment loss provision from IAS 39 to IFRS 9

The movement in the Group's opening impairment provision as a result of adopting an ECL impairment methodology as required by IFRS 9 from 1 October 2018 is illustrated below:

	£m
Closing IAS 39 impairment provision as at 30 September 2018	195
Less: removal of IAS 39 collective provision	(152)
Add: introduction of a 12-month ECL calculation (Stage 1)	53
Add: introduction of a lifetime ECL calculation (Stage 2 and 3)	121
Add: undrawn balances	5
Add: multiple economic scenarios	2
Opening IFRS 9 impairment loss provision as at 1 October 2018	224

Removal of IAS 39 collective provision

The IAS 39 concept of a collective impairment provision to cover losses that have been incurred but not yet identified on loans subject to an individual assessment is no longer an acceptable basis for impairment provisioning under IFRS 9.

Introduction of a 12-month ECL calculation

IFRS 9 requires a 12-month ECL calculation on all assets which have not undergone a significant increase in credit risk since origination. These are classed as Stage 1 under IFRS 9, with the calculation on loans and advances allocating the ECL at an individual account level. The 12-month ECL calculation is based on the possibility of default occurring within 12 months of the reporting date.

Introduction of a lifetime ECL calculation

IFRS 9 requires a lifetime ECL calculation where a financial asset has been assessed as experiencing a significant increase in credit risk based on the Group's staging criteria. These can be classed as either Stage 2 or Stage 3 under IFRS 9, with the calculation on loans and advances allocating the ECL at an individual account level. Not all of these accounts would have been included in the IAS 39 collective provision, with the quantum of the ECL calculation also higher due to the requirement for lifetime losses to be included. The lifetime ECL calculation is based on the possibility of credit losses occurring over the lifetime of the asset.

Undrawn balances

IFRS 9 requires that impairment allowances be held on an expected loss basis rather than the incurred loss basis under IAS 39. This change has brought into scope pipeline exposures where an irrevocable commitment has been made to a customer, but no drawdown had occurred at the IFRS 9 adoption date, and for which no impairment allowance was held previously.

Multiple economic scenarios

This represents the difference, at adoption of IFRS 9, between calculated provisions under the Group's base scenario and the final aggregate position over the three scenarios (base, mild upside and severe downside).

Risk Management

Credit risk

Gross loans and advances by IFRS 9 stage allocation (audited)

The distribution of the Group's gross loans and advances by IFRS 9 stage allocation is analysed below.

Gross loans and advances to customers as at 30 September 2019	Stage 1 £m	Stage 2 <30 DPD £m	Stage 2 >30 DPD £m	Stage 2 Total £m	Stage 3 £m	Stage 3 POCI £m	Total £m
Mortgages	58,120	1,637	168	1,805	363	103	60,391
Personal of which:	4,787	392	32	424	61	8	5,280
- credit cards	3,806	353	25	378	46	8	4,238
- personal overdrafts	53	-	1	1	4	-	58
- other personal lending	928	39	6	45	11	-	984
Business	5,018	2,280	5	2,285	272	-	7,575
Closing balance	67,925	4,309	205	4,514	696	111	73,246

Gross loans and advances to customers(1) as at 1 October 2018 (excluding Virgin Money)	Stage 1 £m	Stage 2 <30 DPD £m	Stage 2 >30 DPD £m	Stage 2 Total £m	Stage 3 £m	Stage 3 POCI £m	Total £m
Mortgages	23,572	605	84	689	279	-	24,540
Personal of which:	1,143	28	10	38	22	-	1,203
- credit cards	370	1	3	4	7	-	381
- personal overdrafts	50	-	1	1	4	-	55
- other personal lending	723	27	6	33	11	-	767
Business	4,741	2,161	9	2,170	263	-	7,174
Closing balance	29,456	2,794	103	2,897	564	-	32,917

(1) Excludes loans designated at fair value through profit and loss, balances due from customers on acceptances, accrued interest and deferred and unamortised fee income.

Overall, the lending portfolio increased by £40.3bn between 1 October 2018 and 30 September 2019. In addition to underlying growth, the increase reflects the acquisition of Virgin Money Holdings (UK) PLC on 15 October 2018, with the acquired portfolio totalling £39.5bn as at 30 September 2019. Of this, £111m is Stage 3 purchased or originated credit impaired (POCI), representing the acquired assets that were classed as credit impaired at date of acquisition.

Mortgages

With total gross loans and advances of £60.4bn as at 30 September 2019, there has been underlying growth in the portfolio year-on-year, although the increase in lending balance results mainly from the impact of the acquired portfolio. Over 95% are classed as Stage 1. Stage 3 POCI for Mortgages reduced from £137m on acquisition to £103m as at 30 September 2019 as a result of customer redemptions and balance paydowns.

Personal

Of the £5.3bn total personal portfolio, the majority is credit cards, at £4.2bn. The year-on-year growth results mainly from the acquired credit cards portfolio, however, underlying growth is evident on both the credit card and other personal lending portfolios. The personal portfolio evidences stable performance with 91% of balances classed as Stage 1. Stage 3 POCI has reduced from £34m on acquisition to £8m as at 30 September 2019, due to write-offs and customer balance paydowns.

Business

At £7.6bn, business lending continues to evidence core underlying growth. The proportion of lending in Stage 2 has remained stable at 30% year-on-year, reflective of the Group's controlled and cautious approach to identifying customers experiencing financial difficulty and, where appropriate, providing early intervention assistance such as forbearance, to support customers in meeting their financial commitments to the Group.

Risk Management

Credit risk

Credit quality of loans and advances

The following tables highlight the significant exposure to credit risk in respect of which ECL model is applied for the Group's mortgage, personal and business loans and advances, including loan commitments and financial guarantee contracts, based on the following risk gradings:

Credit risk exposure, by internal PD rating, by IFRS 9 stage allocation (audited)

The distribution of the Group's credit exposures, by internal PD rating is analysed below.

As at 30 September 2019	Gross carrying amount
As at 30 September 2019	Stage 1 12-month ECLs £m	Stage 2 (not credit impaired) Lifetime ECLs £m	Stage 3 (credit impaired) Lifetime ECLs £m	Stage 3 (POCI) Lifetime ECLs £m	Total £m
Mortgages
<0.15	38,816	389	-	-	39,205
0.15 to <0.25	5,836	103	-	-	5,939
0.25 to <0.50	7,983	245	-	-	8,228
0.50 to <0.75	2,422	96	-	-	2,518
0.75 to <2.50	2,648	455	-	-	3,103
2.50 to <10.00	376	274	-	-	650
10.00 to <100.00	39	243	-	-	282
100.00 (Default)	-	-	363	103	466
Total	58,120	1,805	363	103	60,391

personal
<0.15	93	-	-	-	93
0.15 to <0.25	68	-	-	-	68
0.25 to <0.50	1,326	6	-	-	1,332
0.50 to <0.75	967	8	-	-	975
0.75 to <2.50	1,743	36	-	-	1,779
2.50 to <10.00	553	231	-	-	784
10.00 to <100.00	37	143	-	-	180
100.00 (Default)	-	-	61	8	69
Total	4,787	424	61	8	5,280

Business
<0.15	530	5	-	-	535
0.15 to <0.25	440	17	-	-	457
0.25 to <0.50	718	52	-	-	770
0.50 to <0.75	537	101	-	-	638
0.75 to <2.50	2,199	1,019	-	-	3,218
2.50 to <10.00	592	919	-	-	1,511
10.00 to <100.00	2	172	-	-	174
100.00 (Default)	-	-	272	-	272
Total	5,018	2,285	272	-	7,575

Risk Management

Credit risk

As at 1 October 2018 (excluding Virgin Money)	Gross carrying amount
As at 1 October 2018 (excluding Virgin Money)	Stage 1 12-month ECLs £m	Stage 2 (not credit impaired) Lifetime ECLs £m	Stage 3 (credit impaired) Lifetime ECLs £m	Stage 3 (POCI) Lifetime ECLs £m	Total £m
MORTGAGES
<0.15	8,085	13	-	-	8,098
0.15 to <0.25	4,292	27	-	-	4,319
0.25 to <0.50	6,199	77	-	-	6,276
0.50 to <0.75	1,791	49	-	-	1,840
0.75 to <2.50	2,813	205	-	-	3,018
2.50 to <10.00	370	194	-	-	564
10.00 to <100.00	22	124	-	-	146
100.00 (Default)	-	-	279	-	279
Total	23,572	689	279	-	24,540

personal
<0.15	113	-	-	-	113
0.15 to <0.25	97	-	-	-	97
0.25 to <0.50	249	-	-	-	249
0.50 to <0.75	153	-	-	-	153
0.75 to <2.50	354	2	-	-	356
2.50 to <10.00	166	15	-	-	181
10.00 to <100.00	11	21	-	-	32
100.00 (Default)	-	-	22	-	22
Total	1,143	38	22	-	1,203

business
<0.15	571	8	-	-	579
0.15 to <0.25	371	13	-	-	384
0.25 to <0.50	549	34	-	-	583
0.50 to <0.75	700	157	-	-	857
0.75 to <2.50	1,930	917	-	-	2,847
2.50 to <10.00	594	943	-	-	1,537
10.00 to <100.00	26	98	-	-	124
100.00 (Default)	-	-	263	-	263
Total	4,741	2,170	263	-	7,174

Risk Management

Credit risk

ECL impairment allowance by IFRS 9 stage allocation (audited)

The following tables disclose the impairment allowance by portfolio:

As at 30 September 2019	Stage 1 £m	Stage 2 <30 DPD £m	Stage 2 >30 DPD £m	Stage 2 Total £m	Stage 3 £m	Stage 3 POCI £m	Total £m
Mortgages	6	5	4	9	26	(1)	40
Personal of which:	53	71	16	87	37	(2)	175
- credit cards	42	65	12	77	28	(2)	145
- personal overdrafts	2	-	1	1	3	-	6
- other personal lending	9	6	3	9	6	-	24
Business	20	72	-	72	55	-	147
Closing balance	79	148	20	168	118	(3)	362

As at 1 October 2018 (excluding Virgin Money)	Stage 1 £m	Stage 2 <30 DPD £m	Stage 2 >30 DPD £m	Stage 2 Total £m	Stage 3 £m	Stage 3 POCI £m	Total £m
Mortgages	3	2	1	3	23	-	29
Personal of which:	15	5	7	12	18	-	45
- credit cards	6	-	1	1	7	-	14
- personal overdrafts	2	-	1	1	3	-	6
- other personal lending	7	5	5	10	8	-	25
Business	35	71	-	71	44	-	150
Closing balance	53	78	8	86	85	-	224

The Group's impairment allowance has increased by £138m in the period from 1 October 2018 to 30 September 2019, which is primarily due to the impact of the acquisition of Virgin Money Holdings (UK) PLC. Acquisition accounting requires that the acquired loans and advances balance is fair valued on acquisition, resulting in a nil ECL allowance on acquisition. The loans and advances balance is then subject to the IFRS 9 ECL methodology with a full ECL allowance calculated, which resulted in a charge of £67m being recognised in the Group income statement immediately following the acquisition date. The ECL allowance for the acquired portfolio subsequently increased to £136m as at 30 September 2019.

Mortgages

The Mortgage impairment allowance of £40m is reflective of the level of collateral held and the low expected credit loss for this portfolio. The increase of £11m from 2018 is due to the impact of the acquired mortgage portfolio.

Personal

The total impairment allowance for the personal portfolio of £175m has increased by £130m in the period. This is primarily due to the level of impairment allowance relative to the acquired credit cards portfolio, where the ECL at point of acquisition was £60m and subsequently increased to £125m as at 30 September 2019. The underlying impairment allowance for the personal exposures increased over the period as a result of the combined effect of portfolio growth, higher default rates due to seasoning and maturation of the portfolio and routine recalibration of underlying provisioning models.

Business

Total impairment allowance for the business portfolio decreased by £3m to £147m. This is the result of a £15m reduction in Stage 1 ECL, primarily due to IFRS 9 modelling adjustments, partially offset by an £11m increase in Stage 3 due to a higher level of single name, individually assessed provisions.

Risk Management

Credit risk

ECL impairment allowance coverage ratios (audited)

As at 30 September 2019	Stage 1 %	Stage 2 <30 DPD %	Stage 2 >30 DPD %	Stage 2 Total %	Stage 3 %	Stage 3 POCI %	Total %
Mortgages	0.01	0.29	2.26	0.47	7.13	(0.80)	0.07
Personal of which:	1.15	18.22	51.18	20.64	62.14	(22.61)	3.39
- credit cards	1.11	18.49	46.91	20.35	60.39	(22.61)	3.42
- personal overdrafts	5.00	14.17	66.02	56.00	91.21	-	11.41
- other personal lending	1.09	15.56	68.29	22.35	60.64	-	2.75
Business	0.40	3.13	2.27	3.13	19.99	-	1.93
Closing balance	0.12	3.41	9.68	3.69	16.89	(2.30)	0.50

As at 1 October 2018 (excluding Virgin Money)	Stage 1 %	Stage 2 <30 DPD %	Stage 2 >30 DPD %	Stage 2 Total %	Stage 3 %	Stage 3 POCI %	Total %
Mortgages	0.01	0.32	1.61	0.48	8.19	-	0.12
Personal of which:	1.38	18.17	65.20	30.04	80.36	-	3.78
- credit cards	1.78	9.52	53.16	39.89	94.32	-	3.94
- personal overdrafts	3.66	10.02	59.21	51.07	78.12	-	10.06
- other personal lending	1.03	18.61	71.71	28.05	72.56	-	3.24
Business	0.73	3.25	5.13	3.26	16.79	-	2.08
Closing balance	0.18	2.77	7.86	2.95	15.05	-	0.68

The impact of the Virgin Money Holdings (UK) PLC acquisition results in a proportionately higher volume of the total portfolio being mortgage lending which requires a lower proportionate impairment allowance, consequently the total portfolio coverage has reduced by 18bps in line with the revised portfolio profile.

Mortgages

The coverage ratio reduced by 5bps in the period as a result of the composition, quality and value of the acquired mortgage portfolio.

Personal

The total coverage ratio reduced by 39bps, primarily in the credit card portfolio where the quality of the acquired portfolio, in particular the growing Virgin Atlantic credit card portfolio, is stronger than the pre-existing portfolios.

Business

Coverage for the business portfolio decreased by 15bps, reflective of portfolio growth in Stage 1 where proportionately less provision coverage is required, and a small number of significant write-offs from Stage 3.

Risk Management

Credit risk

Mortgage lending by average LTV (audited)

The LTV ratio of mortgage lending, coupled with the relationship of the debt to customers' income, is integral to the credit quality of these loans. The table below sets out the indexed LTV analysis of the Group's mortgage stock:

	2019 %	2018⁽¹⁾ %
LTV⁽²⁾
Less than 50%	35	31
50% to 75%	48	51
76% to 80%	6	6
81% to 85%	5	5
86% to 90%	4	4
91% to 95%	2	2
96% to 100%	-	-
Greater than 100%	-	-
Unknown	-	1
	100	100

(1) 30 September 2018 shown as reported, excluding Virgin Money.

(2) LTV of the mortgage portfolio is defined as mortgage portfolio weighted by balance. Currently the Clydesdale Bank PLC portfolio is indexed using the MIAC Acadametrics indices at a given date, while the Virgin Money Holdings (UK) PLC portfolio is indexed using the Markit indices. The Group view is a combined summary of the two portfolios. 'Unknown' in the prior period represented loans where data was not available due to front book data matching and a de minimis amount due to weaknesses in historic data capture processes.

Forbearance

Mortgage and personal forbearance

The table below summarises the level of forbearance in respect of the Group's mortgage and credit card portfolios at each balance sheet date. All balances subject to forbearance are classed as either Stage 2 or Stage 3 for ECL purposes.

As at 30 September 2019 (audited)	Total loans and advances subject to forbearance measures			Impairment allowance on loans and advances subject to forbearance measures
As at 30 September 2019 (audited)	Number of loans	Gross carrying amount £m	% of total portfolio	Impairment allowance £m	Coverage %
Mortgages
Formal arrangements	1,352	157	0.26	4.4	2.83
Temporary arrangements	913	119	0.20	3.1	2.62
Payment arrangement⁽¹⁾	1,118	113	0.19	1.6	1.41
Payment holiday⁽¹⁾	981	114	0.19	0.7	0.58
Interest only conversion	358	54	0.09	0.3	0.57
Term extension	174	16	0.03	0.1	0.64
Other	35	3	0.00	-	0.50
Legal	130	13	0.02	0.3	2.46
Total mortgage forbearance	5,061	589	0.98	10.5	1.79

Personal forbearance - credit cards	5,522	24	0.53	9.5	41.30
Total	10,583	613	0.95	20.0	3.31

(1) Payment arrangement and payment holiday have been introduced as additional concession types within the Group's mortgage forbearance policy.

Risk Management

Credit risk

As at 30 September 2018 (excluding Virgin Money) (audited)	Total loans and advances subject to forbearance measures			Impairment allowance on loans and advances subject to forbearance measures
As at 30 September 2018 (excluding Virgin Money) (audited)	Number of loans	Gross carrying amount £m	% of total portfolio	Impairment allowance £m	Coverage %
Mortgages
Formal arrangements	1,497	168	0.68	3.3	2.00
Temporary arrangements	1,275	161	0.66	2.3	1.45
Interest only conversion	231	32	0.13	0.1	0.18
Term extension	150	12	0.05	0.1	0.48
Other	41	4	0.02	-	0.36
Legal	148	15	0.06	0.5	3.34
Total mortgage forbearance	3,342	392	1.60	6.3	1.61

Personal forbearance - credit cards	787	2	0.18	0.9	40.68
Total	4,129	394	1.58	7.2	1.83

The increase in mortgage and credit card forbearance is attributable to the acquisition of the Virgin Money Holdings (UK) PLC portfolios.

When all other avenues of resolution including forbearance have been explored, the Group will take steps to repossess and sell underlying collateral. In the 12-month period to 30 September 2019, there were 66 repossessions of which 14 were voluntary (12 months to 30 September 2018 (excluding Virgin Money): 38 including 16 voluntary).

Forbearance - other personal lending

Excluding credit cards, the Group currently exercises limited forbearance strategies in relation to other types of personal lending; namely current accounts and personal loans. The Group has assessed the total loan balances subject to forbearance on other types of personal lending to be £11.5m as at 30 September 2019 (30 September 2018 (excluding Virgin Money): £10.1m), representing 1.10% of the personal lending portfolio (30 September 2018: 1.22%).

Impairment provisions on forborne balances totalled £3.6m as at 30 September 2019 (30 September 2018 (excluding Virgin Money): £2.8m) providing overall coverage of 31.58% (30 September 2018: 28.30%).

Business forbearance

The tables below summarise the total number of arrangements in place and the loan balances and impairment provisions associated with those arrangements. All balances subject to forbearance are classed as either Stage 2 or Stage 3 for ECL purposes.

As at 30 September 2019 (audited)	Total loans and advances subject to forbearance measures			Impairment allowance on loans and advances subject to forbearance measures
As at 30 September 2019 (audited)	Number of customers	Gross carrying amount £m	% of total portfolio	Impairment allowance £m	Coverage %
Term extension	187	153	1.93	14.9	9.70
Deferral of contracted capital repayments	98	134	1.68	15.0	11.16
Reduction in contracted interest rate	3	1	0.02	-	3.37
Alternative forms of payment	2	7	0.08	0.4	5.37
Debt forgiveness	2	4	0.05	-	1.06
Refinancing	16	10	0.12	1.5	15.03
Covenant breach/reset/waiver	60	200	2.50	23.6	11.82
Total business forbearance	368	509	6.38	55.4	10.87

Risk Management

Credit risk

As at 30 September 2018 (audited)	Total loans and advances subject to forbearance measures			Impairment allowance on loans and advances subject to forbearance measures
As at 30 September 2018 (audited)	Number of customers	Gross carrying amount £m	% of total portfolio	Impairment allowance £m	Coverage %
Term extension	179	162	2.15	10.5	6.48
Deferral of contracted capital repayments	103	129	1.73	15.6	12.02
Reduction in contracted interest rate	2	1	0.01	-	4.05
Alternative forms of payment	4	25	0.33	7.5	30.46
Debt forgiveness	4	11	0.14	0.6	5.64
Refinancing	17	10	0.13	1.0	9.87
Covenant breach/reset/waiver	61	207	2.75	9.2	4.43
Total business forbearance	370	545	7.24	44.4	8.14

Included in other financial assets at fair value is a portfolio of loans that is included in the above table. The gross value of fair value loans subject to forbearance as at 30 September 2019 is £8m (30 September 2018: £15m), representing 0.11% of the total business portfolio (30 September 2018: 0.19%). The credit risk adjustment on these amounts totalled £0.6m (30 September 2018: £2m), a coverage of 6.94% (30 September 2018: 11.66%).

Risk Management

Financial risk

Financial risk covers several categories of risk which impact the manner in which the Group can support its customers in a safe and sound manner. They include capital risk, funding risk, liquidity risk, market risk, model risk, pension risk and financial risks arising from climate change.

Capital

Capital is held by the Group to protect its depositors, to cover inherent risks in a normal and stressed operating environment and to support the Group's strategy of pioneering growth. Capital risk is the risk that the Group has insufficient quantity or quality of capital to support its operations.

Capital position

The Group's capital position as at 30 September 2019 is summarised below:

Regulatory capital (unaudited)⁽¹⁾

	2019 £m	2018 £m
Statutory total equity	5,021	3,186

CET1 capital: regulatory adjustments⁽²⁾
AT1 capital instruments	(915)	(450)
Defined benefit pension fund assets	(257)	(138)
Prudent valuation adjustment	(5)	(3)
Intangible assets	(501)	(412)
Goodwill	(11)	-
Deferred tax asset relying on future profitability	(146)	(99)
Cash flow hedge reserve	26	39
Excess expected losses	(88)	-
AT1 coupon accrual	(20)	(10)
IFRS 9 transitional adjustments	100	-
Total CET1 capital	3,204	2,113

AT1 capital
AT1 capital instruments	915	450
Total AT1 capital	915	450

Total Tier 1 capital	4,119	2,563

Tier 2 capital
Subordinated debt	721	474
Credit risk adjustments⁽³⁾	-	152
Total Tier 2 capital	721	626

Total regulatory capital	4,840	3,189

(1) This table shows the capital position on a CRD IV 'fully loaded' basis and transitional IFRS 9 basis.

(2) A number of regulatory adjustments to CET1 capital are required under CRD IV regulatory capital rules.

(3) The current period does not include Tier 2 credit risk adjustments due to the transition to IFRS 9 reporting.

Risk Management

Financial risk

Regulatory capital flow of funds (unaudited)⁽¹⁾	CRD IV 2019 £m	CRD IV 2018 £m
CET1 capital⁽²⁾
CET1 capital at 1 October	2,113	2,437
Share capital and share premium	3	1
Retained earnings and other reserves (including special purpose entities)	(210)	(217)
Acquisition of Virgin Money Holdings (UK) plc	1,567	-
Prudent valuation adjustment	(2)	1
Intangible assets	(89)	(73)
Goodwill arising on acquisition of Virgin Money Holdings (UK) plc	(11)	-
Deferred tax asset relying on future profitability	(47)	(71)
Defined benefit pension fund assets	(119)	(3)
Cash flow hedge reserve	(13)	38
IRB shortfall of credit risk adjustments to expected losses	(88)	-
IFRS 9 transitional relief	100	-
Total CET1 capital at 30 September	3,204	2,113

AT1 capital
AT1 capital at 1 October	450	450
AT1 capital issued and transferred from Virgin Money Holdings (UK) plc	465	-
Total AT1 capital at 30 September	915	450
Total Tier 1 capital at 30 September	4,119	2,563

Tier 2 capital
Tier 2 capital at 1 October	626	627
Credit risk adjustments⁽³⁾	(152)	(2)
Other movements	-	1
Capital instruments issued: subordinated debt	247	-
Tier 2 capital at 30 September	721	626
Total capital at 30 September	4,840	3,189

(1) The table shows the capital position on a CRD IV 'fully loaded' basis and transitional IFRS 9 basis.

(2) CET1 capital is comprised of shares issued and related share premium, retained earnings and other reserves less specified regulatory adjustments.

(3) The transition to IFRS 9 reporting has removed the requirement for Tier 2 credit risk adjustments.

The Group's CET1 capital increased by £1,091m in the year primarily driven by the positive impact of the acquisition of Virgin Money Holdings (UK) plc, offset by exceptional items in the year.

Risk Management

Financial risk

During the year, there were also increases in AT1 and Tier 2 capital. The Group issued an additional £250m of Tier 2 capital in December 2018 in the form of Fixed Rate Reset 10 non-call 5-year Subordinated Contingent Convertible Notes. In addition, in August 2019, Virgin Money Holdings (UK) plc successfully received investor consent to transfer obligations on its outstanding AT1 (£230m) to Virgin Money UK PLC.

Minimum Pillar 1 capital requirements (unaudited)	2019 £m	2018 £m
Credit risk	1,685	1,449
Operational risk	209	132
Counterparty credit risk	15	10
Credit valuation adjustment	15	17
Total Pillar 1 regulatory capital requirements	1,924	1,608

IFRS 9 transitional arrangements (unaudited)⁽¹⁾

Available capital (amounts)	30 September 2019 (£m)
Available capital (amounts)	IFRS 9 transitional basis	IFRS 9 Fully loaded basis
CET1 capital	3,204	3,104
Tier 1 capital	4,119	4,019
Total capital	4,840	4,740
RWA (amounts)
Total RWA	24,046	23,983
Capital ratios
CET1 (as a percentage of RWA)	13.3%	12.9%
Tier 1 (as a percentage of RWA)	17.1%	16.8%
Total capital (as a percentage of RWA)	20.1%	19.8%
Leverage ratio
Leverage ratio total exposure measure	94,744	94,644
Leverage ratio	4.3%	4.2%

(1) The table shows a comparison of capital resources, requirements and ratios with and without the application of transitional arrangements for IFRS 9.

RWA movements (unaudited)

	12 months to 30 September 2019					12 months to 30 September 2018
RWA flow statement	IRB RWA £m	STD RWA £m	Other RWA £m	Total £m	Capital Required £m	IRB RWA £m	STD RWA £m	Other RWA⁽²⁾ £m	Total £m	Capital Required £m
RWA at 1 October	-	18,104	1,998	20,102	1,608	-	17,753	1,925	19,678	1,574
Asset size	958	478	10	1,446	116	-	347	73	420	34
Asset quality	(291)	(8)	-	(299)	(24)	-	4	-	4	-
Model updates	(396)	-	-	(396)	(32)	-	-	-	-	-
Methodology and policy	250	-	-	250	20	-	-	-	-	-
Acquisitions and disposals	4,330	2,870	962	8,162	654	-	-	-	-	-
IRB accreditation	10,247	(15,592)	-	(5,345)	(428)	-	-	-	-	-
Other	6	101	19	126	10	-	-	-	-	-
RWA at 30 September	15,104	5,953	2,989	24,046	1,924	-	18,104	1,998	20,102	1,608

In October 2018, the Group received IRB accreditation from the PRA for both the mortgage and business portfolios. The impact of this can be seen in the IRB accreditation line above. Also in October 2018, the Group acquired Virgin Money Holdings (UK) plc, which calculates RWA on mortgages under IRB methodology and on all other portfolios under standardised methodology. This impact can be seen in the Acquisitions and disposals line above.

Risk Management

Financial risk

Formal FIRB accreditation for the business portfolios was received in October 2018 for a suite of recalibrated models which were implemented during November 2018, resulting in a £170m model impact, included within the Model updates line above. The differential is predominantly in relation to the retail mortgage quarterly PD model calibrations. Since this implementation, no additional model changes have occurred.

Methodology and processing enhancements implemented prior to formal IRB reporting are captured within the Methodology and policy line.

Other includes operational risk, CVA and counterparty credit risk.

Pillar 1 RWAs and capital requirements by business line (unaudited)

Capital requirements for calculating RWA	At 30 September 2019			At 30 September 2018
Capital requirements for calculating RWA	Capital required £m	RWA £m	Exposure £m	Capital required £m	RWA £m	Exposure £m
Corporates	501	6,258	8,587	-	-	-
Retail	708	8,846	64,067	-	-	-
Total IRB approach	1,209	15,104	72,654	-	-	-
Central governments or central banks	1	9	11,663	-	1	11,361
Regional governments or local authorities	1	13	175	1	12	143
Public sector entities	-	5	335	-	2	155
Multilateral development banks	-	-	1,034	-	-	155
Financial institutions	16	195	948	11	136	630
Corporates	28	347	376	316	3,956	4,311
Retail	319	3,993	5,324	90	1,124	1,499
Secured by mortgages on immovable property	40	498	875	938	11,708	28,423
Exposures in default	5	59	55	45	562	465
Collective investments undertakings	-	1	1	-	1	1
Equity exposures	1	11	9	-	5	4
Items associated with particularly high risk	1	11	7	4	49	33
Covered bonds	11	141	1,415	5	61	615
Other items	53	670	754	39	487	715
Total standardised approach	476	5,953	22,971	1,449	18,104	48,510
Total credit risk	1,685	21,057	95,625	1,449	18,104	48,510
Operational risk	209	2,606		132	1,655
Counterparty credit risk	15	191		10	125
Credit valuation adjustment	15	192		17	218
Total Pillar 1 regulatory capital requirements	1,924	24,046		1,608	20,102

The exposure amounts disclosed above are post-credit conversion factors and pre-credit mitigation.

Additional breakdown analysis of the IRB portfolios can be seen within the 'EU CR6 - IRB Approach - Credit risk by exposure class and PD range' table in the Group's Pillar 3 disclosures.

Prior period comparatives are reported under the standardised approach to credit risk as accreditation for IRB was received in October 2018.

Risk Management

Financial risk

Capital position and CET1 (unaudited)	2019 £m	Pro forma 2018 £m	reported 2018 £m
RWA⁽¹⁾
Retail mortgages	8,846	8,794	9,002
Business lending	7,124	6,604	7,407
Other retail lending	4,042	3,463	981
Other lending	481	109	109
Other⁽²⁾	564	1,013	605
Credit risk	21,057	19,983	18,104
Credit valuation adjustment	192	243	218
Operational risk	2,606	2,523	1,655
Counterparty credit risk	191	194	125
Total RWA	24,046	22,943	20,102

Capital ratios
CET1 ratio	13.3%	15.1%	10.5%
Tier 1 ratio	17.1%	18.3%	12.7%
Total capital ratio	20.1%	20.6%	15.9%

(1) RWA are calculated under the Advanced internal ratings-based (AIRB) approach for the mortgage portfolio and the FIRB approach for the business portfolio, with all other portfolios being calculated under the standardised approach, via either sequential IRB implementation or Permanent Partial Use (PPU).

(2) The items included in the Other exposure class that attract a capital charge include items in the course of collection, fixed assets, prepayments, other debtors and deferred tax assets that are not deducted.

The Group measures the amount of capital it is required to hold by applying CRD IV as implemented in the UK by the PRA and supplemented through additional regulation under the PRA Rulebook. The table below summarises the amount of capital in relation to RWAs the Group is currently required to hold, excluding any PRA buffer.

Minimum requirements (unaudited)	As at 30 Sep 2019
Minimum requirements (unaudited)	CET1	Total Capital
Pillar 1⁽¹⁾	4.5%	8.0%
Pillar 2A	3.0%	5.3%
Total capital requirement	7.5%	13.3%

Capital conservation buffer	2.5%	2.5%
UK countercyclical capital buffer⁽²⁾	1.0%	1.0%
Total (excluding PRA buffer)⁽³⁾	11.0%	16.8%

(1) The minimum amount of total capital under Pillar 1 of the regulatory framework is determined as 8% of RWAs, of which at least 4.5% of RWAs is required to be covered by CET1 capital.

(2) The UK countercyclical capital buffer (CCyB) may be set between 0% and 2.5%. On 28 November 2018 the UK CCyB increased from 0.5% to 1.0%. At its October 2019 meeting, the FPC maintained the UK CCyB rate at 1%, noting the underlying vulnerabilities (excluding Brexit) that can amplify economic shocks have not changed materially since the November 2018 Financial Stability Report and remain at a standard level overall in the UK.

(3) The Group may be subject to a PRA buffer as set by the PRA but is not permitted to disclose the level of any buffer. A PRA buffer can consist of two components:

− a risk management and governance buffer that is set as a scalar of the Pillar 1 and Pillar 2A requirements; and

− a buffer relating to the results of the BoE stress tests.

Underlying capital generation by the core divisions post additional AT1 distribution was 77bps, largely driven by strong underlying profits more than offsetting asset growth and investment spending. After absorbing the net impact of costs associated with restructuring, the acquisition of Virgin Money Holdings (UK) plc and legacy conduct issues, the Group's CET1 ratio was 13.3%.

Risk Management

Financial risk

In August 2019, Virgin Money Holdings (UK) plc successfully received investor consent to transfer obligations on its outstanding AT1 (£230m) and Senior Notes (£350m) to Virgin Money UK PLC (formerly named CYBG PLC). All of the Group's regulatory capital and MREL instruments are now issued out of Virgin Money UK PLC, consistent with the single point of entry resolution model. This also removed the previous need to adjust for non-controlling interests in the Group's capital calculations.

Dividend

As disclosed in the Business and financial review, the Board has recommended not to pay a final dividend for the financial year ending 30 September 2019.

Leverage

Leverage ratio (unaudited)	2019 £m	reported 2018 £m
Total Tier 1 capital for the leverage ratio
Total CET1 capital	3,204	2,113
AT1 capital	915	450
Total Tier 1	4,119	2,563

Exposures for the leverage ratio
Total assets as per published financial statements	90,999	43,456
Adjustment for off-balance sheet items	2,728	1,763
Adjustment for derivative financial instruments	(35)	(134)
Adjustment for securities financing transactions (SFTs)	1,934	1,468
Other regulatory adjustments	(882)	(613)
Leverage ratio exposure	94,744	45,940

2019

£m

pro forma 2018

£m

reported 2018

£m

CRD IV leverage ratio⁽¹⁾

4.3%

4.6%

5.6%

UK leverage ratio⁽²⁾

4.9%

5.1%

6.5%

(1) IFRS 9 transitional capital arrangements have been applied to the leverage ratio calculation as at 30 September 2019.

(2) The Group's leverage ratio on a modified basis as at 30 September 2019, excluding qualifying central bank claims from the exposure measure in accordance with the policy statement issued by the PRA in October 2017.

The UK leverage ratio framework, which came into force on 1 January 2016, is relevant to PRA regulated banks and building societies with consolidated retail deposits equal to or greater than £50bn. The Group is currently excluded from the full reporting requirements of the UK leverage ratio framework but will be required to comply in the first reporting period following the date at which this threshold is breached, which is 31 December 2019.

The leverage ratio is monitored against a Board approved RAS, with responsibility for managing the ratio delegated to the Group's Asset and Liability Committee (ALCO), which monitors it on a monthly basis.

The leverage ratio is the ratio of Tier 1 capital to total exposures, defined as:

− capital: Tier 1 capital defined on a CRD IV fully loaded and IFRS 9 transitional basis; and

− exposures: total on- and off-balance sheet exposures (subject to credit conversion factors) as defined in the delegated act amending CRR article 429 (Calculation of the Leverage Ratio), which includes deductions applied to Tier 1 capital.

Other regulatory adjustments consist of adjustments that are required under CRD IV to be deducted from Tier 1 capital. The removal of these from the exposure measure ensures consistency is maintained between the capital and exposure components of the ratio.

The Group's leverage ratio is 4.3% (30 September 2018 pro forma: 4.6%) which exceeds the Basel Committee's proposed minimum of 3%, applicable from 2018, and the UK minimum ratio of 3.60% (3.25% plus 0.35% countercyclical leverage buffer.)

Risk Management

Financial risk

Funding and liquidity risk

Funding risk occurs where the Group is unable to raise or maintain funds of sufficient quantity and quality to support the delivery of the business plan or sustain lending commitments. Prudent funding risk management reduces the likelihood of liquidity risks occurring, increases the stability of funding sources, minimises concentration risks and controls future balance sheet growth. Liquidity risk occurs when the Group is unable to meet its current and future financial obligations as they fall due or at acceptable cost, or when the Group reduces liquidity resources below internal or regulatory stress requirements.

Liquid assets

The quantity and quality of the Group's liquid assets are calibrated to the Board's view of liquidity risk appetite and remain at a prudent level above regulatory requirements. The Group was compliant with all internal and regulatory liquidity metrics at 30 September 2019 (30 September 2018: compliant). The LCR moved from 137% to 152% during the year.

The liquid asset portfolio provides a buffer against sudden and potentially sharp outflows of funds. Liquid assets must therefore be of a high quality so they can be realised for cash and cannot be encumbered for any other purpose (e.g. to provide collateral for payments systems). The liquid asset portfolio is primarily comprised of cash at BoE, UK government securities (gilts) and listed securities (e.g. bonds issued by supra-nationals and AAA-rated covered bonds).

Liquid asset portfolio⁽¹⁾	2019 (audited) £m	pro forma 2018 (Unaudited) £m	REPORTED 2018 (audited) £m	Change (audited) %	Average 2019 (audited) £m	Average 2018 (audited) £m
Level 1
Cash and balances with central banks	7,469	7,979	3,942	89.5%	7,266	3,405
UK government treasury bills and gilts	1,076	908	513	109.7%	870	568
Other debt securities	2,867	2,180	943	204.0%	2,604	913
Total level 1	11,412	11,067	5,398	111.4%	10,740	4,886
LEVEL 2⁽²⁾	29	175	-	-	103	-
Total LCR eligible assets	11,441	11,242	5,398	111.9%	10,843	4,886

(1) Excludes encumbered assets.

(2) Includes Level 2A and Level 2B.

Encumbered assets by asset category

The Group manages the level of asset encumbrance to ensure appropriate assets are maintained to support potential future planned and stressed funding requirements. Encumbrance limits are set in the Group RAS and calibrated to ensure that after a stress scenario is applied that increases asset encumbrance, the balance sheet can recover over an acceptable period of time. Examples of reasons for asset encumbrance include, among others, supporting the Group's secured funding programmes to provide stable term funding to the Group, the posting of assets in respect of drawings under the Term Funding Scheme, use of assets as collateral for payments systems in order to support customer transactional activity, and providing security for the Group's issuance of Scottish bank notes.

Encumbered assets by asset category (audited)

September 2019	Assets encumbered with non-central bank counterparties				Positioned at the central bank (including encumbered) £m	Other assets				Total £m
	Assets encumbered with non-central bank counterparties					Assets not positioned at the central bank			Total £m
	Covered bonds £m	Securi- tisations £m	Other £m	Total £m		Readily available for encumbrance £m	Other assets capable of being encumbered £m	Cannot be encumbered £m	Total £m
Loans and advances to customers	2,896	8,571	-	11,467	19,929	19,933	18,589	3,430	61,881	73,348
Cash and balances with central banks	-	-	-	-	3,219	7,077	-	-	10,296	10,296
Due from other banks	156	550	171	877	-	-	131	10	141	1,018
Derivative financial instruments	-	-	-	-	-	-	-	366	366	366
Financial instruments at fair value through other comprehensive income	41	34	555	630	-	3,697	-	1	3,698	4,328
Other assets	-	-	409	409	-	-	173	1,061	1,234	1,643
Total assets	3,093	9,155	1,135	13,383	23,148	30,707	18,893	4,868	77,616	90,999

Risk Management

Financial risk

September 2018	Assets encumbered with non-central bank counterparties				Positioned at the central bank (including encumbered) £m	Other assets				Total £m
	Assets encumbered with non-central bank counterparties					Assets not positioned at the central bank			Total £m
	Covered bonds £m	Securi- tisations £m	Other £m	Total £m		Readily available for encumbrance £m	Other assets capable of being encumbered £m	Cannot be encumbered £m	Total £m
Loans and advances to customers	1,393	5,243	-	6,636	6,940	5,016	11,322	2,830	26,108	32,744
Cash and balances with central banks	-	-	-	-	2,809	3,764	-	-	6,573	6,573
Due from other banks	161	299	163	623	-	-	70	-	70	693
Derivatives	-	-	-	-	-	-	-	262	262	262
Financial assets - available for sale	-	-	36	36	46	1,468	5	7	1,526	1,562
Other financial assets	-	-	-	-	-	-	362	-	362	362
Other assets	-	-	143	143	-	-	95	1,022	1,117	1,260
Total assets	1,554	5,542	342	7,438	9,795	10,248	11,854	4,121	36,018	43,456

Analysis of debt securities in issue by residual maturity (unaudited)

	3 months or less £m	3 to 12 months £m	1 to 5 years £m	Over 5 years £m	Total 2019	Total 2018
Covered bonds	-	10	599	1,303	1,912	742
Securitisation	574	928	3,549	-	5,051	2,956
Medium term notes	-	311	298	1,288	1,897	796
Subordinated debt	-	9	722	-	731	479
Total debt securities in issue	574	1,258	5,168	2,591	9,591	4,973
Of which issued by Virgin Money UK PLC	-	18	1,016	1,223	2,257	1,276

Risk Management

Financial risk

External credit ratings

The Group's long-term credit ratings are summarised below:

material risk for the Group	Outlook as at	As at
material risk for the Group	30 Sep 2019⁽¹⁾	30 Sep 2019	30 Sep 2018
Virgin Money UK PLC
Moody's	Positive	Baa3	Not rated
Fitch	Rating Watch Negative	BBB+	BBB+
Standard & Poor's	Stable	BBB-	BBB-

Clydesdale Bank PLC
Moody's⁽²⁾	Positive	Baa1	Baa1
Fitch	Rating Watch Negative	A-	BBB+
Standard & Poor's	Stable	BBB+	BBB+

Virgin Money Holdings (UK) plc
Moody's	Stable	Baa3	Baa3
Fitch	Rating Watch Negative	BBB+	BBB+

Virgin Money plc
Moody's	Positive	Baa1	Baa2
Fitch	Rating Watch Negative	A-	BBB+

(1) For detailed background on the latest credit opinion by S&P and Fitch, please refer to the respective rating agency websites.

(2) Long-term deposit rating

On 1 March 2019, due to a reassessment of the probability of a no-deal/disruptive Brexit scenario, Fitch placed all of the Group's long-term Issuer Default Ratings (IDR) on Rating Watch Negative (along with 19 UK banks in total). None of the Group's other ratings or its 'anchor' Viability Rating have been impacted.

On 3 June 2019, Fitch upgraded the long-term ratings of Clydesdale Bank PLC and Virgin Money PLC to A-. The upgrades followed an increase in the junior debt buffer at Clydesdale Bank PLC.

On 21 October 2019, Fitch and Moody's withdrew the long-and short-term ratings of Virgin Money Holdings (UK) PLC and Virgin Money PLC following completion of the FSMA Part VII transfer. None of the Group's other ratings was impacted by the FSMA Part VII transfer.

As at 27 November 2019, there have been no other changes to the Group's long-term credit ratings or outlooks since the report date, with the exception of the outlook on the Virgin Money UK PLC and Clydesdale Bank PLC Moody's ratings, which were moved from 'positive' to 'stable' on 12 November 2019. This followed a revision in Moody's outlook for the UK Sovereign from 'stable' to 'negative'. This was as a result of Moody's view that UK institutions have weakened and the UK's economic and fiscal strength are likely to be weaker going forward. Subsequently, Moody's adjusted the ratings outlook for 15 UK banks, including the Group.

Directors' responsibility statement in respect of the Annual Report and Accounts

The responsibility statement below has been prepared in connection with the Company's full Annual Report and Accounts for the year ending 30 September 2019. Certain parts thereof are not included within this announcement.

The Directors confirm that to the best of their knowledge:

− the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the Group and the undertakings included in the consolidation taken as a whole; and

− the Strategic report includes a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that they face.

The Directors consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's and Group's position and performance, business model and strategy.

David Duffy

Chief Executive Officer

27 November 2019

Group financial statements

Consolidated income statement

for the year ended 30 September	Note	2019 £m	2018 £m
Interest income		2,420	1,098
Other similar interest		13	15
Interest expense and similar charges		(919)	(262)
Net interest income	2.2	1,514	851
Gains less losses on financial instruments at fair value		(17)	(3)
Other operating income		252	159
Non-interest income	2.3	235	156
Total operating income		1,749	1,007
Operating and administrative expenses before impairment losses	2.4	(1,729)	(1,130)
Operating profit/(loss) before impairment losses		20	(123)
Impairment losses on credit exposures	3.2	(252)	(41)
Loss on ordinary activities before tax		(232)	(164)
Tax credit	2.5	38	19
Loss for the year		(194)	(145)

Attributable to:
Ordinary shareholders		(268)	(181)
Other equity holders		41	36
Non-controlling interests		33	-
Loss for the year		(194)	(145)
Basic loss per share (pence)	2.6	(17.9)	(19.7)
Diluted loss per share (pence)	2.6	(17.9)	(19.7)

All material items dealt with in arriving at the loss before tax for the above years relate to continuing activities.

The notes on pages 48 to 105 form an integral part of these financial statements.

Group financial statements

Consolidated statement of comprehensive income

for the year ended 30 September	Note	2019 £m	2018 £m
Loss for the year		(194)	(145)

Items that may be reclassified to the income statement
Change in cash flow hedge reserve
Gains/(losses) during the year		73	(58)
Transfers to the income statement		(57)	9
Taxation thereon - deferred tax (charge)/credit		(9)	11
Taxation thereon - current tax credit		6	-
		13	(38)
Change in FVOCI reserve
Gains during the year		13	-
Transfers to the income statement		(4)	-
Taxation thereon - deferred tax charge		(2)	-
		7	-
Total items that may be reclassified to the income statement		20	(38)

Items that will not be reclassified to the income statement
Change in asset revaluation reserve	3.9	-	-
Taxation thereon - deferred tax (charge)/credit		(1)	1

Remeasurement of defined benefit pension plans	3.12	110	(9)
Taxation thereon - deferred tax (charge)/credit		(56)	3
Taxation thereon - current tax credit		7	-
		61	(6)
Total items that will not be reclassified to the income statement		60	(5)

Other comprehensive income/(losses), net of tax		80	(43)
Total comprehensive losses for the year, net of tax		(114)	(188)

Attributable to:
Ordinary shareholders		(188)	(224)
Other equity holders		41	36
Non-controlling interests		33	-
Total comprehensive losses for the year, net of tax		(114)	(188)

The notes on pages 48 to 105 form an integral part of these financial statements.

Group financial statements

Consolidated balance sheet

as at 30 September	Note	2019 £m	2018⁽²⁾ £m
Assets
Financial assets at amortised cost
Loans and advances to customers	3.1	73,095	32,748
Cash and balances with central banks	3.4	10,296	6,573
Due from other banks		1,018	693
Financial assets at fair value through profit or loss
Loans and advances to customers	3.5	253	362
Derivative financial instruments	3.6	366	262
Other financial assets	3.5	14	-
Financial assets at fair value through other comprehensive income⁽¹⁾	3.7	4,328	-
Financial assets available for sale⁽¹⁾	3.8	-	1,562
Property, plant and equipment	3.9	145	88
Intangible assets and goodwill	3.10	516	412
Current tax assets		13	-
Deferred tax assets	3.11	322	206
Defined benefit pension assets	3.12	396	212
Other assets		237	338
Total assets		90,999	43,456

Liabilities
Financial liabilities at amortised cost
Customer deposits	3.13	64,000	28,904
Debt securities in issue	3.14	9,591	4,973
Due to other banks	3.15	8,916	3,088
Financial liabilities at fair value through profit or loss
Customer deposits	3.5	4	15
Derivative financial instruments	3.6	273	361
Deferred tax liabilities	3.11	201	77
Provisions for liabilities and charges	3.16	459	331
Other liabilities	3.17	2,534	2,521
Total liabilities		85,978	40,270

Equity
Share capital and share premium	4.1	146	89
Other equity instruments	4.1	915	450
Capital reorganisation reserve	4.1	(839)	(839)
Merger reserve	4.1	2,128	633
Other reserves	4.1	10	(20)
Retained earnings	4.1	2,661	2,873
Total equity		5,021	3,186
Total liabilities and equity		90,999	43,456

(1) Changes required as a result of the adoption of IFRS 9 from 1 October 2018. Refer to notes 1.9 and 5.4.

(2) The comparative year has been restated in line with the current year presentation. Refer to note 1.10.

The notes on pages 48 to 105 form an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 27 November 2019 and were signed on its behalf by:

David Duffy Ian Smith

Chief Executive Officer Group Chief Financial Officer

Virgin Money UK PLC, Registered number: 09595911

Group financial statements

Consolidated statement of changes in equity

Note	Share capital and share premium £m 4.1.1	Capital reorg' reserve £m 4.1.3	Merger reserve £m 4.1.4	Other equity instru- ments £m 4.1.2	Other reserves							Retained earnings £m	Non control- ling interest £m 4.1.6	Total equity £m
Note	Share capital and share premium £m 4.1.1	Capital reorg' reserve £m 4.1.3	Merger reserve £m 4.1.4	Other equity instru- ments £m 4.1.2	Own shares held £m 4.1.5	Deferred shares reserve £m 4.1.5	Equity based comp' reserve £m 4.1.5	Asset reval reserve £m 4.1.5	Available for sale reserve⁽¹⁾ £m 4.1.5	FVOCI reserve⁽¹⁾ £m 4.1.5	Cash flow hedge reserve £m 4.1.5	Retained earnings £m	Non control- ling interest £m 4.1.6	Total equity £m
As at 1 October 2017	88	(839)	633	450	-	-	8	1	7	-	(1)	3,055	-	3,402
Loss for the year	-	-	-	-	-	-	-	-	-	-	-	(145)	-	(145)
Other comprehensive income/(losses), net of tax	-	-	-	-	-	-	-	1	-	-	(38)	(6)	-	(43)
Total comprehensive income/(losses) for the year	-	-	-	-	-	-	-	1	-	-	(38)	(151)	-	(188)
Dividends paid to ordinary shareholders	-	-	-	-	-	-	-	-	-	-	-	(9)	-	(9)
AT1 distribution paid (net of tax)	-	-	-	-	-	-	-	-	-	-	-	(29)	-	(29)
Transfer from equity based compensation reserve	-	-	-	-	-	-	(7)	-	-	-	-	7	-	-
Ordinary shares issued	1	-	-	-	-	-	-	-	-	-	-	-	-	1
Equity based compensation expensed	-	-	-	-	-	-	9	-	-	-	-	-	-	9
As at 30 September 2018	89	(839)	633	450	-	-	10	2	7	-	(39)	2,873	-	3,186
Changes on adoption of IFRS 9 and IFRS 15 (note 5.4)	-	-	-	-	-	-	-	-	(7)	4	-	(18)	-	(21)
As at 1 October 2018	89	(839)	633	450	-	-	10	2	-	4	(39)	2,855	-	3,165
Loss for the year	-	-	-	-	-	-	-	-	-	-	-	(194)	-	(194)
Other comprehensive (losses)/income net of tax	-	-	-	-	-	-	-	(1)	-	7	13	61	-	80
Total comprehensive (losses)/income for the year	-	-	-	-	-	-	-	(1)	-	7	13	(133)	-	(114)
Acquisition of Virgin Money Holdings (UK) PLC	54	-	1,495	-	(5)	23	-	-	-	-	-	-	422	1,989
Dividends paid to ordinary shareholders	-	-	-	-	-	-	-	-	-	-	-	(45)	-	(45)
AT1 distribution paid (net of tax)	-	-	-	-	-	-	-	-	-	-	-	(33)	-	(33)
Distributions to non‑controlling interests (net of tax)	-	-	-	-	-	-	-	-	-	-	-	(26)	-	(26)
Transfer from equity based compensation reserve	-	-	-	-	-	-	(8)	-	-	-	-	8	-	-
Equity based compensation expensed	-	-	-	-	-	-	4	-	-	-	-	-	-	4
Settlement of Virgin Money Holdings (UK) PLC share awards	3	-	-	-	4	(4)	-	-	-	-	-	1	-	4
AT1 issuance	-	-	-	465	-	-	-	-	-	-	-	-	-	465
Capital note redemption	-	-	-	-	-	-	-	-	-	-	-	34	(422)	(388)
As at 30 September 2019	146	(839)	2,128	915	(1)	19	6	1	-	11	(26)	2,661	-	5,021

(1) Changes required as a result of the adoption of IFRS 9 from 1 October 2018. Refer to notes 1.9 and 5.4.

The notes on pages 48 to 105 form an integral part of these financial statements.

Group financial statements

Consolidated statement of cash flows

for the year ended 30 September	Note	2019 £m	2018 £m
Operating activities
Loss on ordinary activities before tax		(232)	(164)
Adjustments for:
Non-cash or non-operating items included in loss before tax	5.2	(1,035)	(715)
Changes in operating assets	5.2	(2,211)	(1,059)
Changes in operating liabilities	5.2	2,635	(122)
Interest received		2,320	1,108
Interest paid		(745)	(173)
Tax paid		(8)	-
Net cash provided by/(used in) operating activities		724	(1,125)

Cash flows from investing activities
Interest received		27	12
Cash acquired on acquisition of Virgin Money Holdings (UK) PLC		4,106	-
Proceeds from maturity of financial assets at FVOCI		659	-
Proceeds from maturity of available for sale investments		-	245
Proceeds from sale of financial assets at FVOCI		352	-
Proceeds from sale of available for sale investments		-	822
Purchase of financial assets at FVOCI		(1,647)	-
Purchase of available for sale investments		-	(593)
Proceeds from sale of 50% (less one share) consideration in UTM		45	-
Proceeds from sale of property, plant and equipment		3	9
Purchase of property, plant and equipment		(20)	(22)
Purchase and development of intangible assets		(130)	(144)
Net cash provided by investing activities		3,395	329

Cash flows from financing activities
Interest received		-	1
Interest paid		(81)	(94)
Proceeds from issuance of other equity instruments		247	-
Repayment of AT1 classified as non-controlling interest		(160)	-
Redemption and principal repayment on RMBS and covered bonds		(2,003)	(1,372)
Issuance of RMBS and covered bonds		2,227	1,049
Issuance of medium-term notes/subordinated debt		642	497
Amounts drawn down under the TFS		-	1,250
Amounts repaid under the TFS		(1,295)	(900)
Ordinary dividends paid		(45)	(9)
AT1 distributions		(41)	(36)
Distributions to non-controlling interests		(33)	-
Net cash (used in)/provided by financing activities		(542)	386
Net increase/(decrease) in cash and cash equivalents		3,577	(410)
Cash and cash equivalents at the beginning of the year		6,542	6,952
Cash and cash equivalents at the end of the year	5.2	10,119	6,542

Group financial statements

Consolidated statement of cash flows

Reconciliation of movements to liabilities from cash flows arising from financing activities	Term funding scheme £m	Debt securities in issue £m	Total £m
At 1 October 2018	2,254	4,973	7,227

Cash flows:
Issuances	-	2,869	2,869
Redemptions	-	(2,003)	(2,003)
Repayment	(1,295)	-	(1,295)

Non-cash flows:
Acquisition of TFS and debt securities in issue	6,389	3,548	9,937
Fair value adjustments and associated unwind on acquired TFS and debt securities in issue	(48)	8	(40)
Movement in accrued interest	8	7	15
Unrealised foreign exchange movements	-	45	45
Unamortised costs	-	6	6
Other movements	-	138	138
At 30 September 2019	7,308	9,591	16,899

The notes on pages 48 to 105 form an integral part of these financial statements.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation

Overview

This section sets out the Group's accounting policies that relate to the consolidated financial statements as a whole. Where an accounting policy is specific to one note, the policy is described in the note to which it relates. This section also shows new accounting standards, amendments and interpretations which are relevant to the Group, and whether they are effective in 2019 or later years. We explain how these changes are expected to impact the financial position and performance of the Group.

1.1 General information

The Company is a public company limited by shares, incorporated in the United Kingdom under the Companies Act and registered in England and Wales.

The consolidated financial statements comprise those of the Company and its controlled entities, together the 'Group'.

1.2 Basis of accounting

The consolidated financial statements have been prepared in accordance with IFRS as adopted by the EU and in accordance with the provisions of the Companies Act 2006.

The financial information has been prepared under the historical cost convention, as modified by the revaluation of land and buildings, investment properties, and certain other financial assets and liabilities at fair value through profit or loss and other comprehensive income. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

1.3 Presentation of risk, offsetting and maturity disclosures

Certain disclosures required under IFRS 7 'Financial instruments: disclosures' and IAS 1 'Presentation of financial statements' have been included within the audited sections of the Risk management report. Where information is marked as audited, it is incorporated into these financial statements by this cross reference and it is covered by the Independent auditor's report contained within the Group's Annual report and accounts.

1.4 Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic report contained within the Group's Annual report and accounts. In addition, the Risk report included within the Group's Annual report and accounts includes the Group's risk management objectives and the Group's objectives, policies and processes for managing its capital.

In assessing the Group's going concern position as at 30 September 2019, the Directors have considered a number of factors, including the current balance sheet position, the principal and emerging risks which could impact the performance of the Group, the Group's strategic and financial plan and the impact of the acquisition of Virgin Money Holdings (UK) PLC. The assessment concluded that, for the foreseeable future, the Group has sufficient capital to support its operations; has a funding and liquidity base which is strong, robust and well managed with future capacity; and has expectations that performance will continue to improve as the Group's strategy is executed.

As a result of the assessment, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and therefore believe that the Group is well placed to manage its risks successfully in line with its business model and strategic aims. Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements.

1.5 Basis of consolidation

Controlled entities are all entities (including structured entities) to which the Company is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. An assessment of control is performed on an ongoing basis.

Controlled entities are consolidated from the date on which control is established by the Group until the date that control ceases. The acquisition method of accounting is used to account for business combinations other than those under common control. A non‑controlling interest is recognised by the Group in respect of any portion of the total assets less total liabilities of an acquired entity or entities that is not owned by the Group. Post-acquisition, income received and expenses incurred by the entity or entities acquired are included in the consolidated income statement on a line-by-line basis in accordance with the accounting policies set out herein. Balances and transactions between entities within the Group and any unrealised gains and losses arising from those transactions are eliminated in full upon consolidation.

The Group's interests in joint venture entities are accounted for using the equity method and then assessed for impairment in the relevant company's financial statements.

The consolidated financial statements have been prepared using uniform accounting policies.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation continued

1.6 Foreign currency

Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates, the 'functional currency'. The consolidated financial statements are presented in pounds sterling (GBP), which is also the Group's presentation currency, rounded to the nearest million pounds sterling (£m) unless otherwise stated.

Transactions and balances

The Group records an asset, liability, expense or revenue arising from a transaction using the closing exchange rate between the functional and foreign currency on the transaction date. At each subsequent reporting date, the Group translates foreign currency monetary items at the closing rate. Foreign exchange differences arising on translation or settlement of monetary items are recognised in the income statement during the year in which the gains or losses arise.

Foreign currency non-monetary items measured at historical cost are translated at the date of the transaction, with those measured at fair value translated at the date when the fair value is determined. Foreign exchange differences are recognised directly in equity for non-monetary items where any component of associated gains or losses is recognised directly in equity. Foreign exchange differences arising from non-monetary items, whereby the associated gains or losses are recognised in the income statement, are also recognised in the income statement.

1.7 Financial assets and liabilities

Recognition and derecognition

A financial asset or a financial liability is recognised on the balance sheet when the Group becomes party to the contractual provisions of the instrument. Purchases and sales of financial assets classified within fair value through profit or loss or fair value through other comprehensive income are recognised on trade date.

The Group derecognises a financial asset when the contractual cash flows from the asset expire or it transfers the right to receive contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership are transferred. Financial liabilities are derecognised when the Group has discharged its obligation to the contract, or the contract is cancelled or expires.

Classification and measurement

The Group measures a financial asset or liability on initial recognition at its fair value, plus or minus transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability (with the exception of financial assets or liabilities at fair value through profit or loss, where transaction costs are recognised directly in the income statement as they are incurred).

Financial assets

Subsequent accounting for a financial asset is determined by the classification of the asset depending on the underlying business model and contractual cash flow characteristics. This results in classification within one of the following categories:

i. Amortised cost

A financial asset is measured at amortised cost when (1) the asset is held within a business model whose objective is achieved by collecting contractual cash flows; and (2) the contractual terms give rise to cash flows on specified dates which are solely payments of principal and interest on the principal amount outstanding.

ii. Fair value through other comprehensive income

A financial asset is measured at fair value through other comprehensive income (FVOCI) when (1) the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and (2) the contractual terms give rise to cash flows on specified dates which are solely payments of principal and interest on the principal amount outstanding, unless the financial asset is designated at fair value through profit or loss on initial recognition.

iii. Fair value through profit or loss

A financial asset is measured at fair value through profit or loss (FVTPL) if it (1) does not fall into one of the business models described above; (2) is specifically designated as FVTPL on initial recognition in order to eliminate or significantly reduce a measurement mismatch; or (3) is classified as held for trading.

A financial instrument is classified as held for trading if it is acquired principally for the purpose of selling in the near term, forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative not in a qualifying hedge relationship.

Financial liabilities

All financial liabilities are measured at amortised cost, except for financial liabilities at fair value through profit or loss. Such liabilities include derivatives (other than derivatives that are financial guarantee contracts or are designated and effective hedging instruments), and liabilities designated at fair value through profit or loss on initial recognition.

Offsetting

This can only occur, and the net amount be presented on the balance sheet, when the Group currently has a legally enforceable right to set off the recognised amounts and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation continued

1.8 Critical accounting estimates and judgements

The preparation of financial statements requires the use of certain critical accounting estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosed amount of contingent liabilities. Assumptions made at each balance sheet date are based on best estimates at that date. Although the Group has internal control systems in place to ensure that estimates can be reliably measured, actual amounts may differ from those estimates. The Group considers the most significant use of accounting estimates and judgements relate to the following areas:

− impairment provisions on credit exposures (note 3.2);

− effective interest rate (note 2.2);

− deferred tax (note 3.11);

− PPI redress provision and other conduct related matters (note 3.16); and

− retirement benefit obligations (note 3.12).

The valuation of the Group's portfolio of loans and advances held at fair value through profit or loss is no longer considered a critical accounting estimate. While unobservable inputs such as the future expectation of credit losses will continue to impact the value of the portfolio, the balance has reduced to a level such that these are no longer considered to be critical to the Group's results.

1.9 New accounting standards and interpretations

The Group has adopted a number of International Accounting Standards Board (IASB) pronouncements in the current financial year.

IFRS 9 'Financial Instruments'

IFRS 9 'Financial Instruments' was issued in July 2014 and effective for financial periods beginning on or after 1 January 2018. IFRS 9 replaces IAS 39 'Financial Instruments: Recognition and Measurement' in accounting for financial instruments and introduces changes to the classification and measurement of financial instruments and the impairment of financial assets. IFRS 9 also introduces new requirements for hedge accounting but includes an accounting policy choice for entities to continue to follow the hedge accounting requirements under IAS 39 until the IASB has an agreed strategy for macro hedge accounting. Consequently, the Group has decided to exercise the available accounting policy option and has chosen not to adopt the hedge accounting requirements of IFRS 9 at this time. There is no change to the Group's policy on financial liabilities, which are measured at amortised cost, except for trading liabilities and other financial liabilities designated at fair value through profit or loss.

Financial assets are classified under IFRS 9 using a two-step process: (i) a business model assessment, and (ii) an assessment of whether the contractual terms of the financial asset give rise to cash flows which are consistent with that of solely payments of principal and interest.

The accounting policies for loans and advances to customers (note 3.1), impairment provisions on credit exposures (note 3.2) and financial assets at fair value through profit or loss (note 3.5), have been revised, and an accounting policy for the new category of financial assets 'financial assets at fair value through other comprehensive income' introduced (note 3.7).

The accounting policy for financial assets available for sale (note 3.8) is no longer relevant as this financial asset category has been removed with the introduction of IFRS 9. All accounting policies for financial assets under IAS 39 that were applicable for the Group up to and including 30 September 2018 have not been replicated in this results announcement but can be found in the Group's 2018 Annual Report and Accounts.

On transition and as permitted by IFRS 9, the Group has not restated comparative figures, with the impact of adopting IFRS 9 adjusted through retained earnings. Further detail on the transitional impact of IFRS 9 can be found in note 5.4.

IFRS 15 'Revenues from Contracts with Customers'

IFRS 15 'Revenue from Contracts with Customers' was issued in May 2014 and effective for financial periods beginning on or after 1 January 2018. IFRS 15 replaces IAS 11 'Construction Contracts' and IAS 18 'Revenue' as the accounting standard on revenue recognition.

IFRS 15 requires revenue to be reflected as a transfer of goods or services to customers in an amount that recognises the consideration to which the Group expects to be entitled. This is satisfied by following a principles based five-step model for revenue recognition.

The majority of the Group's revenue is interest income generated from financial instruments, with the recognition criteria covered in IFRS 9 and not as part of IFRS 15. Interest income generated from lease contracts is also out of scope for IFRS 15. Fees and commissions together with certain elements of non-interest income are in scope of IFRS 15, with the Group's existing accounting policy materially consistent with the expectations under IFRS 15.

On transition and as permitted by IFRS 15, the Group has not restated comparative figures, with the impact of adopting IFRS 15 adjusted through retained earnings. Further detail on the transitional impact of IFRS 15 can be found in note 5.4.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation continued

1.9 New accounting standards and interpretations continued

Other accounting standards and interpretations

Except where otherwise stated, the following IASB pronouncements did not have a material impact on the Group's consolidated financial statements:

− amendments to IFRS 2: 'Classification and Measurement of Share-based Payment Transactions' issued in June 2016 and effective for financial years beginning on or after 1 January 2018. The amendments provide guidance on the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; classification of share-based payments with a net settlement feature for withholding tax obligations; and accounting for modifications to a share-based payment that change the classification from cash-settled to equity-settled;

− 'Annual Improvements to IFRS Standards 2014-2016 Cycle', issued December 2016 and effective for financial years beginning on or after 1 January 2018. The amendment relates to IAS 28: 'Investments in Associates and Joint Ventures' and the measurement of an associate or joint venture at fair value;

− IFRIC interpretation 22: 'Foreign Currency Transactions and Advance Consideration', issued December 2016 and effective for financial years beginning on or after 1 January 2018. The new interpretation provides requirements on which exchange rate to use in reporting foreign currency transactions (such as revenue transactions) when payment is made or received in advance; and

− amendments to IFRS 9: 'Prepayment Features with Negative Compensation' issued in October 2017 and effective for financial years beginning on or after 1 January 2019. The amendments allow companies to measure particular prepayable financial assets with negative compensation at amortised cost or fair value through other comprehensive income if a specified condition is met, instead of these being measured at fair value through profit or loss. The Group early adopted this amendment with effect from 1 October 2018 in line with the adoption of IFRS 9.

New accounting standards and interpretations not yet adopted

IFRS 16 'Leases' was issued in January 2016 and is effective for financial years beginning on or after 1 January 2019. A separate update on the Group's implementation of this new standard can be found at the end of this section.

There are a number of other standards, interpretations and amendments that have not been applied by the Group in preparing these financial statements as they are either not available for adoption in the EU or are not mandatory for the Group as at 30 September 2019. The pronouncements, while relevant to the Group, are not anticipated to have a material impact and include:

− IFRIC interpretation 23: 'Uncertainty over Income Tax Treatments', issued June 2017 and effective for financial years beginning on or after 1 January 2019. The new interpretation applies to any situation in which there is uncertainty as to whether an income tax treatment is acceptable under tax law and is not limited to actual ongoing disputes;

− 'Annual Improvements to IFRS Standards 2015-2017 Cycle'⁽¹⁾, issued December 2017 and effective for financial years beginning on or after 1 January 2019. The IASB has made amendments to the following standards: IFRS 3 'Business Combinations'; IFRS 11 'Joint arrangements'; IAS 12 'Income Taxes'; and IAS 32 'Borrowing Costs'. The amendment clarifies that the income tax consequences of distributions on financial instruments classified as equity should be recognised alongside the past transactions or events that generated the distributable profits. The Group has assessed that, on adoption of this amendment, the taxation impacts of distributions relating to AT1 securities would be recognised within 'Tax expense' in the income statement. Currently these taxation impacts are recognised directly in 'Retained earnings' within equity. As the amendment impacts only the presentation of taxation impacts but not their calculation, adoption will not result in any change to the Group's net assets but will result in an increase in 'Profit for the year attributable to equity owners' compared to existing practice. If the Group had applied the amendment in these financial statements, the Profit for the year attributable to equity owners would have been £15m (2018: £7m) higher than that disclosed in the income statement, with an equivalent reduction in 'Tax expense';

− amendment to IAS 19: 'Plan amendment, curtailment or settlement'⁽¹⁾ issued in February 2018 and effective prospectively for financial years beginning on or after 1 January 2019. The amendments clarify that after a plan event companies should use these updated assumptions to measure current service cost and net interest for the remainder of the reporting period;

− amendments to references to the 'Conceptual Framework in IFRS Standards'⁽¹⁾, issued in March 2018 and effective for financial years beginning on or after 1 January 2020. The amendments were issued following the IASB's publication of a revised version of its Conceptual Framework for Financial Reporting and updates the references in IFRS standards to previous versions of the Conceptual Framework;

− amendment to IAS 28: 'Long-term Interests in Associates and Joint Ventures' issued in October 2017 and effective for financial years beginning on or after 1 January 2019. The amendment clarifies that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests);

− amendments to IAS 1: 'Presentation of Financial Statements' and IAS 8: 'Accounting Policies, Changes in Accounting Estimates and Errors'⁽¹⁾ issued in October 2018 and effective prospectively for financial years beginning on or after 1 January 2020. The amendments provide clarification on the definition of 'material';

− amendments to IFRS 3: 'Business Combinations'⁽¹⁾ issued in October 2018 and effective prospectively for financial years beginning on or after 1 January 2020. The amendment assists in the determination of whether an acquired set of activities and assets meets the test of being classed as a business; and

− Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)⁽¹⁾ issued in September 2019 and effective for financial years beginning on or after 1 January 2020. The amendments provide temporary reliefs which enable hedge accounting to continue during the period of uncertainty before the replacement of an existing interest rate benchmark with an alternative nearly risk-free interest rate (an RFR). The Group is working through the implications of the amendment ahead of implementation from 1 October 2020.

(1) Not yet endorsed by the EU.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation continued

1.9 New accounting standards and interpretations continued

Update on IFRS 16: 'Leases'

IFRS 16 'Leases' was issued in January 2016 and replaces IAS 17 'Leases', IFRIC 4 'Determining whether an Arrangement contains a Lease', SIC-15 'Operating Leases-Incentives' and SIC-27 'Evaluating the Substance of Transactions Involving the Legal Form of a Lease'. IFRS 16 is effective for annual periods beginning on or after 1 January 2019 and was EU endorsed on 31 October 2017. The Group will apply the standard from 1 October 2019.

IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and will result in most leases for lessees being brought on to the balance sheet under a single lease model, removing the distinction between finance and operating leases. It requires a lessee to recognise a 'right-of-use' asset and a lease liability. Lessor accounting remains largely unchanged.

The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to restore the underlying asset, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the incremental borrowing rate is used for the discount rate.

The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in amount expected to be payable under a residual value guarantee, or if there is a change in the assessment of whether a purchase, extension or termination option will be exercised.

When a lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-to-use asset or is recorded in the income statement if the carrying amount of the right-of-use asset has been reduced to zero.

Transition approach and use of practical expedients

The Group will elect to apply the practical expedient to grandfather the assessment of which transactions are leases. It will apply IFRS 16 only to contracts that were previously identified as leases by IAS 17. Contracts that were not identified as leases under IAS 17 and IFRIC 4 will not be reassessed. Therefore, the definition of a lease under IFRS 16 will only be applied to contracts entered into or changed on or after 1 October 2019.

The Group will also elect to apply the recognition exemptions for short-term leases (with a remaining lease term of less than 12 months) and low value leases. Lease payments associated with these leases will be recognised as an expense on a straight line basis over the term of the lease.

The Group will apply IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings as at 1 October 2019 and comparatives are not restated.

Under the modified approach, at transition, lease liabilities will be measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 October 2019.

For the purposes of applying the modified retrospective approach, the Group will elect to:

· measure the right-of-use asset at an amount equal to the lease liability at the date of initial application adjusted by the amount of any prepaid or accrued lease payments;

· apply the exemption not to recognise right-of-use assets and liabilities for leases with less than 12 months of lease term; and

· apply the practical expedient to rely on its assessment whether the lease was onerous under IAS 37 and therefore adjust the right-of-use asset at the date of initial application by the onerous lease provision rather than conduct an impairment test.

Key accounting judgements

The Group undertook a technical assessment of IFRS 16. The two key accounting judgements in relation to IFRS 16 are the determination of the discount rates and lease term.

When measuring the lease liability, lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the incremental borrowing rate is used for the discount rate. Under the modified retrospective approach, the Group will use its incremental borrowing rate at the date of initial application as the discount rate. Judgement will be required to determine an appropriate incremental borrowing rate.

When determining lease term, an assessment is required of whether an extension or termination option will be exercised. This is reassessed if there is a significant event or significant change in circumstances within the Group's control. Judgement is required when making this assessment.

Impact of transition to IFRS 16

On transition to IFRS 16, the Group estimates it will recognise right-of-use assets of approximately £196m and lease liabilities of approximately £207m, with no material impact to retained earnings. The Group will not restate comparative periods.

The Group continues to refine, monitor and validate certain elements of the IFRS 16 model and related controls ahead of full reporting of IFRS 16 impacts later in 2020.

The standard is not expected to have any significant impact on lessor accounting by the Group.

Group financial statements

Notes to the consolidated financial statements

Section 1: Basis of preparation continued

1.10 Prior period comparatives

The prior period comparatives in the balance sheet have been restated in line with the current year presentation. £34m of derivative collateral in relation to clearing houses has been reclassified between other liabilities and due to other banks and £143m has been reclassified between other assets and due from other banks. In addition, certain line items within assets and liabilities which are not material have been aggregated with other similar line items.

Section 2: Results for the year continued

2.1 Segment information

The Group's operating segments are operating units engaged in providing different products or services and whose operating results and overall performance are regularly reviewed by the Group's Chief Operating Decision Maker, the Executive Leadership Team.

Following the acquisition of Virgin Money Holdings (UK) PLC and up until 30 September 2019, the business has been assessed and reported to the Group's Chief Operating Decision Maker as a single segment, with decisions being made on the performance of the Group on that basis.

With effect from 1 October 2019, the business has been aligned to a three operating segments model: Business, Personal and Mortgages. Reporting on this segmental basis will be included in the 2020 Interim Results.

Summary income statement

	2019 £m	2018 £m
Net interest income	1,514	851
Non-interest income	235	156
Total operating income	1,749	1,007
Operating and administrative expenses	(1,729)	(1,130)
Impairment losses on credit exposures	(252)	(41)
Segment loss before tax	(232)	(164)

Average interest earning assets	86,362	39,417

The Group has no operations outside the UK and therefore no secondary geographical area information is presented. The Group is not reliant on a single customer. Liabilities are managed on a centralised basis.

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year continued

2.2 Net interest income

Accounting policy

Interest income is reflected in the income statement using the effective interest method which discounts the estimated future cash payments or receipts over the expected life of the financial instrument to the gross carrying amount of the non-credit impaired financial asset. Interest expense is reflected in the income statement using the same effective interest method on the amortised cost of the financial liability.

When calculating the effective interest rate, cash flows are estimated considering all contractual terms of the financial instrument (e.g. prepayment, call and similar options) excluding future credit losses. The calculation includes all amounts paid or received that are an integral part of the effective interest rate such as transaction costs and all other premiums or discounts. Where it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of financial instruments), the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments) are used.

Loan origination and commitment fees are recognised within the effective interest rate calculation. Non-utilisation of a commitment fee is recognised as revenue upon expiry of the agreed commitment period. Loan related administration and service fees are recognised as revenue over the period of service.

Interest income on financial assets in impairment Stages 1 and 2 is recognised on the unwind of the discount from the initial recognition of the expected credit loss (ECL) using the original effective rate of interest. Once a financial asset or group of similar financial assets has been categorised as credit-impaired (Stage 3), interest income is recognised on the net carrying value (after the ECL allowance) using the asset's original effective interest rate. The interest income for purchase or originated credit impaired financial assets is calculated using the credit-adjusted effective interest rate applied to the amortised cost of the financial asset from initial recognition. The Group recognises and presents the reversal of expected credit losses following the curing of a credit impaired financial asset as a reversal of impairment losses.

Interest income and interest expense on hedged assets and liabilities and financial assets and liabilities designated as fair value through profit or loss are also recognised as part of net interest income.

Interest income and expense on derivatives economically hedging interest bearing financial assets or liabilities (but not designated as hedging instruments) and other financial assets and liabilities held at fair value through profit or loss (either mandatory or by election) are also recognised within net interest income. With effect from 1 October 2018, IAS 1 'Presentation of financial statements' prohibits the inclusion of such interest within 'Interest income'. Therefore interest income or expense on these items is now presented within 'Other similar interest'. Comparatives have been restated.

Critical accounting estimates and judgements

Effective interest rate (EIR)

Following the acquisition of Virgin Money Holdings (UK) PLC, the Group considered the application of EIR in relation to its reported amounts of assets, liabilities, revenues and expenses. The Group has concluded that sufficient judgement is now exercised on EIR for it to be included within its disclosures on critical accounting estimates and judgements.

The EIR is determined at initial recognition based upon management's best estimate of the future cash flows of the financial instrument. In the event these estimates are revised at a later date, a present value adjustment to the carrying value of the EIR asset may be recognised in profit or loss. Such adjustments can introduce income statement volatility and consequently the EIR method introduces a source of estimation uncertainty. Management considers that material risk of adjustments exists in relation to the application of EIR to the Group's mortgage and credit card portfolios.

Mortgages

The main accounting judgement when assessing the cash flows within the Group's secured lending EIR model is the product life (including assumptions based on observed historic customer behaviour when in a standard variable rate (SVR) period) and the early repayment charge income receivable. The Group currently assumes that 83% of customers will have fully repaid or re-mortgaged within two months of reverting to SVR. If this were to increase to 90%, the loans and advances to customers balance would reduce by £20m with the adjustment recognised in net interest income.

Credit cards

The Group measures credit card EIR by modelling expected cash flows based on assumptions of future customer behaviour, which is supported by observed experience. Key behavioural assumptions include an estimation of utilisation of available credit, transaction and repayment activity and the retention of the customer balance after the end of a promotional period.

The EIR of new business written in the current year is 5.26% while that on acquired portfolios nearing the end of their promotional periods is 8.22% (this excludes those which were out of their promotional periods at the date of acquisition and therefore do not form part of the EIR modelling). Revisions to the estimates of future cash flows (compared to the original assumptions) that would have resulted in the EIR across all cohorts being reduced by 25bps, would lead to a £16m decrease in the loans and advances to customers balance. This present value adjustment would be recognised in interest income.

The Group holds an appropriate level of model risk reserve across both asset classes to mitigate the risk of estimation uncertainty.

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year continued

2.2 Net interest income continued

	2019 £m	2018 £m
Interest income
Loans and advances to customers	2,320	1,057
Loans and advances to other banks	72	26
Financial assets at fair value through other comprehensive income	27	-
Financial assets available for sale	-	12
Other interest income	1	3
Total interest income	2,420	1,098

Other similar interest
Financial assets at fair value through profit or loss	21	29
Financial liabilities at fair value through profit or loss	-	(1)
Derivatives economically hedging interest bearing assets	(8)	(13)
Total other similar interest	13	15

Less: interest expense and similar charges
Customer deposits	(580)	(148)
Debt securities in issue	(185)	(94)
Due to other banks	(144)	(18)
Other interest expense	(10)	(2)
Total interest expense and similar charges	(919)	(262)
Net interest income	1,514	851

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year continued

2.3 Non-interest income

Accounting policy

Gains less losses on financial instruments at fair value

This includes fair value gains and losses from three distinct activities:

− derivatives classified as held for trading - the full change in fair value of trading derivatives is recognised inclusive of interest income and expense arising on those derivatives except when economically hedging other assets and liabilities at fair value as outlined in note 2.2;

− other financial assets and liabilities designated at fair value through profit or loss - these relate principally to the Group's fixed interest rate loan portfolio and related term deposits (note 3.5), which were designated at inception as fair value through profit or loss. The fair value of these loans is derived from the future loan cash flows using appropriate discount rates and includes adjustments for credit risk and credit losses. The valuation technique used is reflective of current market practice; and

− hedged assets, liabilities and derivatives designated in hedge relationships - fair value movements are recognised on both the hedged item and hedging derivative in a fair value hedge relationship, the net of which represents hedge ineffectiveness, and hedge ineffectiveness on cash flow hedge relationships (note 3.6).

Fees and commissions

Fees and commissions receivable which are not an integral part of the effective interest rate are recognised as income as the Group fulfils its performance obligations. The Group's principal performance obligations arising from contracts with customers are in respect of current accounts, debit cards and credit cards. The Group provides the service and consequently generates the fees monthly; the fees are recognised in income on this basis. Costs incurred to generate fee and commission income are charged to fees and commissions expense as they are incurred.

Income from insurance, protection and investments

This includes management fees generated from the sale of and management of funds, Stocks and Shares Individual Savings Accounts ('ISAs') and pensions to retail investors. The contractual performance obligations to investors are aligned to the obligations required of UK authorised fund managers.

In return for providing these continuous services, a management charge (expressed on an annualised basis to customers) is levied on investors' funds under management. This charge is accrued by the products via adjustment to the closing unit prices of investors' holdings on a daily basis.

	2019 £m	2018 £m
Gains less losses on financial instruments at fair value
Held for trading derivatives	16	16
Financial assets and liabilities at fair value⁽¹⁾	3	(13)
Ineffectiveness arising from fair value hedges (note 3.6)	(22)	-
Ineffectiveness arising from cash flow hedges (note 3.6)	(14)	(6)
	(17)	(3)
Other operating income
Net fee and commission income	195	141
Margin on foreign exchange derivative brokerage	19	18
Gain on sale of financial assets at fair value through other comprehensive income	3	-
Gain on sale of Virgin Money Unit Trust Managers Limited⁽²⁾	35	-
Share of joint venture results	(1)	-
Other income	1	-
	252	159
Total non-interest income	235	156

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year continued

2.3 Non-interest income continued

Non-interest income includes the following fee and commission income disaggregated by income type:

	2019 £m	2018 £m
Current account and debit card fees	117	114
Credit cards	42	13
Insurance, protection and investments	37	13
Non-banking and other fees⁽³⁾	31	32
Total fee and commission income	227	172
Total fee and commission expense	(32)	(31)
Net fee and commission income	195	141

(1) A credit risk gain on other assets and liabilities at fair value of £2m has been recognised in the current year (2018: £3m gain).

(2) The Group ceased generating management fees directly from the sale and management of funds products from 31 July 2019 when it sold 50% (less one share) of its shareholding in Virgin Money Unit Trust Managers Limited (UTM) to Aberdeen Standard Investments. A gain on sale of £35m was recorded on the partial disposal. Consequently, UTM became a joint venture and is accounted for under the equity method from the date of disposal.

(3) Non-banking and other fees include mortgages, invoice and asset finance and ATM fees.

2.4 Operating and administrative expenses before impairment losses

Accounting policy

Personnel expenses primarily consist of wages and salaries, accrued bonus and social security costs arising from services rendered by employees during the financial year.

The Group recognises bonus costs where it has a present obligation that can be reliably measured. Bonus costs are recognised over the relevant service period required to entitle the employee to the reward.

The Group's accounting policies on pension expenses and equity based compensation are included in notes 3.12 and 4.2 respectively.

	2019 £m	2018 £m
Personnel expenses	421	223
Depreciation and amortisation expense (notes 3.9, 3.10)	108	89
Other operating and administration expenses	1,200	818
Total operating and administrative expenses	1,729	1,130

Personnel expenses comprise the following items:

	2019 £m	2018 £m
Salaries, wages and non-cash benefits and social security costs	256	139
Defined contribution pension expense	47	33
Defined benefit pension expense (note 3.12)	9	2
Equity based compensation (note 4.2)	4	9
Other personnel expenses	105	40
Personnel expenses	421	223

On 26 October 2018, the High Court delivered a judgement confirming that defined benefit schemes should equalise pension benefits for men and women in relation to GMP and concluded on the methods that were appropriate. The estimated increase in the Scheme liabilities at the date of the judgement was £11m, which was based on a number of assumptions and the actual impact may be different. This has been reflected as a past service cost within the defined benefit pension expense above, and in the closing net accounting surplus of the Scheme (note 3.12).

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year continued

2.4 Operating and administrative expenses before impairment losses continued

The average number of FTE employees of the Group during the year was made up as follows:

	2019 Number	2018 number
Managers	2,989	2,161
Clerical staff	5,714	3,608
	8,703	5,769

The average monthly number of employees was 9,787 (2018: 6,461).

All staff are contracted employees of the Group and its subsidiary undertakings. The average figures above do not include contractors.

Other items of significance to the Group which are included within operating and administrative expenses are:

	2019 £m	2018 £m
Restructuring costs	154	-
Consent solicitation	18	-
Legacy restructuring and separation	5	46
Virgin Money Holdings (UK) PLC transaction costs	11	37
SME transformation	30	16
Intangible asset write-off	127	-
PPI redress expense (note 3.16)	415	352
Other conduct expenses (note 3.16)	18	44
Operating lease charges	35	26

Restructuring costs represents the Group's integration costs as it embarks upon a three year programme to fully integrate both banks. The legacy restructuring and separation costs relate to the Sustain programme and demerger from NAB, both of which completed in the current period.

Incidental to the integration programme, a £127m charge was recognised in the year following a review of the Group's software estate, which identified a number of core assets (including £70m in relation to the Virgin Money Digital Bank asset) that are no longer of value to the Group's future strategy and therefore required to be written down.

Auditor's remuneration included within other operating and administrative expenses:

	2019 £'000	2018 £'000
Fees payable to the Company's auditor for the audit of the Company's financial statements	21	21
Fees payable to the Company's auditor for the audit of the Company's subsidiaries⁽¹⁾	2,967	1,593
Total audit fees	2,988	1,614
Audit related assurance services	436	120
Other assurance services	289	700
Total non-audit fees	725	820
Fees payable to the Company's auditor in respect of associated pension schemes	88	84
Total fees payable to the Company's auditor	3,801	2,518

(1) Includes the audit of the Group's structured entities, and the audit of Virgin Money Holdings (UK) PLC subsidiaries for the year ending 31 December 2019.

Non-audit services of £725k (2018: £820k) performed by the auditor during the year included the review of the Interim Financial Report; PRA Written Auditor Reporting; agreed upon procedures under the Conduct Indemnity arrangement with NAB; comfort letters for the global medium-term note programme and AT1 issuance; and client money reviews. The decrease in the year is principally due to reporting accountant procedures in relation to the acquisition of Virgin Money Holdings (UK) PLC.

In addition to the above, out of pocket expenses of £161k (2018: £49k) were borne by the Group, principally related to reimbursement of travel expenses incurred by staff when performing the above services.

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year continued

2.5 Taxation

Accounting policy

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it is related to items recognised directly in equity, in which case the tax is also recognised in equity.

Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities are recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

	2019 £m	2018 £m
Current tax
Current year	20	8
Adjustment in respect of prior years	(5)	8
	15	16
Deferred tax (note 3.11)
Current year	(56)	(1)
Adjustment in respect of prior years	3	(34)
	(53)	(35)
Tax credit for the year	(38)	(19)

The tax assessed for the year differs from that arising from applying the standard rate of corporation tax in the UK of 19%. A reconciliation from the credit implied by the standard rate to the actual tax credit is as follows:

	2019 £m	2018 £m
Loss on ordinary activities before tax	(232)	(164)
Tax credit based on the standard rate of corporation tax in the UK of 19% (2018: 19%)	(44)	(31)
Effects of:
Disallowable expenses	50	42
Conduct indemnity adjustment	10	(5)
Deferred tax assets recognised	(49)	(8)
Non-taxable gain on partial disposal of UTM (note 2.3)	(7)	-
Bank levy	1	-
Impact of rate changes	3	9
Adjustments in respect of prior years	(2)	(26)
Tax credit for the year	(38)	(19)

Disallowable expenses represent, in the main, conduct charges that are not deductible in computing taxable profits, and non‑deductible transaction costs predominantly in relation to the acquisition of Virgin Money Holdings (UK) PLC.

The increase in the conduct indemnity adjustment reflects a change in anticipated quantum and timing of the use of historic indemnified losses, following the acquisition of Virgin Money Holdings (UK) PLC.

Deferred tax assets recognised represent previously unrecognised historic losses that are now brought onto the balance sheet in accordance with the Group's established methodology.

Group financial statements

Notes to the consolidated financial statements

Section 2: Results for the year continued

2.6 Earnings per share (EPS)

Accounting policy

Basic earnings per share

Basic earnings per share is calculated by taking the profit attributable to ordinary shareholders of the parent company, deducting the weighted-average of the Group's holdings of its own shares, and then dividing this by the weighted-average number of ordinary shares outstanding during the period.

Diluted earnings per share

This requires the weighted-average number of ordinary shares in issue to be adjusted to assume conversion of all dilutive potential ordinary shares. These arise from awards made under equity based compensation schemes. Share awards with performance conditions attaching to them are not considered to be dilutive unless these conditions have been met at the reporting date.

The Group presents basic and diluted loss per share data in relation to the ordinary shares of Virgin Money UK PLC.

	2019 £m	2018 £m
Loss attributable to ordinary shareholders	(268)	(181)
Tax relief on AT1 distribution attributable to ordinary equity holders	8	7
Tax relief on non-controlling interest distributions attributable to ordinary equity holders	7	-
Loss attributable to ordinary equity holders for the purposes of basic and diluted EPS	(253)	(174)

	2019 Number of shares (million)	2018 Number of shares (million)
Weighted-average number of ordinary shares in issue
- Basic	1,414	885
- Diluted	1,414	885
Basic loss per share (pence)	(17.9)	(19.7)
Diluted loss per share (pence)	(17.9)	(19.7)

Basic earnings per share has been calculated after deducting 1m (2018: Nil) ordinary shares representing the weighted-average of the Group's holdings of its own shares. The calculation of the diluted earnings per share excludes conditional awards of over 1m (2018: 1m) ordinary shares made under equity based compensation schemes. These are considered anti-dilutive due to the Group making a loss in both the current and the prior year.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities

3.1 Loans and advances to customers

Accounting policy

Loans and advances to customers arise when the Group provides money directly to a customer and includes mortgages, term lending, overdrafts, credit card lending, lease finance and invoice financing. They are recognised initially at fair value and are subsequently measured at amortised cost, using the effective interest method, adjusted for expected credit losses (note 3.2). They are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership.

Leases entered into by the Group as lessor, where the Group transfers substantially all the risks and rewards of ownership to the lessee, are classified as finance leases. The leased asset is not held on the Group balance sheet; instead, a finance lease is recognised representing the minimum lease payments receivable under the terms of the lease, discounted at the rate of interest implicit in the lease. Interest income is recognised in interest receivable, allocated to accounting periods to reflect a constant periodic rate of return.

In certain limited circumstances, the Group has elected to apply the fair value through profit or loss measurement option to some debt instruments that would otherwise be classified at amortised cost (note 3.5).

	2019 £m	2018⁽¹⁾ £m
Gross loans and advances to customers	73,246	32,943
Impairment provisions on credit exposures (note 3.2)	(362)	(195)
Fair value hedge adjustment	211	-
	73,095	32,748

(1) The prior year comparative has been restated in line with the current year presentation (note 1.10).

The Group has a portfolio of fair valued business loans of £253m (2018: £362m) which are classified separately as financial assets at fair value through profit or loss on the balance sheet (note 3.5). Combined with the above, this is equivalent to total loans and advances of £73,348m (2018: £33,110m).

The fair value hedge adjustment represents an offset to the fair value movement on derivatives designated in hedge relationships to manage the interest rate risk inherent in the Group's fixed rate mortgage portfolio.

The Group has transferred a proportion of mortgages to the securitisation and covered bond programmes (note 3.3).

Lease finance

The Group leases a variety of assets to third parties under finance lease arrangements, including vehicles and general plant and machinery. The cost of assets acquired by the Group during the year for the purpose of letting under finance leases and hire purchase contracts amounted to £38m (2018: £20m) and £408m (2018: £399m) respectively.

Finance lease and hire purchase receivables

	2019 £m	2018 £m
Gross investment in finance lease and hire purchase receivables
Due within 1 year	276	269
Due within 1 to 5 years	386	376
Due after more than 5 years	23	15
	685	660
Unearned income	(36)	(32)
Net investment in finance lease and hire purchase receivables	649	628

The total receivables from finance leases and hire purchase contracts were £60m (2018: £32m) and £589m (2018: £596m) respectively.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.2 Impairment provisions on credit exposures

Accounting policy

At each reporting date, the Group assesses financial assets measured at amortised cost, as well as loan commitments and financial guarantees not measured at fair value through profit or loss, for impairment. The impairment loss allowance is calculated using an expected credit loss (ECL) methodology. The overarching objective is to calculate an impairment loss allowance that reflects: (i) an unbiased and probability weighted amount; (ii) the time value of money which discounts the impairment loss; and (iii) reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

ECL methodology

The ECL methodology is based upon the combination of probability of default (PD), loss given default (LGD) and exposure at default (EAD) estimates that consider a range of factors which have a direct bearing on credit risk and consequently the required level of impairment loss provisioning.

The future cash flows used within the ECL calculation are estimated based on the contractual cash flows of the assets, adjusted for the probability of default occurring and taking account of historical loss experience. In addition, the Group uses reasonable and supportable forecasts of future economic conditions to estimate the ECL allowance. The use of such judgements and reasonable estimates is considered by management to be an essential part of the process which does not impact reliability. The methodology and assumptions are reviewed regularly and updated as necessary.

The ECL assessment is performed on either a collective or individual basis as follows:

Collectively assessed: these assets are assessed and provided for on a group or a pooled basis due to the existence of shared risk characteristics. Financial assets with shared risk characteristics are assessed in the sense that assets with similar characteristics at a given point in time will tend to display a similar PD profile but only for as long as they retain those similar characteristics. In particular, movement between stages will tend to occur when individual assets have deteriorated, rather than because a proportion of a pool is presumed to have deteriorated.

Individually assessed: these assets are assessed and provided for at the financial instrument level, with the assessment (which is governed by the Group's Credit Policy) taking into consideration a range of likely potential outcomes relating to each customer and their associated financial assets.

It is not possible for an asset to have both an individual and a collectively assessed ECL provision. Regardless of the calculation basis, the Group generates an allowance at the individual financial instrument level.

Significant increase in credit risk assessment

The impairment loss allowance is calculated as either a 12-month or lifetime ECL depending on whether the financial asset has exhibited a significant increase in credit risk (SICR) since origination or has otherwise become credit impaired as at the reporting date.

The Group uses a PD threshold curve (distinct for each portfolio) to assess for a SICR and also utilises the 30 days past due and 90 days past due backstops for recognising SICR and credit impairment effectively.

The Group has not made use of the low credit risk option under IFRS 9 for loans and advances at amortised cost.

Impairment staging

Financial assets where a 12-month ECL is recognised are classified as Stage 1; financial assets which are considered to have experienced a SICR are classified as Stage 2; and financial assets which have defaulted or are otherwise considered to be credit impaired are classified as Stage 3. The Group adopts the backstop position that a financial asset has experienced a SICR (and therefore falls into Stage 2) when it reaches 30 days past due, and that a financial asset becomes credit impaired (and therefore falls into Stage 3) when it reaches 90 days past due.

In addition to the above stages, purchase or originated credit-impaired (POCI) financial assets are those which are assessed as being credit impaired upon initial recognition. Once a financial asset is classified as POCI, it remains there until de-recognition irrespective of its credit quality. POCI financial assets are disclosed separately from those financial assets in Stage 3. The Group regards the date of acquisition as the origination date for purchased portfolios.

Financial assets can move between stages when the relevant staging criteria are no longer satisfied. If the level of impairment loss reduces in a subsequent period, the previously recognised impairment loss allowance is reversed and recognised in the income statement.

Write-offs and recoveries

When there is no reasonable expectation of recovery for a loan, it is written off against the related provision. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the impairment charge in the income statement.

The Group's impairment policy for debt instruments at fair value through other comprehensive income is included in note 3.7. The impact of the ECL methodology on the Group's cash and balances with central banks and due from other banks balances is immaterial.

Critical accounting estimates and judgements

The use of an ECL methodology under IFRS 9 requires the Group to apply estimates and exercise judgement when calculating an impairment allowance for credit exposures. The most significant of these are detailed below.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.2 Impairment provisions on credit exposures continued

Accounting policy continued

Accounting estimates

Asset lifetimes

The calculation of the ECL allowance is also dependent on the expected life of the Group's portfolios. The Group assumes the remaining contract term as the maximum period to consider credit losses wherever possible. For the Group's credit card and overdraft portfolios, behavioural factors such as observed retention rates and other portfolio level assumptions are taken into consideration in determining the estimated asset life.

Shortening the Group's credit card portfolio lifetime assumption by three months would equate to an ECL decrease of £1m.

Economic scenarios

The Group relies on three economic scenarios over a five-year forecast period when calculating the ECL allowance: base case, mild upside and severe downside. These contain a number of key economic assumptions such as unemployment rates, base rates and inflation, which ensure that non-linear relationships between different forward-looking scenarios and their associated credit losses do not materially impact the ECL calculation. The base case used by the Group for IFRS 9 modelling is also used for the Group's internal planning purposes.

The Group sources forward-looking scenarios and a range of macroeconomic conditions over the forecast period from a third-party provider. The Group considers that the resulting 'mild upside' and 'severe downside' scenarios provide a balance in reaching an ECL calculation that is free from bias and addresses concerns around the potential for non-linearity of the ECL calculation. The Group applied the following weightings to the chosen scenarios:

	30 september 2019	1 october 2018
Mild upside	20%	25%
Base case	60%	60%
Severe downside	20%	15%

The scenario weightings are considered and debated by an internal review panel and then recommended and approved for use in the IFRS 9 models by ALCO. The slight increase in the weightings towards the mild upside scenario on adoption of IFRS 9 reflected the relative conservatism in the Group's base case, which was closer to the chosen downside scenario. The weightings applied at 30 September 2019 were revised to reflect a general deterioration in future economic outlook relative to the base case.

The calculation of the Group's impairment provision is sensitive to changes in the chosen weightings, with the effect on the closing impairment allowance of £362m as a result of applying a 100% weighting separately to each scenario producing the following: Base case - an ECL reduction of £11m; Mild upside - an ECL reduction of £27m; and Severe downside - an ECL increase of £65m.

Accounting judgements

Significant increase in credit risk

Considerable management judgement is required in determining the point at which a SICR has occurred, as this is the point at which a 12-month ECL is replaced by a lifetime ECL. Management has developed a series of triggers that indicate where a SICR has occurred when assessing exposures for the risk of default occurring at each reporting date compared to the risk at origination. There is no single factor that influences this decision, rather a combination of different criteria that enable management to make an assessment based on the quantitative and qualitative information available. This includes the impact of forward-looking macroeconomic factors but excludes the existence of any collateral implications.

Indicators of a significant increase in credit risk include deterioration of the residual lifetime PD by set thresholds which are unique to each product portfolio, non-default forbearance programmes, and watch list status. The Group adopts the backstop position that a significant increase in credit risk will have taken place when the financial asset reaches 30 days past due.

Changes to these set thresholds can impact staging, driving accounts into higher stages. If a further 10% of the business population in Stage 1 were to move Stage leading to an increase in ECL held by approximately £13m. In contrast, if a further 10% of the credit card population in Stage 1 were to experience a non-default related forbearance issue and migrate to Stage 2, the level of ECL held would increase by £52m. In mortgages this would increase by £7m. Introducing a PD stress, which increased PDs upwards by 20% for all portfolios, would result in an overall increase in ECLs of £54m.

Definition of default

The PD of a credit exposure is a key input to the measurement of the ECL allowance. Default occurs when there is evidence that a customer is experiencing significant financial difficulty which is likely to affect the ability to repay amounts due. The Group utilises the 90 days past due backstop for default purposes.

Post Model Adjustments (PMAs)

The ECL provision is further impacted by management judgements in the form of PMAs, which were also a feature of impairment provisioning under IAS 39. These are judgements that increase the collectively assessed modelled output where management consider that not all of the risks identified in a particular product segment have been, or are capable of being, accurately reflected within those models. This can be the case when modelled inputs are not sufficiently sensitive to sudden changes in economic conditions e.g. Brexit. PMAs can also be applied when assessing potential recoveries on individually assessed provisions where factors such as customer and economic specific conditions need to be considered.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.2 Impairment provisions on credit exposures continued

Movement in impairment provisions on credit exposures

	2019 £m	2018 £m
Opening balance at 30 September	195	210
IAS 39 restatement	(195)	-
IFRS 9 adoption	224	-
Charge for the year	252	41
Amounts written off	(142)	(68)
Recoveries of amounts written off in previous years	28	13
Other	-	(1)
Closing balance	362	195

Following the adoption of IFRS 9 on 1 October 2018, the Group impairment provision is classified by stage allocation as follows:

	2019 £m	2018 £m
Stage 1	79	-
Stage 2	168	-
Stage 3	118	-
POCI	(3)	-
	362	-

The transitional stage allocation on adoption date of 1 October 2018 is presented in the Risk management section on page 27.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.3 Securitisation and covered bond programmes

Accounting policy

The Group sponsors the formation of structured entities, primarily for the purpose of facilitation of asset securitisation and covered bond transactions, the full details of which can be found in note 6.2 to the Company financial statements. The Group has no shareholding in these entities, but is exposed, or has rights, to variable returns and has the ability to affect those returns. The entities are consolidated in the Group's financial statements in accordance with note 1.5.

Securitisation

The Group has securitised a portion of its retail mortgage loan portfolio under both master trust (Lanark & Lannraig) and standalone (Gosforth) securitisation programmes. The securitised mortgage loans have been assigned at principal value to bankruptcy remote structured entities. The securitised debt holders have no recourse to the Group other than the principal and interest (including fees) generated from the securitised mortgage loan portfolio.

The externally held securitised notes in issue are included within debt securities in issue (note 3.14). There are a number of notes held internally by the Group which are used as collateral for repurchases and similar transactions or for credit enhancement purposes.

Covered bond

A subset of the Group's retail mortgage loan portfolio has been ring-fenced and assigned to bankruptcy remote limited liability partnerships, Clydesdale Covered Bond No 2 LLP and Eagle Place LLP, to provide a guarantee for the obligations payable on the covered bonds issued by the Group.

The covered bond partnerships are consolidated with the mortgage loans retained on the consolidated balance sheet and the covered bonds issued included within debt securities in issue (note 3.14). The covered bond holders have dual recourse: firstly, to the bond issuer on an unsecured basis; and secondly, to the appropriate LLP under the Covered Bond Guarantee secured against the mortgage loans.

Under both the securitisation and covered bond programmes, the mortgage loans do not qualify for balance sheet derecognition because the Group remains exposed to the majority of the risks and rewards of the mortgage loan portfolio, principally the associated credit risk. The Group continues to service the mortgage loans in return for an administration fee and is also entitled to any residual income after all payment obligations due under the terms of the programmes and senior programme expenses have been met. In the mortgage originator a deemed loan liability is recognised for the proceeds of the funding transaction.

Significant restrictions

Where the Group uses its financial assets to raise finance through securitisations and the sale of securities subject to repurchase agreements, the assets become encumbered and are not available for transfer around the Group.

The assets and liabilities in relation to securitisation and covered bonds in issue at 30 September are as follows:

	2019		2018
	Loans and advances securitised £m	notes in issue £m	Loans and advances securitised £m	notes in issue £m
Securitisation Programmes
Lanark Master Issuer	5,009	4,597	5,479	4,536
Lannraig Master Issuer	1,032	838	933	899
Gosforth 2014-1	372	385	-	-
Gosforth 2015-1	707	630	-	-
Gosforth 2016-1	1,142	1,048	-	-
Gosforth 2016-2	701	579	-	-
Gosforth 2017-1	934	852	-	-
Gosforth 2018-1	1,353	1,267	-	-
	11,250	10,196	6,412	5,435
Less held by the Group		(5,154)		(2,486)
		5,042		2,949
Covered Bond Programmes
Clydesdale Covered Bond No 2 LLP	1,253	776	1,389	732
Eagle Place LLP	2,622	1,126	-	-
	3,875	1,902	1,389	732

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.3 Securitisation and covered bond programmes continued

The fair values of financial assets and associated liabilities relating to the securitisation programmes where the counterparty to the liabilities has recourse only to the financial assets were £11,329m and £5,085m respectively (2018: £6,284m and £2,948m).

There were no events during the year that resulted in any Group transferred financial assets being derecognised.

The Group has contractual and non-contractual arrangements which may require it to provide financial support as follows:

Securitisation programmes

The Group provides credit support to the structured entities via reserve funds, which are partly funded through subordinated debt arrangements and by holding junior notes. Exposures totalled £100m in subordinated debt (2018: £23m) and £1,722m in junior notes held (2018: £971m). The Group has a beneficial interest in the securitised mortgage portfolio held by the structured entities of £1,467m (2018: £1,074m).

Looking forward through future reporting periods there are a number of date-based options on the notes issued by the structured entities which could be actioned by them as issuer. These could require the Group, as sponsor, to provide additional liquidity support.

Covered bond programmes

The nominal level of over-collateralisation was £699m (2018: £860m) in Clydesdale Covered Bond No 2 LLP and £1,490m in Eagle Place LLP. From time-to-time the obligations of the Group to provide over-collateralisation may increase due to the formal requirements of the programme.

Under all programmes, the Group has an obligation to repurchase mortgage exposures if certain mortgage loans no longer meet the programme criteria.

3.4 Cash and balances with central banks

Accounting policy

Cash and balances with central banks are measured at amortised cost, using the effective interest method, adjusted for expected credit losses, and are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership. These balances are generally of a short-term nature, and repayable on demand or within a short timescale, generally three months.

	2019 £m	2018 £m
Cash assets	1,574	1,656
Balances with central banks (including EU payment systems)	8,722	4,917
	10,296	6,573
Less mandatory deposits with central banks⁽¹⁾	(183)	(75)
Included in cash and cash equivalents (note 5.2)	10,113	6,498

(1) Mandatory deposits are not available for use in the Group's day-to-day business and are non-interest bearing.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.5 Financial assets and liabilities at fair value through profit or loss

Accounting policy

Financial assets and liabilities are designated at fair value through profit or loss, with gains and losses recognised in the income statement as they arise (note 2.3), when this reduces measurement or recognition inconsistencies (e.g. an accounting mismatch) or where the performance is evaluated on a fair value basis in accordance with risk management and investment strategies.

The Group's unlisted securities and other financial assets which were held under IAS 39 as 'available for sale' have been classified as FVTPL on adoption of IFRS 9, with the business model they are held under assessed as neither to hold and collect contractual cash flows nor to hold and collect contractual cash flows and to sell.

	2019 £m	2018 £m
Financial assets at fair value through profit or loss
Loans and advances	253	362
Other financial assets⁽¹⁾	14	-
	267	362
Financial liabilities at fair value through profit or loss
Customer deposits - term deposits	4	15

(1) Included within other financial assets is £8m (2018: £Nil) of unlisted securities.

Loans and advances

Included in financial assets at fair value through profit or loss is a historical portfolio of loans (sales ceased in 2012). Interest rate risk associated with these loans is managed using interest rate derivative contracts and the loans are recorded at fair value to avoid an accounting mismatch. The maximum credit exposure of the loans is £253m (2018: £362m) including accrued interest receivable of £1m (2018: £2m). The cumulative loss in the fair value of the loans attributable to changes in credit risk amounts to £4m (2018: £8m) and the change for the current year is a decrease of £4m (2018: decrease of £3m), of which £2m (2018: £3m) has been recognised in the income statement.

Other financial assets

This represents deferred consideration receivable and consists of the rights to future income.

Note 5.4 provides the transitional disclosures for IFRS 9.

Refer to note 3.18 for further information on the valuation methodology applied to financial assets held at fair value through profit or loss and their classification within the fair value hierarchy. Details of the credit quality of financial assets is provided in the Risk management section.

Customer deposits - term deposits

Included in other financial liabilities at fair value through profit or loss are fixed rate deposits, the interest rate risk on which is hedged using interest rate derivative contracts. The deposits are recorded at fair value to avoid an accounting mismatch.

The change in fair value attributable to changes in the Group's credit risk is £Nil (2018: £Nil). The Group is contractually obligated to pay £Nil (2018: £0.3m) less than the carrying amount at maturity to the deposit holder.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.6 Derivative financial instruments

Accounting policy

The Group uses derivative financial instruments to manage exposure to interest rate and foreign currency risk. Interest rate risk arises when there is a mismatch between fixed interest rate and floating interest rates, and different repricing characteristics between assets and liabilities. Currency risk arises when assets and liabilities are not denominated in the functional currency of the entity. Derivatives are recognised on the balance sheet at fair value on trade date and are measured at fair value throughout the life of the contract. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. The notional amount of a derivative contract is not recorded on the balance sheet but is disclosed as part of this note.

Netting

Derivative assets and liabilities are offset against collateral received and paid respectively, and the net amount reported in the due to and from other banks in the balance sheet only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis. Amounts offset on the balance sheet represent the Group's centrally cleared derivative financial instruments and collateral paid to/from central clearing houses, which meet the criteria for offsetting under IAS 32.

Hedge accounting

The Group elects to apply hedge accounting for the majority of its risk management activity that uses derivatives. This results in greater alignment in the timing of recognition of gains and losses on hedged items and hedging instruments and therefore reduces income statement volatility. The Group does not have a trading book, however, derivatives that do not meet the hedging criteria, or for which hedge accounting is not applied, are classified as held for trading.

IFRS 9 replaces IAS 39 for annual periods beginning on or after 1 January 2018. The Group has elected, as a policy choice permitted under IFRS 9, to continue to apply hedge accounting in accordance with IAS 39. The method of recognising the fair value gain or loss on a derivative depends on whether it is designated as a hedging instrument and the nature of the item being hedged. Certain derivatives are designated as either hedges of highly probable future cash flows attributable to a recognised asset or liability, or a highly probable forecast transaction (a cash flow hedge); or hedges of the fair value of recognised assets or liabilities or firm commitments (a fair value hedge).

Cash flow hedge

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity. Specifically, the separate component of equity (note 4.1) is adjusted to the lesser of the cumulative gain or loss on the hedging instrument, and the cumulative change in fair value of the expected future cash flows on the hedged item from the inception of the hedge. Any remaining gain or loss on the hedging instrument is recognised in the income statement. The carrying value of the hedged item is not adjusted. Amounts accumulated in equity are transferred to the income statement in the period in which the hedged item affects profit or loss.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

Fair value hedge

The carrying value of the hedged item on initial designation is adjusted for the fair value attributable to the hedged risk. Subsequently, changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. This movement in the fair value of the hedged item is made as an adjustment to the carrying value of the hedged asset or liability.

Where the hedged item is derecognised from the balance sheet, the adjustment to the carrying amount of the asset or liability is immediately transferred to the income statement. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item is amortised to the income statement over the remaining life of the asset or liability.

Hedge effectiveness

The Group documents, at the inception of a transaction, the relationship between hedging instruments and the hedged items, and the Group's risk management objective and strategy for undertaking these hedge transactions. The documentation covers how effectiveness will be measured throughout the life of the hedge relationship and its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. A hedge is expected to be highly effective if the changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated are expected to offset in a range of 80% to 125%.

Derivatives held for trading

Changes in value of held for trading derivatives are immediately recognised in the income statement (note 2.3).

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.6 Derivative financial instruments continued

The tables below analyse derivatives between those designated as hedging instruments and those classified as held for trading:

	2019 £m	2018 £m
Fair value of derivative financial assets
Designated as hedging instruments	315	203
Designated as held for trading	51	59
	366	262
Fair value of derivative financial liabilities
Designated as hedging instruments	191	259
Designated as held for trading	82	102
	273	361

Cash collateral on derivatives placed with banks totalled £55m (2018: £306m). Cash collateral received on derivatives totalled £149m (2018: £37m). These amounts are included within due from and due to other banks respectively. Collateral placed with clearing houses, which did not meet offsetting criteria, totalled £55m (30 September 2018: £143m) and is included within other assets. Similarly, collateral received from clearing houses is included in other liabilities and totalled £Nil (30 September 2018: £34m).

The derivative financial instruments held by the Group are further analysed below. The notional contract amount is the amount from which the cash flows are derived and does not represent the principal amounts at risk relating to these contracts.

Total derivative contracts	2019			2018
Total derivative contracts	Notional contract amount £m	Fair value of assets £m	Fair value of liabilities £m	Notional contract amount £m	Fair value of assets £m	Fair value of liabilities £m
Derivatives designated as hedging instruments
Cash flow hedges
Interest rate swaps (gross)	25,023	105	121	24,570	88	111
Less: net settled interest rate swaps⁽¹⁾	(14,513)	(47)	(75)	-	-	-
Interest rate swaps (net)⁽²⁾	10,510	58	46	24,570	88	111
Cross currency swaps⁽²⁾	1,446	162	-	690	70	-
	11,956	220	46	25,260	158	111
Fair value hedges
Interest rate swaps (gross)	25,492	146	526	2,180	45	148
Less: net settled interest rate swaps⁽¹⁾	(23,872)	(60)	(389)	-	-	-
Interest rate swaps (net)⁽²⁾	1,620	86	137	2,180	45	148
Cross currency swaps⁽²⁾	808	9	8	-	-	-
	2,428	95	145	2,180	45	148
Total derivatives designated as hedging instruments	14,384	315	191	27,440	203	259

Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward foreign exchange⁽²⁾	728	16	15	1,788	26	23
Cross currency swaps⁽²⁾	1,123	11	9	455	10	10
Options⁽²⁾	2	-	-	11	-	-
	1,853	27	24	2,254	36	33
Interest rate related contracts
Interest rate swaps (gross)	1,159	24	53	811	15	59
Less: net settled interest rate swaps⁽¹⁾	(363)	(5)	(2)	-	-	-
Interest rate swaps (net)⁽²⁾	796	19	51	811	15	59
Swaptions⁽²⁾	11	-	2	33	-	-
Options⁽²⁾	465	2	3	501	1	3
	1,272	21	56	1,345	16	62
Commodity related contracts	55	2	2	53	7	7
Equity related contracts	3	1	-
Total derivatives designated as held for trading	3,183	51	82	3,652	59	102

(1) Presented within other assets.

(2) Presented within derivative financial instruments.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.6 Derivative financial instruments continued

Hedge accounting

The hedging strategy of the Group is divided into micro hedges, where the hedged item is a distinctly identifiable asset or liability, and portfolio hedges, where the hedged item is a homogenous portfolio of assets and liabilities.

In some hedge accounting relationships, the Group designates risk components of hedged items as follows:

− benchmark interest rate risk as a component of interest rate risk, such as the LIBOR component;

− exchange rate risk for foreign currency financial assets and financial liabilities; and

− components of cash flows of hedged items, for example certain interest payments for part of the life of an instrument.

Other risks such as credit risk and liquidity risk are managed by the Group but are not included in the hedge accounting relationship. Changes in the designated risk component usually account for the largest portion of the overall change in fair value or cash flows of the hedged item.

Portfolio fair value hedges

The Group applies macro fair value hedging to its fixed rate mortgages and fixed rate customer deposits. The Group determines hedged items by identifying portfolios of homogeneous loans or deposits based on their contractual maturity and other risk characteristics. Loans or deposits within the identified portfolios are allocated to repricing time buckets based on expected, rather than contractual, repricing dates. The hedging instruments are designated appropriately to those repricing time buckets. Hedge effectiveness is measured on a monthly basis, by comparing fair value movements of the designated proportion of the bucketed loans due to the hedged risk, against the fair value movements of the derivatives, to ensure that they are within an 80% to 125% range.

The aggregated fair value changes in the hedged loans and deposits are recognised on the Group's balance sheet as an asset and liability respectively. At the end of every month, in order to minimise the ineffectiveness from early repayments and accommodate new exposures, the Group voluntarily de-designates the hedge relationships and redesignates them as new hedges. At de-designation, the fair value hedge accounting adjustments are amortised on a straight line basis over the original hedged life. The Group has elected to commence amortisation at the date of de-designation.

Micro fair value hedges

The Group uses this hedging strategy on GBP and foreign currency denominated fixed rate assets held at fair value through other comprehensive income (or available-for-sale fixed rate assets in the year to 30 September 2018) and GBP and foreign currency denominated fixed rate debt issuances by the Group.

Portfolio cash flow hedges

The Group applies macro cash flow hedge accounting to a portion of its floating rate financial assets and liabilities. The hedged cash flows are a group of forecast transactions that result in cash flow variability from resetting of interest rates, reinvestment of financial assets, or refinancing and rollovers of financial liabilities. This cash flow variability can arise on recognised assets or liabilities or highly probable forecast transactions. The hedged items are designated as the gross asset or liability positions allocated to time buckets based on projected repricing and interest profiles. The Group aims to maintain a position where the principal amount of the hedged items are greater than or equal to the notional amount of the corresponding interest rate swaps used as the hedging instruments. The hedge accounting relationship is reassessed on a monthly basis with the composition of hedging instruments and hedged items changing frequently in line with the underlying risk exposures. If necessary, the hedge relationships are de-designated and redesignated based on the effectiveness test results.

Micro cash flow hedges

Floating rate issuances that are denominated in currencies other than the functional currency of the Group are designated in cash flow hedges with cross currency swaps.

Hedge ineffectiveness

Hedge ineffectiveness can arise from:

− differences in timing of cash flows of hedged items and hedging instruments;

− changes in expected timings and amounts of forecast future cash flows;

− different interest rate curves applied to discount the hedged items and hedging instruments; and

− derivatives used as hedging instruments having a non-zero fair value at the time of designation.

Additionally, for portfolio fair value hedges of the Group's fixed rate mortgage portfolio, ineffectiveness also arises from the difference between forecast and actual prepayments (prepayment risk).

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.6 Derivative financial instruments continued

The below table discloses the impact derivatives held in micro hedging relationships are expected to have on the timing and uncertainty of future cash flows. All notional principal amounts and carrying values are presented gross, prior to any netting permitted for balance sheet presentation as this reflects the derivative position used for risk management and the impact on future cash flows.

30 September 2019

	3 months or less	3 to 12 months	1 to 5 years	Total
Cash flow hedges
Foreign exchange risk
Cross currency swap
Notional principal (£m)	107	445	894	1,446
Average GBP/EUR rate	1.3459	1.3423	1.3680	n/a
Average GBP/USD rate	1.3263	1.3228	1.3089	n/a

Summary of hedging instruments in designated hedge relationships

In the below table, the Group sets out the accumulated adjustments arising from the corresponding continuing hedge relationships, irrespective of whether or not there has been a change in hedge designation during the year.

30 September 2019	Notional contract amount £m	Carrying amount		Change in fair value of hedging instrument in the year used for ineffectiveness measurement⁽²⁾ £m
30 September 2019	Notional contract amount £m	Assets £m	Liabilities £m
Cash flow hedges
Interest rate risk
Interest rate swaps⁽¹⁾	25,023	105	(121)	-
Foreign exchange risk
Cross currency swaps	1,446	162	-	59
Total derivatives designated as cash flow hedges	26,469	267	(121)	59

Fair value hedges
Interest rate risk
Interest rate swaps⁽¹⁾	25,492	146	(526)	(264)
Foreign exchange and interest rate risk
Cross currency swaps	808	9	(8)	1
Total derivatives designated as fair value hedges	26,300	155	(534)	(263)

(1) As shown in the total derivatives contracts table on page 69, for centrally cleared derivatives, where the IAS 32 'Financial Instruments: Presentation' netting criteria is met, the derivative balances are offset within other assets. For all other derivatives, the derivative balances are presented within derivative financial instruments.

(2) Changes in fair value of cash flow hedging instruments are recognised in other comprehensive income. Changes in fair value of fair value hedging instruments are recognised in the income statement in non-interest income.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.6 Derivative financial instruments continued

Summary of hedged items in designated hedge relationships

30 September 2019	Carrying amount of hedged items		Accumulated amoUnt of fair value adjustments on the hedged item⁽⁶⁾ £m	Change in fair value of hedged item in the year used for ineffectiveness measurement £m	Cash flow hedge reserve
30 September 2019	Assets £m	Liabilities £m			Continuing hedges £m	Discontinued hedges £m
Cash flow hedges
Interest rate risk
Gross floating rate assets and gross floating rate liabilities⁽¹⁾				(14)	(15)	(20)
Foreign exchange risk
Floating rate currency issuances⁽²⁾				(59)	-	-
Total				(73)	(15)	(20)

Fair value hedges
Interest rate risk
Fixed rate mortgages⁽³⁾	16,436	-	211	209
Fixed rate customer deposits⁽⁴⁾	-	(4,769)	(10)	(9)
Fixed rate FVOCI debt instruments⁽⁵⁾	2,940	-	166	133
Fixed rate issuances⁽²⁾	-	(2,368)	122	(92)
Foreign exchange and interest rate risk
Fixed rate currency FVOCI debt instruments⁽⁵⁾	82	-	3	4
Fixed rate currency issuances⁽²⁾	-	(530)	1	(4)
Total	19,458	(7,667)	493	241

(1) Future highly probable cash flows arising from loans and advances to customers, due to customers and debt securities in issue.

(2) Hedged item is recorded in debt securities in issue.

(3) Hedged item and the cumulative fair value changes, are recorded in loans and advances to customers.

(4) Hedged item and the cumulative fair value changes, are recorded in due to customers.

(5) Hedged item is recorded in financial assets at fair value through other comprehensive income.

(6) Includes cumulative unamortised fair value hedge adjustments relating to hedges that have been discontinued and are being amortised to the income statement over the remaining life of the asset or liability.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.6 Derivative financial instruments continued

Gains and losses from hedge accounting 30 September 2019	Hedge ineffectiveness recognised in income statement⁽¹⁾ £m	Effective portion recognised in other comprehensive income £m	Reclassified into income statement as
Gains and losses from hedge accounting 30 September 2019			Net interest income £m	Non-interest income £m
Cash flow hedges
Interest rate risk
Gross floating rate assets and gross floating rate liabilities	(14)	14	-	-
Foreign exchange risk
Floating rate currency issuances	-	59	-	(57)
Total (losses)/gains on cash flow hedges	(14)	73	-	(57)

Fair value hedges
Interest rate risk
Fixed rate mortgages	(24)
Fixed rate customer deposits	4
Fixed rate FVOCI debt instruments	(2)
Fixed rate issuances	(1)
Foreign exchange and interest rate risk
Fixed rate currency FVOCI debt instruments	-
Fixed rate currency issuances	1
Total losses on fair value hedges	(22)

(1) Recognised in gains less losses on financial assets at fair value.

The ineffectiveness arising from cash flow and fair value hedges was:

	2019 £m	2018 £m
Loss arising from cash flow hedges
Loss from cash flow hedges due to hedge ineffectiveness	(14)	(6)
	(14)	(6)
(Loss)/gain arising from fair value hedges
Hedging instrument	(263)	14
Hedged item attributable to the hedged risk	241	(14)
	(22)	-

Ineffectiveness arising from cash flow and fair value hedges	(36)	(6)

Below is a schedule indicating, as at 30 September 2018, the periods when the hedged cash flows are expected to occur and when they are expected to affect profit or loss:

	Forecast receivable cash flows 2018 £m	Forecast payable cash flows 2018 £m
Within 1 year	109	283
Between 1 and 2 years	130	366
Between 2 and 3 years	108	160
Between 3 and 4 years	63	5
Between 4 and 5 years	37	3
Greater than 5 years	60	10
	507	827

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.7 Financial assets at fair value through other comprehensive income

Accounting policy

Fair value through other comprehensive income (FVOCI) is a new financial asset classification category introduced by IFRS 9 'Financial Instruments'. As permitted by IFRS 9, the Group has not restated its comparative financial statements, consequently no comparative is presented as at 30 September 2018. The Group's listed securities previously classified as 'available for sale' under IAS 39 (note 3.8) have been assessed as meeting the criteria to be classified as FVOCI.

Interest income and impairment gains and losses on FVOCI assets are measured in the same manner as for assets measured at amortised cost and are recognised in the income statement, with all other gains or losses recognised in other comprehensive income as a separate component of equity in the period in which they arise. Gains and losses arising from changes in fair value are included as a separate component of equity until sale when the cumulative gain or loss is transferred to the income statement. For all FVOCI assets, the gain or loss is calculated with reference to the gross carrying amount

Debt instruments at FVOCI are subject to the same impairment criteria as amortised cost financial assets (note 3.2), with the expected credit loss (ECL) element recognised directly in the income statement. As the financial asset is fair valued through other comprehensive income, the change in its value includes the ECL element, with the remaining fair value change recognised in other comprehensive income. Any reversal of the ECL is recorded in the income statement up to the value recognised previously.

The Group exercises the low credit risk option for debt instruments classified as FVOCI, recognising the high credit quality of the instruments, accordingly a 12-month ECL is calculated on the assets.

2019

£m

2018

£m

Listed securities

4,328

Total financial assets at fair value through other comprehensive income

4,328

Refer to note 3.18 for further information on the valuation methodology applied to financial assets at FVOCI at 30 September 2019 and their classification within the fair value hierarchy. Details of the credit quality of financial assets is provided in the Risk management section.

Note 5.4 provides the transitional disclosures for IFRS 9.

3.8 Financial assets available for sale

Accounting policy

The available for sale classification category for financial assets ceased to apply from 1 October 2018 on the adoption of IFRS 9.

The Group's listed securities have been assessed as meeting the criteria to be classified as fair value through other comprehensive income under IFRS 9 (note 3.7). Unlisted securities and other financial assets have been classified as fair value through profit or loss (note 3.5).

	2019 £m	2018 £m
Listed securities	-	1,551
Unlisted securities	-	5
Other financial assets	-	6
Total financial assets available for sale	-	1,562

Refer to note 3.18 for further information on the valuation methodology applied to financial assets available for sale at 30 September 2018 and their classification within the fair value hierarchy. Details of the credit quality of financial assets is provided in the Risk management section.

Note 5.4 provides the transitional disclosures for IFRS 9.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.9 Property, plant and equipment

Accounting policy

The Group's freehold and long-term leasehold land and buildings are carried at their fair value as determined by the Directors, taking account of advice received from independent valuers. Fair values are determined in accordance with guidance published by the Royal Institution of Chartered Surveyors, including adjustments to observable market inputs reflecting any specific characteristics of the land and buildings. Directors' valuations are performed annually in July, with the independent valuations carried out on a three-year cycle on an open market basis.

All other items of property, plant and equipment are carried at cost, less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to acquisition of the asset. Impairment is assessed whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

With the exception of freehold and long-term leasehold land, all items of property, plant and equipment are depreciated or amortised using the straight line method, at rates appropriate to their estimated useful life to the Group. The annual rates of depreciation or amortisation are:

Buildings 50 years

Leases (leasehold improvements) the lower of the expected lease term or the asset's remaining useful life

Fixtures and equipment 3-10 years

Residual values and useful lives of assets are reviewed at each reporting date. Depreciation is recognised within operating expenses in the income statement.

	Freehold land and buildings £m	Long-term leasehold land and buildings £m	Building improvements £m	Fixtures and equipment £m	Total £m
Cost or valuation
At 1 October 2017	5	3	143	102	253
Additions	-	-	9	13	22
Disposals	(2)	-	(3)	(1)	(6)
At 30 September 2018	3	3	149	114	269
Acquisition of Virgin Money Holdings (UK) PLC	36	3	11	15	65
Additions	-	-	12	8	20
Disposals	(1)	-	(4)	-	(5)
At 30 September 2019	38	6	168	137	349

Accumulated depreciation
At 1 October 2017	1	-	88	78	167
Charge for the year	-	-	10	8	18
Disposals	-	-	(3)	(1)	(4)
At 30 September 2018	1	-	95	85	181
Charge for the year (note 2.4)	3	-	11	11	25
Disposals	-	-	(2)	-	(2)
At 30 September 2019	4	-	104	96	204
Net book value
At 30 September 2019	34	6	64	41	145
At 30 September 2018	2	3	54	29	88

Valuations

A comparison of the carrying value between the revaluation basis and the historical cost basis, for freehold and long-term leasehold land and buildings, is shown below:

2019

£m

2018

£m

Carrying value as included under the revaluation basis

Carrying value if the historical cost basis had been used

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.10 Intangible assets and goodwill

Accounting policy

Capitalised software costs are stated at cost, less amortisation and any provision for impairment.

Identifiable and directly associated external and internal costs of acquiring and developing software are capitalised where the software is controlled by the Group, and where it is probable that future economic benefits that exceed its cost will flow from its use over more than one year. Costs associated with maintaining software are recognised as an expense as incurred. Capitalised software costs are amortised on a straight line basis over their expected useful lives, usually between three and ten years. Impairment losses are recognised in the income statement as incurred.

Goodwill arises on the acquisition of an entity and represents the excess of the fair value of the purchase consideration and direct costs of making the acquisition over the fair value of the Group's share of the net assets at the date of the acquisition. Goodwill is not subject to amortisation and is tested for impairment on an annual basis.

Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, which typically arises when the benefits associated with the software were substantially reduced from what had originally been anticipated or the asset has been superseded by a subsequent investment. In such situations, an impairment loss is recognised for the amount by which the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is the higher of its fair value less costs of disposal or its value in use.

Intangible assets which are fully amortised are reviewed annually to consider whether the assets remain in use.

	Capitalised software £m	Goodwill £m	Core deposit intangible £M	Total £m
Cost
At 1 October 2017	589	-	-	589
Additions	144	-	-	144
At 30 September 2018	733	-	-	733
Acquisition of Virgin Money Holdings (UK) PLC	172	11	6	189
Additions	130	-	-	130
Write-off	(85)	-	-	(85)
At 30 September 2019	950	11	6	967

Accumulated amortisation
At 1 October 2017	250	-	-	250
Charge for the year	71	-	-	71
At 30 September 2018	321	-	-	321
Charge for the year (note 2.4)	82	-	1	83
Impairment (note 2.4)	115	-	-	115
Write-off	(68)	-	-	(68)
At 30 September 2019	450	-	1	451

Net book value
At 30 September 2019	500	11	5	516
At 30 September 2018	412	-	-	412

£31m (2018: £1m) of the £130m (2018: £144m) software additions do not form part of internally generated software projects.

A £127m charge (comprising impairment of £115m and write-offs with a net book value of £12m) was recognised in the year following a review of the Group's software estate following the acquisition of Virgin Money Holdings (UK) PLC, which identified a number of core assets (including £70m in relation to the Virgin Money Digital Bank asset) that are no longer of value to the Group's future strategy and therefore required to be written down (note 2.4).

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.11 Deferred tax

Accounting policy

Deferred tax assets and liabilities are recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. A deferred tax asset is recognised for unused tax losses and unused tax credits only if it is probable that future taxable amounts will arise against which those temporary differences and losses may be utilised.

Critical accounting estimates and judgements

The Group has deferred tax assets of £322m (2018: £206m), the principal components of which are tax losses, capital allowances and acquisition accounting adjustments.

Tax losses carried forward of £146m (2018: £99m) have increased due to the recognition of historic losses and a re-evaluation of the rate at which they are expected to unwind.

The Group has assessed the recoverability of these deferred tax assets at 30 September 2019 and considers it probable that sufficient future taxable profits will be available against which the underlying deductible temporary differences can be utilised over the corporate planning horizon.

At 30 September 2019, the Group had an unrecognised deferred tax asset of £114m (2018: £157m) representing trading losses with a gross value of £668m (2018: £926m). Although there is no prescribed period after which losses expire, a deferred tax asset has not been recognised in respect of these losses as the Directors have insufficient certainty over their recoverability in the foreseeable future.

Movement in net deferred tax asset

	2019 £m	2018 £m
At 30 September	129	79
IFRS 9 adjustment recognised in equity (note 5.4)	7	-
At 1 October	136	79
Recognised in the income statement (note 2.5)	53	35
Recognised directly in equity	(68)	15
At 30 September	121	129

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.11 Deferred tax continued

The Group has recognised deferred tax in relation to the following items:

	2019 £m	2018 £m
Deferred tax assets
Tax losses carried forward	146	99
Capital allowances	91	88
Cash flow hedge reserve	3	12
Acquisition accounting adjustments	44	-
Transitional adjustment - IFRS 9	16	-
Transitional adjustment - available for sale reserve	1	1
Employee equity based compensation	5	3
Unamortised issue costs	4	-
Pension spreading	11	-
Other	1	3
	322	206

Deferred tax liabilities
Defined benefit pension scheme surplus	(139)	(74)
Acquisition accounting adjustments	(51)	-
Gains on unlisted financial instruments at fair value through other comprehensive income	(6)	(3)
Intangible assets	(4)	-
Other	(1)	-
	(201)	(77)
Net deferred tax asset	121	129

Payments to the pension scheme were greater than 210% of 2018 contributions and therefore in accordance with the legislation, tax relief is spread over four years giving rise to the pension spreading deferred tax asset of £11m. The current and deferred tax impact of pension contributions, and pension spreading, are reflected in the consolidated statement of comprehensive income.

The accounting adjustments relating to the acquisition of Virgin Money Holdings (UK) PLC (note 3.19) resulted in a net deferred tax liability of £22m on the date of acquisition, which has subsequently unwound in line with the related unwind of the fair value adjustments to a net deferred tax liability of £7m at 30 September 2019. The constituent parts of the net liability have been shown as deferred tax assets of £44m and deferred tax liabilities of £51m as they are not expected to unwind at the same time.

In accordance with legislation, the tax relief on the IFRS 9 opening adjustment (note 5.4) is spread evenly over 10 years and will unwind through entity corporation tax computations across the Group. The IFRS 9 deferred tax asset balance of £16m represents the combination of the Group's transitional position as presented in note 5.4 and the IFRS 9 transitional element remaining of the Virgin Money Holdings (UK) PLC adoption of IFRS 9 on 1 January 2018.

The European Securities and Markets Authority (ESMA) issued a Public Statement relating to IAS 12 'Income Taxes' in July 2019. The publication covered considerations on the recognition of deferred tax assets arising from the carry-forward of unused tax losses. As the Group's deferred tax asset, including the element relating to tax losses carried forward, is material, the Group has assessed the content of the ESMA Public Statement and will look to incorporate any potential further disclosure requirements arising from the statement in the financial statements in future reporting periods.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.12 Retirement benefit obligations

Accounting policy

The Group makes contributions to both defined benefit and defined contribution pension schemes which entitle employees to benefits on retirement or disability.

Defined contribution pension scheme

The Group recognises its obligation to make contributions to the scheme as an expense in the income statement as incurred. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.

Defined benefit pension scheme

A liability or asset is recognised on the balance sheet in respect of the defined benefit scheme and is measured as the difference between the present value of the defined benefit obligation less the fair value of the defined benefit scheme assets at the reporting date. The present value of the defined benefit obligation for the scheme is discounted by high quality corporate bond rates that have maturity dates approximating to the terms of the defined benefit obligation. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through refunds from the scheme. In assessing whether a surplus is recoverable, the Group considers its current right to obtain a refund or a reduction in future contributions and does not anticipate any future acts by other parties that could change the amount of the surplus that may be ultimately recovered.

Pension expense attributable to the Group's defined benefit scheme comprises current service cost, net interest on the net defined benefit obligation/asset, past service cost resulting from a scheme amendment or curtailment, gains or losses on settlement and administrative costs incurred. Where actuarial remeasurements arise, the Group recognises such amounts directly in equity through the statement of comprehensive income in the period in which they occur. Actuarial remeasurements arise from experience adjustments (the effects of differences between previous actuarial assumptions and what has actually occurred) and changes in actuarial assumptions.

The following table summarises the present value of the defined benefit obligation and fair value of plan assets for the Scheme as at 30 September:

	2019 £m	2018 £m
Active members' defined benefit obligation	(30)	(24)
Deferred members' defined benefit obligation	(2,537)	(2,131)
Pensioner and dependant members' defined benefit obligations	(1,744)	(1,591)
Total defined benefit obligation	(4,311)	(3,746)
Fair value of Scheme assets	4,707	3,958
Net defined benefit pension asset	396	212
Post-retirement medical benefits obligations⁽¹⁾	(3)	(3)

(1) Post-retirement medical benefits obligations are included within other liabilities (note 3.17).

The Group's pension arrangements

The Group operates both defined benefit and defined contribution arrangements. The Group's principal trading subsidiary, Clydesdale Bank PLC, is the sponsoring employer in one funded defined benefit pension scheme, the Yorkshire and Clydesdale Bank Pension Scheme ('the Scheme'). The current version of the Scheme was established under trust on 30 September 2009 with the assets held in a trustee administered fund. The Trustee is responsible for the operation and governance of the Scheme, including making decisions regarding the Scheme's funding and investment strategy.

The Scheme is subject to the funding legislation outlined in the Pensions Act 2004 which came into force on 30 December 2005. This, together with documents issued by the Pensions Regulator, sets out the framework for funding defined benefit occupational pension plans in the UK.

The Group has implemented a number of reforms to the Scheme to manage the obligation. It closed the Scheme to new members in 2004 and since April 2006 has determined benefits accruing on a career average revalued earnings basis. On 1 August 2017, the Scheme was closed to future benefit accrual for the majority of current employees, with affected employees' future pension benefits being provided through the Group's existing defined contribution scheme, 'Total Pension'. The income statement charge for this is separately disclosed in note 2.4.

The Group also provides post-retirement health care under a defined benefit scheme for pensioners and their dependant relatives for which provision has been made on a basis consistent with the methodology applied to the defined benefit pension scheme. This is a closed scheme and the provision will be utilised over the life of the remaining scheme members. The obligation in respect of this scheme was £3m at 30 September 2019 (2018: £3m) and is included within other liabilities in note 3.17.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.12 Retirement benefit obligations continued

Scheme valuations

There are a number of means of measuring liabilities in the defined benefit schemes, with the ultimate aim of the Trustee being that the Scheme is 100% funded on an agreed self-sufficiency basis⁽¹⁾. The two bases used by the Group to value its obligations are (i) an IAS 19 accounting basis; and (ii) a Trustee's Technical Provision basis.

(i) IAS 19 accounting basis

The valuations of the Scheme assets and obligations are calculated on an accounting basis in accordance with the applicable accounting standard IAS 19 which provides the basis for the accounting framework and methodology for entries in the income statement, balance sheet and capital reporting. The principal purpose of this valuation is to allow comparison of pension obligations between companies. The obligation under an accounting valuation can be higher or lower than those under a Trustee's Technical Provision valuation.

The rate used to discount the obligation on an IAS 19 basis is a key driver of any potential volatility and is based on yields on AA rated high-quality corporate bonds, regardless of how the Trustee of the Scheme invests the assets. The accounting valuation under IAS 19 can therefore move adversely because of low rates and narrowing credit spreads which are not fully matched by the Scheme assets. Inflation is another key source of volatility and arises as a result of member benefits having an element of index linking, which causes the obligation to increase in line with rises in long-term inflation assumptions. In practice however, over the long term, the relationship between interest and inflation rates tends to be negatively correlated resulting in a degree of risk offset.

(ii) Trustee's Technical Provision basis

This valuation basis reflects how much money the Trustee considers is required now in order to provide for the promised benefits as they come up for payment in the future. The Trustee is responsible for ensuring that the calculation is conducted prudently on an actuarial basis, taking into account factors including the Scheme's investment strategy and the relative financial strength of the sponsoring employer.

A key aspect of this valuation is the investment strategy the Trustee proposes to follow as part of the policy for meeting the Scheme's obligations. Because there are no guarantees about investment returns over long periods, legislation requires the Trustee to consider carefully how much of their expected future investment returns it would be prudent for them to account for in advance.

The last Scheme funding valuation was conducted in accordance with Scheme data and market conditions as at 30 September 2016 and resulted in a reported deficit of £290m⁽²⁾. The Group agreed to eliminate this deficit through making contributions as agreed in the recovery plan dated 31 July 2017 and a revised schedule of contributions dated 31 January 2018. The following scheduled contributions of £184m remain to be made over the period to March 2023:

− equal monthly contributions totalling £50m per annum until 31 March 2022; and

− £55m in the year to 31 March 2023.

The next triennial funding valuation is currently in progress and will be calculated with reference to the Scheme data and market conditions as at 30 September 2019. The Group expects this valuation to be agreed with the Trustee of the Scheme by the end of 2020.

Scheme assets are not subject to the same valuation differences as Scheme obligations and are consistently valued at current market value.

(1) This is where the Scheme is essentially self-funded and does not need to call on the Group for any additional funding.

(2) The IAS 19 valuation as at 30 September 2016 reported a Scheme deficit of £75m.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.12 Retirement benefit obligations continued

IAS 19 position

The Scheme movements in the year are as follows:

	2019				2018
	Present value of obligation £m	Fair value of plan assets £m	Total £m	Cumulative loss in OCI £m	Present value of obligation £m	Fair value of plan assets £m	Total £m	Cumulative loss in OCI £m
Balance sheet surplus at 1 October	(3,746)	3,958	212		(3,974)	4,181	207
				(704)				(695)
Total expense
Current service cost	-	-	-		(1)	-	(1)
Past service cost	(11)	-	(11)		(2)	-	(2)
Interest (expense)/income	(100)	107	7		(104)	109	5
Administrative costs	-	(5)	(5)		-	(6)	(6)
Total (expense)/income recognised in the consolidated income statement	(111)	102	(9)		(107)	103	(4)

Remeasurements
Return on Scheme assets greater than discount rate	-	772	772	772	-	27	27	27
Actuarial:
Loss - experience adjustments	(9)	-	(9)	(9)	(35)	-	(35)	(35)
Gain - demographic assumptions	30	-	30	30	19	-	19	19
Loss - financial assumptions	(683)	-	(683)	(683)	(20)	-	(20)	(20)
Remeasurement (losses)/gains recognised in other comprehensive income	(662)	772	110	110	(36)	27	(9)	(9)

Contributions and payments
Employer contributions	-	83	83		-	18	18
Benefit payments	96	(96)	-		93	(93)	-
Transfer payments	112	(112)	-		278	(278)	-
	208	(125)	83		371	(353)	18
Balance sheet surplus at 30 September	(4,311)	4,707	396		(3,746)	3,958	212
				(594)				(704)

The past service cost included within the income statement charge for the current year of £11m relates to GMP equalisation, which is detailed further below. In the prior year, the Group incurred a past service cost of £2m in relation to enhanced early retirement entitlements on redundancy, which was fully offset in the income statement by a corresponding release from the restructuring provision.

The expected contributions and benefit payments for the year ending 30 September 2020 are £56m (2019: £77m) and £108m (2019: £98m) respectively.

The Group and Trustee have entered into a contingent security arrangement (the 'Security Arrangement') (note 5.3).

GMP equalisation

On 26 October 2018, the High Court handed down a judgement concluding that defined benefit schemes should equalise pension benefits for men and women in relation to GMP and concluded on the methods that were appropriate. The estimated increase in the Scheme obligations at the date of the judgement was £11m which is based on a number of assumptions, therefore the actual impact may be different. An allowance for GMP equalisation has been reflected in the income statement and in the closing net accounting surplus of the Scheme.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.12 Retirement benefit obligations continued

Maturity of Scheme liabilities

The estimated maturity period of Scheme obligations on an IAS 19 accounting basis is provided within the Group annual report and accounts.

The discounted mean term of the defined benefit obligation at 30 September 2019 is 20 years (2018: 19 years).

Scheme assets

In order to meet the obligations of the Scheme, the Trustee invests in a diverse portfolio of assets, with the level and volatility of asset returns being a key factor in the overall investment strategy. The investment portfolio is subject also to a range of risks typical of the types of assets held, such as: equity risk; credit risk on bonds; currency risk; interest rate and inflation risk; and exposure to the property market. The Trustee's investment strategy (including physical assets and derivatives) seeks to reduce the Scheme's exposure to these risks. In managing interest rate and inflation risks, the investment strategy seeks to hold portfolios of matching assets (including derivatives) that enable the Scheme's assets to better match movements in the value of liabilities due to changes in interest rates and inflation.

As at 30 September 2019, both the interest rate and inflation rate hedge ratios were around 85% and 75% respectively (2018: 81% and 71%) of the obligation when measured on a self-sufficiency basis. This strategy reflects the Scheme's obligation profile and the Trustee's and the Group's attitude to risk. The Trustee monitors the investment objectives and asset allocation policy on a regular basis.

The Trustee's investment strategy involves two main categories of investments:

− matching assets - a range of investments that provide a match to changes in obligation values; and

− return seeking assets - a range of investments designed to provide specific, planned and consistent returns.

The major categories of plan assets for the Scheme, stated at fair value, are as follows:

	2019				2018
	Quoted £m	Unquoted £m	Total £m	%	Quoted⁽³⁾ £m	Unquoted⁽³⁾ £m	Total £m	%
Bonds
Fixed government	569	-	569		478	-	478
Index linked government	1,757	-	1,757		1,539	-	1,539
Global sovereign	20	1	21		23	1	24
Corporate and other	531	305	836		412	294	706
	2,877	306	3,183	68%	2,452	295	2,747	70%
Equities⁽¹⁾
Global equities	-	503	503		-	555	555
Emerging market equities	-	50	50		-	58	58
UK equities	-	32	32		-	37	37
	-	585	585	12%	-	650	650	16%
Other
Secured income alternatives	-	358	358		-	336	336
Derivatives⁽²⁾	-	219	219		-	172	172
Repurchase agreements	-	(534)	(534)		-	(836)	(836)
Property	-	129	129		-	132	132
Alternative credit	-	409	409		-	260	260
Infrastructure	-	352	352		-	255	255
Cash	-	1	1		-	238	238
Equity options	5	-	5		4	-	4
	5	934	939	20%	4	557	561	14%

Total Scheme assets	2,882	1,825	4,707	100%	2,456	1,502	3,958	100%

(1) Equity investments are classified as unquoted reflecting the nature of the funds in which the Scheme invests directly. The underlying investments within those funds are, however, mostly quoted.

(2) Derivative financial instruments are used to modify the profile of the assets of the Scheme to better match the Scheme liabilities. Derivative holdings may lead to increased or decreased exposures to the physical asset categories disclosed above.

(3) The split of plan assets between quoted and unquoted in the prior year has been restated to reflect their nature.

At 30 September 2019, the Scheme had employer-related investments within the meaning of Section 40 (2) of the Pensions Act 1995 totalling £2m
(2018: nil).

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.12 Retirement benefit obligations continued

Actuarial assumptions

The following assumptions were used in arriving at the IAS 19 defined benefit obligation:

	2019 % p.a.	2018 % p.a.
Financial assumptions
Discount rate	1.77	2.75
Inflation (RPI)	3.20	3.30
Inflation (CPI)	2.20	2.30
Career average revalued earnings (CARE) revaluations:
Pre 31 March 2012 benefits (RPI)	3.20	3.30
Post 31 March 2012 benefits (CPI capped at 5% per annum)	2.20	2.30
Pension increases (capped at 2.5% per annum)	2.10	2.13
Pension increases (capped at 5% per annum)	3.07	3.15
Rate of increase for pensions in deferment	2.20	2.30

Demographic assumptions

	2019 years	2018 years
Post-retirement mortality:
Current pensioners at 60 - male	28.0	28.2
Current pensioners at 60 - female	29.6	29.8
Future pensioners at 60 - male	29.1	29.3
Future pensioners at 60 - female	30.8	31.0

Critical accounting estimates and judgements

The value of the Group's defined benefit pension scheme requires management to make several assumptions. The key areas of estimation uncertainty are:

discount rate applied: this is set with reference to market yields at the end of the reporting period on high quality corporate bonds in the currency and with a term consistent with the Scheme's obligations. The average duration of the Scheme's obligations is approximately 20 years. The market for bonds with a similar duration is illiquid and, as a result, significant management judgement is required to determine an appropriate yield curve on which to base the discount rate;

inflation assumptions: this is set with reference to market expectations of the RPI measure of inflation for a term consistent with the Scheme's obligations, based on data published by the BoE. Other measures of inflation (such as CPI, or inflation measures subject to an annual cap) are derived from this assumption; and

mortality assumptions: the cost of the benefits payable by the Scheme will also depend upon the life expectancy of the members. The assumptions for mortality rates are based on standard mortality tables (as adjusted to reflect the characteristics of Scheme members) which allow for future improvements in life expectancies.

The table below sets out the sensitivity and impact on the balance sheet surplus position of the Scheme, the defined benefit obligation and pension cost to changes in the key actuarial assumptions:

Assumption change		Balance sheet surplus £m	Obligation £m	Pension cost £m
Discount rate	+ 0.25%	(6)	(205)	(5)
	- 0.25%	8	220	4
Inflation	+ 0.25%	(9)	145	3
	- 0.25%	(9)	(137)	(2)
Life expectancy	+1 year	(169)	169	3
	-1 year	164	(164)	(3)

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, changes in some of the assumptions may be correlated.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.13 Customer deposits

	2019 £m	2018 £m
Interest bearing demand deposits	38,551	19,895
Term deposits	22,239	6,192
Non-interest bearing demand deposits	3,002	2,756
Other wholesale deposits	1	1
	63,793	28,844
Accrued interest payable	207	60
	64,000	28,904

3.14 Debt securities in issue

Accounting policy

Debt securities comprise short and long-term debt issued by the Group including commercial paper, medium-term notes, term loans, covered bonds and RMBS notes.

Debt securities are initially recognised at fair value, being the issue proceeds, net of transaction costs incurred. These instruments are subsequently measured at amortised cost using the effective interest method resulting in premiums, discounts and associated issue costs being recognised in the income statement over the life of the instrument.

The breakdown of debt securities in issue is shown below:

2019	Medium-term notes £m	Subordinated debt £m	Securitisation £m	Covered bonds £m	Total £m
Carrying value	1,838	722	5,040	1,828	9,428
Fair value hedge adjustments	47	-	2	74	123
Total debt securities	1,885	722	5,042	1,902	9,551
Accrued interest payable	12	9	9	10	40
	1,897	731	5,051	1,912	9,591

2018	Medium-term notes £m	Subordinated debt £m	Securitisation £m	Covered bonds £m	Total £m
Carrying value	794	476	2,949	698	4,917
Fair value hedge adjustments	(1)	-	-	34	33
Total debt securities	793	476	2,949	732	4,950
Accrued interest payable	3	3	7	10	23
	796	479	2,956	742	4,973

The acquisition of Virgin Money Holdings (UK) PLC on 15 October 2018 resulted in recognition of the following debt securities (excluding accrued interest), which are included within the above balances as at 30 September 2019:

Medium-term

notes

£m

Subordinated

debt

£m

Securitisation

£m

Covered bonds

£m

Total

£m

Fair value of acquired balances

647

2,909

3,556

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.14 Debt securities in issue continued

The following tables provide a breakdown of the medium-term notes and subordinated debt by instrument as at 30 September:

Medium-term notes (excluding accrued interest)

	2019 £m	2018 £m
CYBG 3.125% fixed-to-floating rate callable senior notes due 2025	298	298
CYBG 4% fixed rate reset callable senior notes due 2026	523	495
CYBG 3.375% fixed rate reset callable senior notes due 2025	366	-
CYBG 4% fixed rate reset callable senior notes due 2027	397	-
VM PLC 2.25% fixed rate senior notes due 2020	301	-
	1,885	793

Subordinated debt (excluding accrued interest)

	2019 £m	2018 £m
CYBG 5% fixed rate reset callable subordinated notes due 2026	476	476
CYBG 7.875% fixed rate reset callable subordinated notes due 2028	246	-
	722	476

Details of securitisation and covered bond issuances are included in note 3.3.

During the year, the Group issued £400m of medium-term notes and £250m of subordinated notes. The Group also issued £1,102m in Sterling and US Dollar denominations and redeemed £769m in Sterling denominations from the securitisation programmes, and issued £1,132m in Sterling and Euro denominations from the Eagle Place covered bond programme.

3.15 Due to other banks

Accounting policy

Repurchase agreements

Securities sold subject to sale and repurchase agreements ('repos') are retained in their respective balance sheet categories. The associated liabilities are included in amounts due to other banks based upon the counterparties to the transactions.

The difference between the sale and repurchase price of repos is treated as interest and accrued over the life of the agreements using the effective interest method.

	2019 £m	2018⁽¹⁾ £m
Secured loans	7,308	2,254
Securities sold under agreements to repurchase⁽²⁾	1,554	802
Transaction balances with other banks	12	29
Deposits from other banks	42	3
	8,916	3,088

(1) The prior year comparative has been restated in line with the current year presentation. £34m of derivative collateral in relation to clearing houses has been reclassified between other liabilities and due to other banks (note 1.10).

(2) The underlying securities sold under agreements to repurchase have a carrying value of £2,324m (2018: £1,172m).

Secured loans comprise amounts drawn under the TFS (including accrued interest).

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.16 Provisions for liabilities and charges

Accounting policy

Provisions for liabilities and charges are recognised when a legal or constructive obligation exists as a result of past events, it is probable that an outflow of economic benefits will be necessary to settle the obligation, and the obligation can be reliably estimated. Provisions for liabilities and charges are not discounted to the present value of their expected net future cash flows except where the time value of money is considered material.

Critical accounting estimates and judgements

PPI redress provision and other conduct related matters

With the FCA's deadline on PPI complaints now passed the level of uncertainty in determining the quantum of PPI related liability has reduced. However, owing to the significant volumes received in the weeks preceding the time bar there continues to be significant judgement required to determine the key assumptions used to estimate the quantum of the provision, including the level of conversion rate if information requests convert into complaints, uphold rates (how many claims are, or may be, upheld in the customer's favour), and redress costs (the average payment made to customers). The provision, therefore, continues to be subject to inherent uncertainties as a result of the subjective nature of the assumptions used in quantifying the overall estimated position at 30 September 2019, consequently the provision calculated may be subject to change in the future if outcomes differ to those currently assumed. Sensitivity analysis indicating the impact of reasonably possible changes in key assumptions on the PPI provision is presented within this note.

There are similar uncertainties and judgements for other conduct risk related matters, however the level of liability is materially lower.

	2019 £m	2018 £m
PPI redress provision
Opening balance	275	422
Charge to the income statement (note 2.4)	415	352
Charge reimbursed under Conduct Indemnity	-	148
Utilised	(311)	(647)
Closing balance	379	275

Customer redress and other provisions
Opening balance	41	109
Virgin Money Holdings (UK) PLC provision on acquisition	11	-
Charge to the income statement (note 2.4)	18	44
Utilised	(45)	(112)
Closing balance	25	41

Restructuring provision
Opening balance	15	23
Virgin Money Holdings (UK) PLC provision on acquisition	2	-
Charge to the income statement	64	15
Utilised	(26)	(23)
Closing balance	55	15

Total provisions for liabilities and charges	459	331

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.16 Provisions for liabilities and charges continued

PPI redress

In common with the wider UK retail banking sector, the Group has continued to deal with complaints and redress issues arising out of historic sales of PPI. During the year, the Group reassessed the level of provision that was considered appropriate to meet current and future expectations in relation to the mis-selling of PPI policies and concluded that a further charge of £415m was required due to the significant volume of information requests received, mainly from claims management companies ahead of the August 2019 industry deadline. It also incorporates a reassessment of the costs of processing cases and the impact of experience adjustments. The total provision raised to date in respect of PPI is £3,055m (30 September 2018: £2,640m), with £379m of this remaining (30 September 2018: £275m) for closing out the remaining stock of complaints and information requests including costs of administration.

To 30 September 2019, the Group has received 629,000 complaints (30 September 2018: 483,000) and has allowed for 86,000 further complaints converted from information requests received prior to the time bar (30 September 2018: 83,000).

The overall provision is based on a number of assumptions derived from a combination of past experience, estimated future experience, industry comparison and the exercise of judgement in the key areas identified. There remain risks and uncertainties in relation to these assumptions and consequently in relation to the ultimate costs of redress and related costs, including: (i) the number of PPI claims arising from the volume of information requests submitted prior to the time bar; (ii) the number of those claims that ultimately will be upheld; (iii) the amount that will be paid in respect of those claims; and (iv) the costs of administration.

As such, the factors discussed above mean there is a risk that existing provisions for PPI customer redress may not cover all potential costs. In light of this, the eventual costs of PPI redress and complaint handling may therefore differ materially from that estimated and further provision could be required.

The table below sets out the key assumptions and the effect on the provision at 30 September 2019 of future, potential, changes in key assumptions:

Assumptions

	Change in assumption	Sensitivity⁽¹⁾
Number of expected complaints converted from the stock of information requests at 30 September 2019	+/-5%	£44m
Uphold rate on stock of complaints at 30 September 2019 and expected converted complaints from information requests	+/-1%	£5m
Average redress costs⁽²⁾	+/-1%	£2m

(1) There are inter-dependencies between several of the key assumptions which add to the complexity of the judgements the Group has to make. This means that no single factor is likely to move independently of others, however, the sensitivities disclosed above assume all other assumptions remain unchanged.

(2) Sensitivity to a change in average redress across customer initiated complaints.

Customer redress and other provisions

Other provisions include amounts in respect of a number of non-PPI conduct related matters, legal proceedings, and claims arising in the ordinary course of the Group's business. Over the course of the year, the Group has raised further provisions of £18m in relation to non-PPI conduct matters (note 2.4). The ultimate cost to the Group of these customer redress matters is driven by a number of factors relating to offers of redress, compensation, offers of alternative products, consequential loss claims and administrative costs. The matters are at varying stages of their life cycle and in certain circumstances, usually early in the life of a potential issue, elements of the potential exposure are contingent. These factors could result in the total cost of review and redress varying materially from the Group's estimate. The final amount required to settle the Group's potential liabilities in these matters is therefore uncertain and further provision could be required.

Conduct Indemnity Deed

The Group's economic exposure to the impact of historic conduct related liabilities was mitigated by a Capped Indemnity of £1.7bn from NAB. The full amount of the Capped Indemnity was drawn down in the year to 30 September 2018. Details of this matter can be found in note 3.14 of the 2018 Annual Report and Accounts.

To the extent that tax relief is expected in relation to provisions for which reimbursement income is applicable, amounts may become repayable to NAB. In the consolidated financial statements, deferred tax assets are only recognised in respect of the loss share proportion (9.7%) of unused tax losses on Relevant Conduct Matters, on the basis that the Group does not obtain the economic benefit of the future tax relief which is repayable to NAB.

3.16 Provisions for liabilities and charges continued

Restructuring provision

Restructuring of the business is currently ongoing and a provision is held to cover redundancy payments, property vacation costs and associated enablement costs. During the year £64m (2018: £15m) was provided for in accordance with the requirements of IAS 37. £26m (2018: £23m) of the total provision was utilised in the year.

Included within the restructuring provision is an amount for committed rental expense on surplus lease space consistent with the expected exposure on individual leases where the property is unoccupied. This element of the provision will be utilised over the remaining life of the leases, or until the leases are assigned, and is measured at present values by discounting anticipated future cash flows.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.17 Other liabilities

	2019 £m	2018⁽¹⁾ £m
Notes in circulation	2,277	2,254
Accruals and deferred income	130	125
Other⁽²⁾	127	142
	2,534	2,521

(2) Other includes £3m (2018: £3m) of post retirement medical benefit obligations (note 3.12).

3.18 Fair value of financial instruments

Accounting policy

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the valuation date.

When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. Where no such active market exists for the particular asset or liability, the Group uses a valuation technique to arrive at the fair value, including the use of transaction prices obtained in recent arm's length transactions where possible, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. In doing so, fair value is estimated using a valuation technique that makes maximum possible use of market inputs and that places minimal possible reliance upon entity-specific inputs.

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, which represents the fair value of the consideration paid or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Group recognises profits or losses on the transaction date.

In certain limited circumstances, the Group applies the fair value measurement option to financial assets including loans and advances where the inherent market risks (principally interest rate and option risk) are individually hedged using appropriate interest rate derivatives. The loan is designated as being carried at fair value through profit or loss to offset the movements in the fair value of the derivative within the income statement and therefore avoid an accounting mismatch. When a loan is held at fair value, a statistical-based calculation is used to estimate expected losses attributable to adverse movements in credit risk on the assets held. This adjustment to the credit quality of the asset is then applied to the carrying amount of the loan to arrive at fair value and recognised in the income statement.

Analysis of the fair value disclosures uses a hierarchy that reflects the significance of inputs used in measuring fair value. The level in the fair value hierarchy within which a fair value measurement is categorised is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. The fair value hierarchy is as follows:

Level 1 fair value measurements - quoted prices (unadjusted) in active markets for an identical financial asset or liability;

Level 2 fair value measurements - inputs other than quoted prices within Level 1 that are observable for the financial asset or liability, either directly (as prices) or indirectly (derived from prices); and

Level 3 fair value measurements - inputs for the financial asset or liability that are not based on observable market data (unobservable inputs).

For the purpose of reporting movements between levels of the fair value hierarchy, transfers are recognised at the beginning of the reporting period in which they occur.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.18 Fair value of financial instruments continued

(a) Fair value of financial instruments recognised on the balance sheet at amortised cost

The tables show a comparison of the carrying amounts of financial assets and liabilities measured at amortised cost, and their fair values, where these are not approximately equal.

There are various limitations inherent in this fair value disclosure, particularly where prices are derived from unobservable inputs due to some financial instruments not being traded in an active market. The methodologies and assumptions used in the fair value estimates are therefore described in the notes to the tables. The difference between carrying value and fair value is relevant in a trading environment but is not relevant to assets such as loans and advances.

	30 September 2019		30 September 2018
	Carrying value £m	Fair value £m	Carrying value £m	Fair value £m
Financial assets
Loans and advances to customers⁽¹⁾	73,095	73,119	32,748	32,307

Financial liabilities
Due to other banks⁽²⁾	8,916	8,874	3,122	3,057
Customer deposits⁽²⁾	64,000	64,166	28,904	28,968
Debt securities in issue⁽³⁾	9,591	9,667	4,973	5,052

(1) Loans and advances to customers are categorised as Level 3 in the fair value hierarchy with the exception of £1,513m (2018: £1,110m) of overdrafts which are categorised as Level 2.

(2) Categorised as Level 2 in the Fair Value Hierarchy.

(3) Categorised as Level 2 in the Fair Value Hierarchy with the exception of £2,606m of listed debt (2018: £1,279m) which is categorised as Level 1.

The Group's fair values disclosed for financial instruments at amortised cost are based on the following methodologies and assumptions:

(a) Loans and advances to customers - The fair values of loans and advances are determined by firstly segregating them into portfolios of similar characteristics. Contractual cash flows are then adjusted for expected credit losses and expectations of customer behaviour based on observed historic data. The cash flows are then discounted using current market rates for instruments of similar terms and maturity to arrive at an estimate of their fair value.

(b) Due to other banks - The fair value is determined from a discounted cash flow model using current market rates for instruments of similar terms and maturity.

(c) Customer deposits - The fair value of deposits is determined using a replacement cost method which assumes alternative funding is raised in the most advantageous market. The contractual cash flows have been discounted using a funding curve with credit spreads reflecting the tenor of each deposit.

(d) Debt securities in issue - The fair value is taken directly from quoted market prices where available or determined from a discounted cash flow model using current market rates for instruments of similar terms and maturity.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.18 Fair value of financial instruments continued

(b) Fair value of financial instruments recognised on the balance sheet at fair value

The following tables provide an analysis of financial instruments that are measured subsequent to initial recognition at fair value, using the fair value hierarchy described above.

	Fair value measurement as at 30 September 2019				Fair value measurement as at 30 September 2018
	Level 1 £m	Level 2 £m	Level 3 £m	Total £m	Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Financial assets
Financial assets at fair value through other comprehensive income⁽¹⁾	4,328	-	-	4,328	-	-	-	-
AFS investments⁽¹⁾	-	-	-	-	1,551	-	11	1,562
Financial assets at fair value through profit or loss	-	253	-	253	-	362	-	362
Other financial assets	-	-	14	14	-	-	-	-
Derivative financial assets	-	366	-	366	-	262	-	262
Total financial assets at fair value	4,328	619	14	4,961	1,551	624	11	2,186

Financial liabilities
Financial liabilities at fair value	-	4	-	4	-	15	-	15
Derivative financial liabilities	-	273	-	273	-	361	-	361
Total financial liabilities at fair value	-	277	-	277	-	376	-	376

(1) Changes required as a result of the adoption of IFRS 9 from 1 October 2018. Refer to notes 1.9 and 5.4.

There were no transfers between Level 1 and 2 in the current or prior year.

The Group's valuations for financial instruments that are measured subsequent to initial recognition at fair value are based on the following methodologies and assumptions:

(a) Derivative financial assets and liabilities - The fair values of derivatives, including foreign exchange contracts, interest rate swaps, interest rate and currency option contracts, and currency swaps, are obtained from discounted cash flow models or option pricing models as appropriate.

(b) Fair value through other comprehensive income - The fair values of listed investments are based on quoted closing market prices⁽¹⁾.

− Loans and advances to customers and term deposits (Level 2) - The fair values are derived from data or valuation techniques based upon observable market data and non-observable inputs as appropriate to the nature and type of the underlying instrument.

− Financial assets at fair value through profit or loss (Equity investment, Level 3) - Primarily represents £6m of Visa Inc. preferred stock received as partial consideration for the sale of the Group's share in Visa Europe (note 2.3). The preferred stock is convertible into Visa Inc. common stock or its equivalent at a future date, subject to potential reduction for certain litigation losses that may be incurred by Visa Europe. The fair value of the preference shares has been calculated by taking the period end New York Stock Exchange share price for Visa Inc. and discounting for illiquidity and clawback related to contingent litigation. For other unlisted equity investments, the Group's share of the net asset value or the transaction price respectively is considered the best representation of the exit price and is the Group's best estimate of fair value⁽¹⁾.

− Financial assets at fair value through profit or loss (Debt investment, Level 3) - Primarily represents £5m of deferred consideration receivable and consists of the rights to future commission. The valuation is determined from a discounted cash flow model incorporating estimated attrition rates and investment growth rates appropriate to the underlying funds under management⁽¹⁾. For other unlisted debt investments, the transaction price is considered the best estimate of the exit price and is the Group's best estimate of fair value.

(1) These balances were disclosed under available for sale in 2018 and were reclassified as a result of IFRS 9 (note 1.9).

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.18 Fair value of financial instruments continued

Level 3 movement analysis:

	2019			2018
	Financial assets available for sale £m	Financial assets at fair value through profit or loss £m	Financial liabilities at fair value £m	Financial assets available for sale £m	Financial assets at fair value through profit or loss £m	Financial liabilities at fair value £m
Balance at the beginning of the year	11	-	-	10	477	(26)
Transfer to Level 2⁽¹⁾	-	-	-	-	(477)	26
Reclassification on adoption of IFRS 9⁽²⁾	(11)	11	-	-	-	-
Fair value gains/(losses) recognised⁽³⁾
In profit or loss - unrealised	-	1	-	1	-	-
In profit or loss - realised	-	3	-	(1)	-	-
In available for sale - unrealised	-	-	-	1	-	-
Purchases	-	3	-	-	-	-
Settlements	-	(4)	-	-	-	-
Balance at the end of the year	-	14	-	11	-	-

(1) The financial assets at fair value comprise a portfolio of loans which are no longer on sale. The continued run-off of these loans has resulted in the unobservable credit risk inputs no longer being significant to their fair value. As such, in the prior year, the loans (and associated liabilities) were reclassified to Level 2 in the fair value hierarchy. In accordance with the Group's accounting policy, the transfer was deemed to have occurred at the beginning of the reporting period.

(2) Changes required as a result of the adoption of IFRS 9 from 1 October 2018. Refer to notes 1.9 and 5.4.

(3) Net gains or losses were recorded in non-interest income, or available for sale reserve as appropriate.

Quantitative information about significant unobservable inputs in Level 3 valuations

The table below lists key unobservable inputs to Level 3 financial instruments and provides the range of those inputs as at 30 September 2019.

	Fair value £m	Valuation technique	Unobservable inputs	Low range	High range
other Financial assets at FVTPL
Equity investments	8	Discounted cash flow	Contingent litigation risk	0%	100%
Debt investments	6	Discounted cash flow	Funds under management attrition rate	10%	20%

Sensitivity of Level 3 fair value measurements to reasonably possible alternative assumptions

Where valuation techniques use non-observable inputs that are significant to a fair value measurement in its entirety, changing these inputs will change the resultant fair value measurement.

The most significant input impacting the carrying value of the FVTPL-debt investment is the 'Funds Under Management attrition' rate. The Group currently assumes an annual 15% attrition rate. If this rate was 20% the fair value would reduce by £1m; if it was 10% the fair value would increase by £2m.

Other than these significant Level 3 measurements, the Group has a limited remaining exposure to Level 3 fair value measurements and changing one or more of the inputs for fair value measurements in Level 3 to reasonable alternative assumptions would not change the fair value significantly with respect to profit or loss, total assets, total liabilities or equity on these remaining Level 3 measurements.

3.19 Acquisition of Virgin Money Holdings (UK) PLC

On 15 October 2018, the Group acquired all the voting rights in Virgin Money Holdings (UK) PLC by means of a scheme of arrangement under Part 26 of the UK Companies Act 2006 for a purchase consideration of £1,532m. This comprised the fair value of approximately 541m new CYBG PLC ordinary shares in exchange for all Virgin Money Holdings (UK) PLC shares at a ratio of 1.2125 CYBG shares for each Virgin Money Holdings (UK) PLC share. Immediately following completion, Virgin Money Holdings (UK) PLC shareholders owned approximately 38% of the Combined Group (on a fully diluted basis).

The fair value of the shares issued was calculated using the CYBG PLC market price of 286.4 pence per share, on the London Stock Exchange at its close of business on 12 October 2018.

In seeking to address the underlying trends of scale and adaptability within the banking industry, the combination brings together the two banks to create a national competitor to the large incumbent banks. The combination offers retail and business customers an alternative to the status quo.

Group financial statements

Notes to the consolidated financial statements

Section 3: Assets and liabilities continued

3.19 Acquisition of Virgin Money Holdings (UK) PLC continued

The table below sets out the fair values of the identifiable net assets and liabilities acquired.

	Book value at 15 October 2018 £m	Fair value adjustments £m	Fair value at 15 October 2018 £m
Assets
Cash and balances with central banks	4,146	-	4,146
Due from other banks	598	-	598
Financial assets at fair value through other comprehensive income⁽¹⁾⁽²⁾	2,028	-	2,028
Other financial assets at fair value through profit or loss	1	-	1
Derivative financial instruments	71	-	71
Loans and advances to customers⁽³⁾	37,840	34	37,874
Property, plant and equipment	73	(7)	66
Intangible assets	172	6	178
Deferred tax assets	23	22	45
Other assets	93	-	93
Total assets	45,045	55	45,100

Liabilities
Due to other banks⁽³⁾	7,171	(114)	7,057
Derivative financial instruments	41	-	41
Customer deposits	32,111	10	32,121
Debt securities in issue	3,548	8	3,556
Deferred tax liabilities	-	44	44
Other liabilities	337	1	338
Total liabilities	43,208	(51)	43,157

Net assets	1,837	106	1,943

Fair value of net assets acquired			1,943
Fair value of non-controlling interests⁽⁴⁾			(422)
Goodwill arising on acquisition			11
Total consideration⁽²⁾⁽⁵⁾			1,532

(1) Under IFRS 9 'Financial Instruments', debt investments which would previously have been classified in the available for sale category are reclassified to the new fair value through other comprehensive income category.

(2) Adjusted to remove the CYBG debt securities held by Virgin Money Holdings (UK) PLC.

(3) Included within Loans and advances to customers and Due to other banks is c£300m of fair value assets which will unwind through the income statement over the next 3 to 5 years.

(4) At the acquisition date, Virgin Money Holdings (UK) PLC had in issue Fixed Rate Resettable AT1 securities issued on the Luxembourg Stock Exchange. In accordance with IAS 32 these were classified as equity instruments. The Group did not acquire the AT1 securities which remained in issue to third parties, consequently these represented a non-controlling interest. As the AT1 instruments were actively traded, the fair value of £422m was calculated based on the market price on the Luxembourg Stock Exchange at its close of business on 12 October 2018.

(5) Includes 'shares to be issued' in the future relating to employee share plans in regard to the settlement of the outstanding Virgin Money Holdings (UK) PLC share awards partially offset by the purchase of 'own shares' (note 4.1.5).

At acquisition date, the contractual amount of loans and advances receivable from customers was £37,664m. The best estimate of the amounts not expected to be collected was £123m. The goodwill arising on the acquisition of Virgin Money Holdings (UK) PLC is mainly attributable to expected cash flows from new customers and significant synergies which are expected to be realised. The goodwill arising on acquisition is not expected to be deductible for tax purposes.

The amounts of net interest income and profit before tax contributed to the Group's consolidated income statement for the year ended 30 September 2019 from the acquired Virgin Money Holdings (UK) PLC business were £559m and £149m respectively. If the acquisition had occurred on 1 October 2018, the Group's total net interest income for the year would have increased by £22m to £1,536m and the loss before tax would have increased by £33m to £265m.

Transaction costs of £48m were incurred by CYBG PLC in relation to the acquisition.

Group financial statements

Notes to the consolidated financial statements

Section 4: Capital

4.1 Equity

Accounting policy

Equity

The financial instruments issued by the Company are treated as equity (i.e. forming part of shareholders' funds) only to the extent that they meet the following two conditions:

(a) they include no contractual obligations upon the Company to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Group; and

(b) where the instrument will or may be settled in the Company's own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company's own equity instruments or is a derivative that will be settled by the Company exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.

To the extent that this definition is not met, the proceeds of issue are classified as a financial liability.

Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds.

Dividends

Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Company's shareholders. Interim dividends are deducted from equity when they are no longer at the discretion of the Company.

Proposed final dividends for the year are disclosed as an event after the balance sheet date.

4.1.1 Share capital and share premium

	2019 £m	2018 £m
Share capital	143	89
Share premium	3	-
Share capital and share premium	146	89

	2019 Number of shares	2018 Number of shares	2019 £m	2018 £m
Ordinary shares of £0.10 each - allotted, called up and fully paid
Opening ordinary share capital	886,079,959	883,606,066	89	88
Share for share exchange	540,856,644	-	54	-
Issued under employee share schemes	7,549,086	2,473,893	-	1
Closing ordinary share capital	1,434,485,689	886,079,959	143	89

Acquisition of Virgin Money Holdings (UK) PLC

On 15 October 2018, CYBG PLC issued 540,856,644 £0.10 ordinary shares in exchange for the acquisition of the entire share capital of Virgin Money Holdings (UK) PLC by means of a scheme of arrangement under Part 26 of the UK Companies Act 2006 for a purchase consideration of £1.5bn. The nominal value of the shares issued was £54m and the balance of £1,495m was transferred to a merger reserve in accordance with Section 612 of the Companies Act.

The holders of ordinary shares are entitled to dividends as declared from time to time and are entitled to one vote per share at meetings of the shareholders of the Company. All shares in issue at 30 September 2019 rank equally with regard to the Company's residual assets.

During the year 7,549,086 (2018: 2,473,893) ordinary shares were issued under employee share schemes with a nominal value of £0.7m (2018: £0.2m).

A final dividend in respect of the year ended 30 September 2018 of 3.1p (2017: 1p) per ordinary share amounting to £45m (2017: £9m), was paid in February 2019. This dividend was deducted from retained profits in the current year. The Directors have recommended that no dividend will be paid in respect of the year ended 30 September 2019.

Share premium represents the aggregate of all amounts that have ever been paid above par value to the Company when it has issued ordinary shares.

Group financial statements

Notes to the consolidated financial statements

Section 4: Capital continued

4.1 Equity continued

A description of the other equity categories included within the consolidated statement of changes in equity, and significant movements during the year, is provided below:

4.1.2 Other equity instruments

Other equity instruments consist of the following Perpetual Contingent Convertible Notes.

− Perpetual securities (fixed 8% up to the first reset date) issued on 8 February 2016 with a nominal value of £450m and optional redemption on 8 December 2022.

− Perpetual securities (fixed 8.75% up to the first reset date) issued on 10 November 2016 with a nominal value of £230m and optional redemption on 10 November 2021. This was held by Virgin Money Holdings (UK) PLC on the date of acquisition and was originally recognised as a non-controlling interest (note 4.1.6). Following a change in obligor from Virgin Money Holdings (UK) PLC to CYBG PLC on 20 August 2019, this has been recognised within other equity.

− Perpetual securities (fixed 9.25% up to the first reset date) issued on 13 March 2019 with a nominal value of £250m and optional redemption on 8 June 2024.

The issues are treated as equity instruments in accordance with IAS 32 'Financial Instruments: Presentation' with the proceeds included in equity, net of transaction costs of £15m (2018: £Nil). AT1 distributions of £41m were made in the year, £33m net of tax (2018: £36m paid, £29m net of tax).

4.1.3 Capital reorganisation reserve

The capital reorganisation reserve of £839m was recognised on the issuance of CYBG PLC ordinary shares in February 2016 in exchange for the acquisition of the entire share capital of the Group's previous parent company, CYB Investments Limited (CYBI). The reserve reflects the difference between the consideration for the issuance of CYBG PLC shares and CYBI's share capital and share premium.

4.1.4 Merger reserve

A merger reserve of £633m was recognised on the issuance of CYBG PLC ordinary shares in February 2016 in exchange for the acquisition of the entire share capital of CYBI. An additional £1,495m was recognised on the issuance of CYBG PLC ordinary shares in October 2018 in exchange for the acquisition of the entire share capital of Virgin Money Holdings (UK) PLC. The merger reserve reflects the difference between the consideration for the issuance of CYBG PLC shares and the nominal value of the shares issued.

4.1.5 Other reserves

Own shares held

Virgin Money Holdings (UK) PLC established an Employee Benefit Trust (EBT) in 2011 in connection with the operation of its share plans. On the date of acquisition by CYBG PLC, the shares held in the EBT were converted to CYBG shares at a ratio of 1.2125 CYBG shares for each Virgin Money Holdings (UK) PLC share. The investment in own shares as at 30 September 2019 is £1m (2018: £Nil). The market value of the shares held in the EBT at 30 September 2019 was £1m (2018: £Nil).

Deferred shares reserve

The deferred share reserve comprises shares to be issued in the future relating to employee share plans in regard to the settlement of outstanding Virgin Money Holdings (UK) PLC share awards, which will be settled through the issuance of Virgin Money UK PLC shares at a future date in line with the vesting profile of the underlying plans.

Equity-based compensation reserve

The Group's equity based compensation reserve records the value of equity settled share based payment benefits provided to the Group's employees as part of their remuneration that has been charged through the income statement and adjusted for deferred tax.

Asset revaluation reserve

The asset revaluation reserve includes the gross revaluation increments and decrements arising from the revaluation of land and buildings.

Available for sale (AFS) reserve

The AFS reserve recorded the gains and losses arising from changes in the fair value of AFS financial assets prior to 1 October 2018. On adoption of IFRS 9 'Financial Instruments' with the removal of the AFS category for financial assets, part of the balance on the reserve was transferred to the FVOCI reserve with £3m released to retained earnings (note 5.4).

Fair value through other comprehensive income (FVOCI ) reserve

The FVOCI reserve records the unrealised gains and losses arising from changes in the fair value of financial assets at fair value through other comprehensive income. The movements in this reserve are detailed in the consolidated statement of comprehensive income. On adoption of IFRS 9 'Financial Instruments' with the removal of the AFS category for financial assets, £4m of the balance on the AFS reserve was transferred to the FVOCI reserve (note 5.4).

Group financial statements

Notes to the consolidated financial statements

Section 4: Capital continued

4.1.5 Other reserves continued

Cash flow hedge reserve

The cash flow hedge reserve represents the effective portion of cumulative post-tax gains and losses on derivatives designated as cash flow hedging instruments that will be recycled to the income statement when the hedged items affect profit or loss.

	2019 £m	2018 £m
At 1 October	(39)	(1)

Amounts recognised in other comprehensive income:
Cash flow hedge - interest rate risk
Effective portion of changes in fair value of interest rate swaps	14	(58)
Amounts transferred to the income statement	-	9
Taxation	(3)	11
Cash flow hedge - Foreign exchange risk
Effective portion of changes in fair value of cross currency swaps	59	-
Amounts transferred to the income statement	(57)	-
Taxation	-	-
At 30 September	(26)	(39)

4.1.6 Non-controlling interests

At the acquisition date, Virgin Money Holdings (UK) PLC had in issue Fixed Rate Resettable AT1 securities issued on the Luxembourg Stock Exchange. In accordance with IAS 32 these are classified as equity instruments. The Group did not acquire the AT1 securities which remained in issue to third parties, consequently these represented a non-controlling interest. As the AT1 instruments are actively traded, the fair value on acquisition of £422m was calculated based on the market price on the Luxembourg Stock Exchange at its close of business on 12 October 2018. Following the change in obligor from Virgin Money Holdings (UK) PLC to CYBG PLC on 20 August 2019, this has been recognised within other equity (note 4.1.2).

Distributions to non-controlling interests of £33m were made in the year, £26m net of tax (2018: £Nil).

4.2 Equity based compensation

Accounting policy

The Group operates a number of equity settled share based compensation plans in respect of services received from certain of its employees. The fair value of the services received is recognised as an expense. The total amount to be expensed is measured by reference to the fair value of the Company's shares, performance options or performance rights granted, including, where relevant, any market performance conditions and any non-vesting conditions. The impacts of any service and non-market performance vesting conditions are not included in the fair value and instead are included in estimating the number of awards or options that are expected to vest.

The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. A corresponding credit is recognised in the equity based compensation reserve, adjusted for deferred tax. In some circumstances, employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognising the expense during the period between the start of the service period and the grant date.

At the end of each reporting period, the Group revises its estimates of the number of shares, performance options and performance rights that are expected to vest based on the non-market and service vesting conditions. The impact of the revision to original estimates, if any, is recognised in the income statement, with a corresponding adjustment to the equity based compensation reserve.

The equity settled share based payment charge for the year is £4m (2018: £9m).

Group financial statements

Notes to the consolidated financial statements

Section 4: Capital continued

4.2 Equity based compensation continued

CYBG awards

The Group made a number of awards under its share plans:

Plan	Eligible employees	Nature of award	Vesting conditions⁽¹⁾	Grant dates⁽²⁾
DEP⁽³⁾	Selected employees	Conditional rights to shares	Continuing employment or leaving in certain limited circumstances	2016, 2017 and 2018
LTIP	Selected senior employees	Conditional rights to shares	Continuing employment or leaving in certain limited circumstances and achievement of delivery of the Group's strategic goals and growth in shareholder value	2017 and 2018
SIP	All employees	Non-conditional share award	Continuing employment	2016 and 2017

(1) All awards are subject to vesting conditions and therefore may or may not vest.

(2) The year in which grants have been made under the relevant plan.

(3) Grants made under the DEP are made the year following the financial year to which they relate.

Further detail on each plan is provided below:

DEP

Under the plan employees were awarded conditional rights to CYBG PLC shares. The shares are subject to forfeiture conditions including forfeiture as a result of resignation, termination by the Group or failure to meet compliance requirements. Awards include:

− the upfront and deferred elements of bonus awards where required to comply with the PRA Remuneration Code or the Group's deferral policy;

− buyout of equity from previous employment for senior new hires; and

− Demerger awards which are also subject to the achievement of performance conditions over a three-year period. Details of the performance conditions are set out in the Directors' remuneration report contained in the Group's Annual Report and Accounts.

LTIP

Under the plan, employees were awarded conditional rights to CYBG PLC shares. The shares are subject to forfeiture conditions including forfeiture as a result of resignation, termination by the Group or failure to meet compliance requirements.

The performance conditions of the plan must be met over a three-year period. The measures reflect a balanced approach between financial and non-financial performance and are aligned to the organisation's strategic goals. Measures, relative weightings and the quantum for assessing performance are outlined in the Directors' remuneration report section contained in the Group's Annual Report and Accounts.

SIP

Eligible employees at the date of the award, were awarded Group shares, which are held in the Share Incentive Plan Trust (SIP Trust). Awards are not subject to performance conditions and participants are the beneficial owners of the shares granted to them, but not the registered owners. Voting rights over the shares are normally exercised by the registered owner at the direction of the participants. For the 2015 Demerger award, leavers (with the exception of gross misconduct) retain their awards but they must withdraw their shares from the SIP Trust.

Group financial statements

Notes to the consolidated financial statements

Section 4: Capital continued

4.2 Equity based compensation continued

Awards/rights made during the year

Plan	Number outstanding at 1 October 2018	Number awarded	Number forfeited	Number released	Number outstanding at 30 September 2019	Average fair value of awards at grant pence
DEP
2015 Demerger	2,038,052	-	(223,829)	(1,785,999)	28,224	196.96
2015 Bonus	54,953	-	-	(54,953)	-	195.17
2015 Commencement	25,685	-	-	(25,685)	-	194.67
2016 Bonus	21,403	-	-	(10,700)	10,703	266.03
2016 Commencement	57,271	-	-	(36,867)	20,404	266.03
2017 Bonus	592,807	-	(31,943)	(329,794)	231,070	313.20
2017 Commencement	68,167	-	(34,324)	(28,734)	5,109	313.20
2018 Bonus	-	1,634,582	-	(1,462,777)	171,805	192.35
LTIP
2016 LTIP	2,232,391	-	(203,923)	-	2,028,468	266.03
2017 LTIP	2,314,487	-	(207,534)	-	2,106,953	313.20
2018 LTIP	-	5,857,259	(61,455)	-	5,795,804	190,47
SIP
2015 Demerger	1,297,152	-	(512)	(270,148)⁽¹⁾	1,026,492	194.67
2017 Free Share	906,141	-	(477)	(68,688)	836,976	313.20
2019 Free Share	-	2,343,888	(84,870)	(48,216)	2,210,802	202.53

(1) Shares withdrawn from SIP Trust on leaving the Group.

Determination of grant date fair values

Participants of the DEP and LTIP plans are not entitled to dividends until the awards vest, but the number of shares which vest may be increased to reflect the value of dividends that would have been paid up to the end of the holding period for the awards, subject to the extent permitted under the relevant remuneration regulation. Accordingly, the grant date fair value of the awards with only service conditions and/or non-market performance conditions has been taken as the market value of the Company's ordinary shares at the grant date. Where awards are subject to non-market performance conditions, an estimate is made of the number of awards expected to vest in order to determine the overall share-based payment charge to be recognised over the vesting period.

The Group has not issued awards under any CYBG plan with market performance conditions.

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes

5.1 Contingent liabilities and commitments

Accounting policy

Financial guarantees

The Group provides guarantees in the normal course of business on behalf of its customers. Guarantees written are conditional commitments issued by the Group to guarantee the performance of a customer to a third party and are primarily issued to support direct financial obligations such as commercial bills or other debt instruments issued by a counterparty. The rating of the Group as a guarantee provider enhances the marketability of the paper issued by the counterparty in these circumstances. Financial guarantee contracts are initially recorded at fair value which is equal to the premium received, unless there is evidence to the contrary.

The expected credit loss requirements of IFRS 9 as set out in note 3.2 are equally applicable to loan commitments and financial guarantee contracts.

Operating lease commitments

The leases entered into by the Group are primarily operating leases, with operating lease rentals charged to the income statement on a straight line basis over the period of the lease. The Group discloses its obligations for future minimum payments under non-cancellable leases.

Contingent liabilities

Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised on the balance sheet but are disclosed unless they are remote.

The table below sets out the amounts of financial guarantees and commitments which are not recorded on the balance sheet. Financial guarantees and commitments are credit-related instruments which include acceptances, letters of credit, guarantees and commitments to extend credit. The amounts do not represent the amounts at risk at the balance sheet date but the amounts that would be at risk should the contracts be fully drawn upon and the customer defaults. Since a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements.

Financial guarantees

	2019 £m	2018 £m
Guarantees and assets pledged as collateral security:
Due in less than 3 months	24	26
Due between 3 months and 1 year	24	36
Due between 1 year and 3 years	6	10
Due between 3 years and 5 years	11	2
Due after 5 years	48	45
	113	119
Other credit commitments
Undrawn formal standby facilities, credit lines and other commitments to lend at call	15,158	7,016

The Group's loan commitments and financial guarantee contracts attracted expected credit losses of £5m at 30 September 2019. The balance calculated on adoption of IFRS 9 is disclosed in note 5.4.

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes continued

5.1 Contingent liabilities and commitments continued

Capital commitments

The Group had future capital expenditure which had been contracted for, but not provided for, at 30 September 2019 of £0.2m (2018: £1m).

Operating lease commitments

	2019 £m	2018 £m
Leases as lessor
Future minimum lease payments under non-cancellable operating leases:
Within 1 year	2	1
Between 1 year and 5 years	4	4
Over 5 years	1	1
	7	6
Leases as lessee
Future minimum lease payments under non-cancellable operating leases:
Within 1 year	35	29
Between 1 year and 5 years	135	96
Over 5 years	244	124
	414	249

Other contingent liabilities

Conduct risk related matters

There continues to be significant uncertainty and thus judgement is required in determining the quantum of conduct risk related liabilities, with note 3.16 reflecting the Group's current position in relation to redress provisions including those for PPI. The final amount required to settle the Group's potential liabilities for these, and other conduct related matters, is materially uncertain. Contingent liabilities include those matters where redress is likely to be paid and costs incurred but the amounts cannot currently be estimated.

The Group will continue to reassess the adequacy of provisions for these matters and the assumptions underlying the calculations at each reporting date based upon experience and other relevant factors at that time.

Legal claims

The Group is named in and is defending a number of legal claims arising in the ordinary course of business. No material adverse impact on the financial position of the Group is expected to arise from the ultimate resolution of these legal actions.

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes continued

5.2 Notes to the statement of cash flows

	2019 £m	2018 £m
Adjustments included in the loss before tax
Interest receivable	(2,432)	(1,113)
Interest payable	918	262
Depreciation and amortisation (note 2.4)	108	89
Derivative financial instruments fair value movements	17	(3)
Impairment losses on credit exposures (note 3.2)	252	41
Software impairments and write-offs	132	-
Other non-cash movements	1	-
Gain on sale of 50% (less one share) consideration in Virgin Money UTM	(35)	-
Equity based compensation	4	9
	(1,035)	(715)
Changes in operating assets
Net (increase)/decrease in:
Balances with supervisory central banks	(20)	(31)
Due from other banks	274	339
Derivative financial instruments	64	18
Financial instruments at fair value through other comprehensive income	(33)	-
Financial assets at fair value through profit or loss	103	117
Loans and advances to customers	(2,663)	(1,488)
Defined benefit pension assets	(74)	-
Other assets	138	(14)
	(2,211)	(1,059)
Changes in operating liabilities
Net increase/(decrease) in:
Due to other banks	(20)	(1,053)
Derivative financial instruments	(128)	(16)
Financial liabilities at fair value through profit or loss	(11)	(11)
Customer deposits	2,837	1,186
Provisions for liabilities and charges	128	(223)
Defined benefit pension obligations	-	(14)
Other liabilities	(171)	9
	2,635	(122)

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes continued

5.2 Notes to the statement of cash flows continued

For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances with less than three months maturity from the date of acquisition. This includes cash and liquid assets and amounts due to other banks (to the extent less than 90 days).

	2019 £m	2018 £m
Cash and balances with central banks (note 3.4)	10,113	6,498
Other assets	43	86
Due to other banks	(20)	(12)
Other liabilities	(17)	(30)
	10,119	6,542

5.3 Related party transactions

Following the acquisition of Virgin Money Holdings (UK) PLC, the Group has a number of additional related entities. No comparative information is required where the entity only became a related party during the period.

Assets with related entities

	2019 £m	2018 £m
Investments in joint ventures and associates
Virgin Money Unit Trust Managers Limited⁽¹⁾	8	-

Other assets
Amounts due from Virgin Money Unit Trust Managers Limited⁽¹⁾	2	-
Total assets with related entities	10	-

Liabilities with related entities

Customer deposits
The Virgin Money Foundation	1	-

Other liabilities
Group pension deposits⁽²⁾	17	36
Commissions and charges due to Virgin Atlantic Airways Limited⁽³⁾	6	-
Trademark licence fees due to Virgin Enterprises Limited⁽⁴⁾	4	-

Total liabilities with related entities	28	36

Non-interest income
Net fees and commissions to Virgin Atlantic Airways Limited	(15)	-
Share of post-tax result of Virgin Money Unit Trust Managers Limited⁽¹⁾	(1)	-
Gain on sale of 50% (less one share) consideration in Virgin Money Unit Trust Managers Limited to Aberdeen Standard Investments⁽¹⁾	35	-

Operating and administrative expenses
Trademark licence fees to Virgin Enterprises Limited⁽⁴⁾	(11)	-
Costs recharged to Virgin Money Unit Trust Managers Limited⁽¹⁾	2	-
Donations to the Virgin Money Foundation⁽⁵⁾	(2)	-

Total income statement	8	-

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes continued

5.3 Related party transactions continued

(1) The Group entered into a joint venture with Aberdeen Standard Investments (ASI), under the terms of which ASI acquired 50% (less one share) of the Group's investments and pensions business. This new joint venture is Virgin Money Unit Trust Managers Limited.

(2) The Group and the Trustee to the pension scheme have entered into a contingent Security Arrangement which provides additional support to the Scheme by underpinning recovery plan contributions and some additional investment risk. The security is in the form of a pre-agreed maximum level of assets that are set aside for the benefit of the Pension Scheme in certain trigger events. These assets are held by Red Grey Square Funding LLP, an insolvency remote consolidated structured entity. The Group incurred costs in relation to pension scheme administration. These costs, which amounted to £0.1m (2018: £0.3m), were charged to the Group sponsored scheme. Information on the pension schemes operated by the Group is provided in note 3.12. Pension contributions of £83m (2018: £18m) were made to the Scheme (note 3.12).

(3) The Group incurs credit card commissions and air mile charges with Virgin Atlantic Airways Limited (VAA) in respect of an agreement between the two parties. £4m of cash costs payable to VAA have been deferred on the balance sheet.

(4) Licence Fees of £11m were payable to Virgin Enterprises Limited for the use of the Virgin Money brand trademark. This contract was previously held by Virgin Money Holdings (UK) plc. However, following the acquisition of Virgin Money Holdings (UK) PLC, the contract was renewed directly between CYBG plc and Virgin Enterprises Ltd.

(5) The Group has made donations to the Virgin Money Foundation to enable it to pursue its charitable objectives. The Group has also provided a number of support services to the Virgin Money Foundation on a pro bono basis, including use of facilities and employee time. The estimated gift in kind for support services provided during the year was £0.6m and is included in the total value disclosed above.

The Group paid £0.2m of ordinary dividends to Virgin Group Holdings Ltd.

Compensation of key management personnel (KMP)

KMP comprises Directors of the Company and members of the Executive Leadership Team.

	2019 £m	2018 £m
Salaries and short-term benefits	14	9
Other long-term employee benefits	-	-
Termination benefits	5	-
Equity based compensation⁽¹⁾	2	1
	21	10

(1) Basis of the expense recognised in the year in accordance with IFRS 2 'Equity based compensations', including associated employers' NIC.

The following information regarding Directors' remuneration is presented in accordance with the Companies Act 2006.

2019

£m

2018

£m

Aggregate remuneration

In addition to the above, £0.5m (2018: £0.4m) was expensed relating to LTIP. None of the Directors were members of the Group's defined contribution pension scheme during 2019 (2018: none). None of the Directors were members of the Group's defined benefit pension scheme during 2019 (2018: none). None of the Directors hold share options and none were exercised during the year (2018: none).

Transactions with KMP

KMP, their close family members and any entities controlled or significantly influenced by the KMP have undertaken the following transactions with the Group in the normal course of business. The transactions were made on the same terms and conditions as applicable to other Group employees, or on normal commercial terms.

2019

£m

2018

£m

Loans and advances

Deposits

No provisions have been recognised in respect of loans provided to the KMP (2018: £Nil). There were no debts written-off or forgiven during the year to 30 September 2019 (2018: £Nil). Included in the above are four (2018: six) loans totalling £1m (2018: £2m) made to Directors. In addition to the above, there are guarantees of £Nil (2018: £Nil) made to Directors and their related parties.

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes continued

5.4 Transition to IFRS 9 'Financial Instruments' from IAS 39 'Financial Instruments: Recognition and Measurement' and the adoption of IFRS 15 'Revenue from Contracts with Customers'

IFRS 9

IFRS 9 replaced IAS 39 as the accounting standard for financial instruments and was adopted (except for the hedge accounting requirements) by the Group with effect from 1 October 2018. The requirements of IFRS 9 allow for the transitional adjustments to be reflected through the opening retained earnings line, without the need to produce comparative information on an IFRS 9 basis.

The following table summarises the locations of the policies and key judgement areas and impact on the Group's financial position of adopting IFRS 9 on 1 October 2018⁽¹⁾:

Detail	Location
New accounting standards	Note 1.9
Loans and advances to customers	Note 3.1
Impairment provisions on credit exposures	Note 3.2
Critical accounting estimates and judgements in relation to expected credit losses (ECL)	Note 3.2
Financial assets and liabilities at fair value through profit or loss (FVTPL)	Note 3.5
Financial assets at fair value through other comprehensive income (FVOCI)	Note 3.7
Financial assets available for sale (AFS)	Note 3.8 - and only applicable for the year ended 30 September 2018 as this category for financial assets was removed with the introduction of IFRS 9
Other relevant credit risk disclosures	Pages 144 to 157 of the Risk report contained in the Group's Annual Report and Accounts

The carrying amount of the Group's financial assets and financial liabilities at 30 September 2018 under IAS 39 and at 1 October 2018 under IFRS 9 are as follows:

	Measurement under IAS 39	Measurement under IFRS 9	IAS 39 carrying amount £m⁽²⁾	IFRS 9 carrying amount £m
Financial assets
Cash and balances with central banks	Amortised cost	Amortised cost	6,573	6,573
Due from other banks	Amortised cost	Amortised cost	693	693
Financial assets available for sale⁽³⁾	Available for sale	Fair value through profit or loss	1,562	11
		Fair value through other comprehensive income	n/a	1,551
Loans and advances to customers at fair value through profit or loss	Fair value through profit or loss	Fair value through profit or loss	362	362
Derivative financial instruments	Fair value through profit or loss	Fair value through profit or loss	262	262
Loans and advances to customers	Amortised cost	Amortised cost	32,748	32,719

Financial liabilities
Other financial liabilities at fair value	Fair value through profit or loss	Fair value through profit or loss	15	15

(1) The acquisition of Virgin Money Holdings (UK) PLC on 15 October 2018 has no impact or effect on the Group's disclosures on the transition to IFRS 9, which is based on the Group balance sheet position as at 30 September 2018 which was prior to the acquisition.

(2) The prior year comparative has been restated in line with the current year presentation (note 1.10).

(3) The Group's listed securities, comprising of UK Government Securities, and other listed securities (e.g. bonds issued by supra-nationals and AAA rated covered bonds), are held in a business model that is 'to hold to collect and sell' and classified at fair value through other comprehensive income. The Group's unlisted securities, and other financial assets held as available for sale have been classified at fair value through profit or loss.

The changes required (net of deferred tax) to the Group's financial assets and liabilities on adoption of IFRS 9 have been adjusted through the Group's retained earnings figure for 30 September 2018.

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes continued

5.4 Transition to IFRS 9 'Financial Instruments' from IAS 39 'Financial Instruments: Recognition and Measurement' and the adoption of IFRS 15 'Revenue from Contracts with Customers' continued

Initial adoption approach

The methodology and nature of the key judgements applied on the initial adoption of IFRS 9 were consistent with the Group policy as outlined in detail in note 3.2, and are therefore not repeated here.

Consistent with the Group's approach to the application of economic scenarios to the ECL calculation at 30 September 2019, similar scenarios fed into the ECL calculation at 1 October 2018. The Group applied the following weightings to the chosen scenarios at 1 October 2018:

Mild upside 25%

Base case 60%

Severe downside 15%

Refer to note 3.2 for further detail regarding the approach and comparison of the weightings applied at 1 October 2018 and 30 September 2019.

Future macroeconomic conditions

A range of future macroeconomic conditions is used in the scenarios over a five-year forecast period and reflects the best estimates of future conditions under each scenario. The Group has identified the following key macroeconomic conditions as the most significant inputs for IFRS 9 modelling purposes: UK GDP growth, CPI inflation, house prices, bank rates, unemployment rates and CRE capital values. These are assessed and reviewed by an internal panel on a six-monthly basis to ensure appropriateness and relevance to the ECL calculation. Where model inputs are not reflective of the current market conditions at the date of the financial statements, the Group may reflect these through the use of temporary adjustments to the ECL calculation using expert credit judgement.

The simple forward-looking five-year averages for the key model inputs used in the ECL calculations at 1 October 2018 are:

	uk gdp growth %	cpi inflation %	house prices %	bank rate %	ilo unemployment %
1 October 2018
Mild upside	2.6	2.4	4.9	2.5	3.3
Base case	2.1	1.9	4.3	1.1	4.2
Severe downside	0.6	0.8	(1.7)	0.1	6.2

The revised simple forward-looking five-year averages for the key model inputs used in the ECL calculations at 30 September 2019 are:

	uk gdp growth %	cpi inflation %	house prices %	bank rate %	ilo unemployment %
30 September 2019
Mild upside	2.7	2.3	5.8	2.0	3.4
Base case	1.8	1.7	2.9	0.9	3.8
Severe downside	0.2	0.8	(4.6)	0.4	5.8

IFRS 15

The Group also adopted IFRS 15 'Revenue from Contracts with Customers' with effect from 1 October 2018.

The requirements of IFRS 15 allow for the transitional adjustments to be reflected through the opening retained earnings line, without the need to produce comparative information on an IFRS 15 basis.

The majority of the Group's income was either not in scope for IFRS 15 or was being recognised in a way that was consistent with the requirements of the new standard. The limited exception to this was income recognised in relation to the Group's rights to future commission on the deferred consideration receivable. This was held as an 'other' available for sale financial asset under IAS 39 and reclassified to FVTPL on transition to IFRS 9 as detailed in this note. As a result of this remeasurement, a further £1m of future commission income was recognised on transition to IFRS 15, which has been reflected in increases to both other assets and retained earnings on transition.

Group financial statements

Notes to the consolidated financial statements

Section 5: Other notes continued

5.4 Transition to IFRS 9 'Financial Instruments' from IAS 39 'Financial Instruments: Recognition and Measurement' and the adoption of IFRS 15 'Revenue from Contracts with Customers' continued

Quantitative impact of IFRS 9 and IFRS 15 on adoption at 1 October 2018

The change to the carrying amounts of the Group's assets, liabilities, reserves and retained earnings as at 30 September 2018 as a result of the IFRS 9 and IFRS 15 reclassifications and remeasurements required on 1 October 2018 are as follows:

	IAS 39 carrying amount as at 30 Sept 2018⁽¹⁾ £m	IFRS 9 - reclassifications £m	IFRS 9 - remeasurement in ECL £m	IFRS 9 - release of Available for sale reserve £m	IFRS 15 remeasurement £m	Carrying amount as at 1 Oct 2019 £m
Assets
Financial assets available for sale	1,562	(1,562)	-	-	-	-
Financial assets at fair value through other comprehensive income	-	1,551	-	-	-	1,551
Other financial assets at fair value	362	11	-	-	-	373
Loans and advances to customers	32,748	-	(29)	-	-	32,719
Deferred tax	206	-	7	-	-	213
Other assets	338	-	-	-	1	339

Equity
Available for sale reserve	(7)	4	-	3	-	-
FVOCI reserve	-	(4)	-	-	-	(4)
Retained earnings	(2,873)	-	22	(3)	(1)	(2,855)

(1) The prior year comparative has been restated in line with the current year presentation (note 1.10).

The move to IFRS 9 has resulted in a net £19m decrease in retained earnings at 1 October 2018 primarily due to the change in the measurement in impairment losses, which are now calculated on an ECL basis as opposed to the incurred loss methodology used in IAS 39. The gross impairment loss adjustment of £29m as at 1 October 2018 includes £5m of ECLs calculated on the Group's loan commitments and financial guarantee contracts. In addition, while an ECL calculation is also performed on the Group's financial assets held at FVOCI, the resultant impairment provision is not material enough to be reported separately in the above tables.

5.5 Pillar 3 disclosures

Basel III Capital Requirements Directive IV

Pillar 3 disclosure requirements are set out in Part Eight of the CRR. The consolidated disclosures of the Group, for the 2019 financial year, will be issued concurrently with the Annual Report and Accounts and will be found at www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/.

5.6 Post balance sheet events

FSMA Part VII transfer of trade and assets from Virgin Money PLC to Clydesdale Bank PLC

On 26 September 2019, at a hearing in the Court of Session in Edinburgh, the Court approved a banking business transfer scheme under Part VII of the Financial Services and Markets Act 2000. The scheme effective date was 21 October 2019, and in accordance with the court approval, on this date the business of Virgin Money PLC was transferred to Clydesdale Bank PLC for a cash consideration of £10m. The transfer of the trade and assets is a business transfer under common control and has no impact on the consolidated Group financial results.

Change in Company name

CYBG PLC changed its name to Virgin Money UK PLC on 30 October 2019. The registered office address of the Company has changed from Merrion Way to Jubilee House, Gosforth, Newcastle upon Tyne, NE3 4PL.

Additional information

Measuring financial performance - glossary

Financial performance measures

As highlighted in the Annual Report and Accounts, the Group utilises a range of performance measures⁽¹⁾ to assess the Group's performance. These can be grouped under the following headings:

− profitability;

− asset quality; and

− capital optimisation.

The performance measures used are a combination of statutory, regulatory and alternative performance measures; with the type of performance measure used dependent on the component elements and source of what is being measured.

Statutory performance measures (S)

These are used when the basis of the calculation is derived from a measure that is required under generally accepted accounting principles (GAAP). An example of this would be references to earnings per share.

Regulatory performance measures (R)

These are used when the basis of the calculation is required and specified by the Group's regulators. Examples of this would be the leverage ratio and the Tier 1 ratio.

Alternative performance measures (A)

These are used when the basis of the calculation is derived from a non-GAAP measure - also referred to as APMs. Examples of this would be the statutory cost to income ratio and the statutory return on tangible equity.

Where a performance measure refers to an 'underlying' metric, the detail on how this measure is arrived at, along with management's reasoning for excluding the item from the Group's current underlying performance rationale, can be found on page 108, directly following this section. These adjustments to the Group's statutory results made by management are designed to provide a more meaningful underlying basis.

Descriptions of the performance measures used, including the basis of calculation where appropriate, are set out below:

Profitability:

Term	Type	Definition
Net interest margin (NIM)	A	Underlying net interest income as a percentage of average interest earning assets for a given period. Underlying net interest income of £1,433m (2018: £1,457m) is divided by average interest earning assets for a given period of £86,362m (2018: £81,934m) (which is then adjusted to exclude short-term repos used for liquidity management purposes, fair value adjustments, amounts received under the Conduct Indemnity and not yet utilised, and any associated income). As a result of the exclusions noted above, average interest earning assets used as the denominator have reduced by £Nil (2018: £187m) and the net interest income numerator has reduced by £Nil (2018: £3m).
Statutory return on tangible equity (RoTE)	A	Statutory profit/(loss) after tax attributable to ordinary equity holders as a percentage of average tangible equity (total equity less intangible assets, AT1 and non-controlling interests) for a given period.
Statutory return on assets	A	Statutory profit/(loss) after tax as a percentage of average total assets for a given period.
Statutory basic earnings per share (EPS)	S	Statutory profit/(loss) after tax attributable to ordinary equity shareholders including tax relief on any distributions made to other equity holders and non-controlling interests, divided by the weighted average number of ordinary shares in issue for a given period (excluding own shares held).
Underlying RoTE	A	Underlying profit after tax attributable to ordinary equity holders, including tax relief on any distributions made to other equity holders and non-controlling interests, as a percentage of average tangible equity (total equity less intangible assets, AT1 and non-controlling interests) for a given period.
Underlying CIR	A	Underlying operating and administrative expenses as a percentage of underlying total operating income for a given period.
Underlying return on assets	A	Underlying profit after tax as a percentage of average total assets for a given period.
Underlying basic EPS	A	Underlying profit after tax attributable to ordinary equity holders divided by the weighted average number of ordinary shares in issue for a given period.
Underlying profit after tax attributable to ordinary equity holders	A	Underlying profit before tax of £539m (2018: £581m) less tax charge of £77m (2018: £101m), less AT1 distributions (net of tax relief) of £33m (2018: £29m), less distributions to non-controlling interests (net of tax relief) of £26m (2018:£25m) and was equal to £403m (2018: £426m). The underlying tax charge is calculated by applying the statutory tax rate for the relevant period to the taxable items adjusted on the underlying basis.

(1) The term 'financial performance measure' covers all metrics, ratios and percentage calculations used to assess the Group's performance and is interchangeable with similar terminology used in the Annual Report and Accounts such as highlights, key metrics, key performance indicators (KPIs) and key credit metrics.

Additional information

Measuring financial performance - glossary

Asset quality:

Term	Type	Definition
Impairment charge to average customer loans (cost of risk)	A	Impairment losses on credit exposures plus credit risk adjustment on fair value loans to average customer loans (defined as loans and advances to customers, other financial assets at fair value and due from customers on acceptances).
Total provision to customer loans	A	Total impairment provision on credit exposures as a percentage of total customer loans at a given date.
Indexed loan to value (LTV) of the mortgage portfolio	A	The mortgage portfolio weighted by balance and indexed using the MIAC Acadametrics indices for the Clydesdale Bank PLC portfolio while the Virgin Money Holdings (UK) PLC portfolio is indexed using the Markit indices.

Capital optimisation:

Term	Type	Definition
Common Equity Tier 1 (CET1) ratio	R	CET1 capital divided by RWAs at a given date.
Tier 1 ratio	R	Tier 1 capital as a percentage of RWAs.
Total capital ratio	R	Total capital resources divided by RWAs at a given date.
CRD IV leverage ratio	R	This is a regulatory standard ratio proposed by Basel III as a supplementary measure to the risk-based capital requirements. It is intended to constrain the build-up of excess leverage in the banking sector and is calculated by dividing Tier 1 capital resources by a defined measure of on and off-balance sheet items plus derivatives.
UK leverage ratio	R	The Group's leverage ratio on a modified basis, excluding qualifying central bank claims from the exposure measure in accordance with the policy statement issued by the PRA in October 2017.
Tangible net asset value (TNAV) per share	A	Tangible equity (total equity less intangible assets, AT1 and non-controlling interests) as at the period end divided by the number of ordinary shares in issue at the year end (excluding own shares held).
Pro forma tangible net asset value (TNAV) per share	A	Tangible equity (total equity less intangible assets, AT1 and non-controlling interests) as at the period end divided by the number of ordinary shares in issue at the period end. For comparative periods, the number of ordinary shares in issue used in the calculation is the number of ordinary shares in issue on 15 October 2018 following the acquisition of Virgin Money Holdings (UK) PLC (excluding own shares held).
Pro forma underlying basic earnings per share	A	Underlying profit after tax attributable to ordinary equity shareholders, including tax relief on any distributions made to other equity holders and non-controlling interests, divided by the weighted average number of ordinary shares in issue for a given period (excluding own shares held). The weighted average number of ordinary shares in issue assumes that the 540,856,644 shares issued on the acquisition of Virgin Money Holdings (UK) PLC, was completed on 1 October 2017.
Loan to deposit ratio (LDR)	R	Customer loans as a percentage of customer deposits at a given date.
Liquidity coverage ratio (LCR)	R	Measures the surplus (or deficit) of the Group's high quality liquid assets relative to weighted net stressed cash outflows over a 30-day period. It assesses whether the Group has sufficient liquid assets to withstand a short-term liquidity stress based on cash outflow assumptions provided by regulators.
Net stable funding ratio (NSFR)	R	The total amount of available stable funding divided by the total amount of required stable funding, expressed as a percentage. The Group monitors the NSFR, based on its own interpretations of current guidance available for CRD IV NSFR reporting. Therefore, the reported NSFR may change over time with regulatory developments. Due to possible differences in interpretation of the rules, the Group's ratio may not be directly comparable with those of other financial institutions.

Additional information

Measuring financial performance - glossary

Underlying adjustments to the pro forma view of performance

On arriving at an underlying basis, the effects of certain items that do not promote an understanding of historical or future trends of earnings or cash flows are removed, as management consider that this presents more comparable results year-on-year. These items are all significant and are typically one-off in nature. Additional detail is provided below where considered necessary to further explain the rationale for their exclusion from underlying performance, in particular for new items in the current year or recurring non-underlying items:

Item	2019 £m	2018 £m	Reason for exclusion from the Group's current underlying performance
Restructuring costs	(156)	-	These are part of the Group's publicised three-year integration plan following the acquisition of Virgin Money Holdings (UK) PLC and comprise a number of one-off expenses that are required to realise the anticipated cost synergies.
Acquisition costs:			All costs incurred as a direct result of the acquisition of Virgin Money Holdings (UK) PLC have been removed from underlying performance due to the scale and nature of the transaction. Further information on the items is provided below to aid understanding.
Acquisition accounting	(87)	-	This consists principally of the unwind of the IFRS 3 fair value adjustments created on the acquisition of Virgin Money Holdings (UK) PLC in October 2018 (£23m gain) and the IFRS 9 impairment impact on acquired assets (£103m charge) with other smaller items amounting to £7m. These represent either one-off adjustments or are the scheduled reversals of the accounting adjustments that arose following the fair value exercise required by IFRS 3. These will continue to be treated as non-underlying adjustments over the expected three to five-year period until they have been fully reversed.
Intangible asset write-off	(127)	-	The charge for the software write-off is significant and has arisen in respect of software assets which are no longer considered to be of value relative to the Group's strategy following the acquisition of Virgin Money Holdings (UK) PLC.
Mortgage EIR adjustments	80	-	The alignment of accounting practices is a one-off exercise arising from the acquisition.
Virgin Money Holdings (UK) PLC transaction costs	(55)	(39)	These costs related directly to the transaction and comprised legal, advisory and other associated costs required to complete the transaction.
Total acquisition costs	(189)	(39)
Legacy conduct	(433)	(396)	These costs are historical in nature and are not indicative of the Group's current practices.
Other:
Consent solicitation	(18)	-	One-off costs relating to the change in obligor of senior debt from Virgin Money Holdings (UK) PLC to CYBG on 20 August 2019.
SME transformation	(30)	(16)	These costs are significant and considered to be one-off due to the unique growth opportunities currently available to the Group in respect of its Business lending.
Gain on sale of UTM	35	-	A one-off gain recognised on the disposal of 50% (less one share) of Virgin Money Unit Trust Managers Limited.
UTM transition costs	(1)	-
GMP equalisation cost	(11)	-	A one-off charge for GMP equalisation in the Group's defined benefit scheme.
Legacy restructuring and separation	(5)	(46)	These legacy costs were significant in prior periods and related to the Sustain programme, and demerger from NAB, both of which completed in the current period.
Virgin Money digital bank termination costs	-	(3)
Gain on disposal of VocaLink	4	-
Gain on disposal of Visa C shares	-	3
Total other	(26)	(62)

Additional information

Glossary

Term	Definition
Additional Tier 1 (AT1)	Securities that are considered Additional Tier 1 capital in the context of CRD IV.
arrears	A customer is in arrears when they fail to adhere to their contractual payment obligations resulting in an outstanding loan that is unpaid or overdue.
average assets	Represents the average of assets over the year adjusted for any disposed operations.
B	The Group's digital application suite, offering retail customers money management capabilities across Web, Android and Apple platforms.
Bank	Clydesdale Bank PLC.
Basel II	The capital adequacy framework issued by the Basel Committee on Banking Supervision (BCBS) in June 2004.
Basel III	Reforms issued by the BCBS in December 2017 with subsequent revisions.
basis points (bps)	One hundredth of a percent (0.01%); meaning that 100 basis points is equal to 1%. This term is commonly used in describing interest rate movements.
Board	Refers to the Virgin Money UK PLC Board or the Clydesdale Bank PLC Board as appropriate.
Business lending	Lending to non-retail customers, including overdrafts, asset and lease financing, term lending, bill acceptances, foreign currency loans, international and trade finance, securitisation and specialised finance.
Capped Indemnity	The indemnity from NAB in favour of the Group in respect of certain qualifying conduct costs incurred by the Group under the terms of the Conduct Indemnity Deed.
carrying value (also referred to as carrying amount)	The value of an asset or a liability in the balance sheet based on either amortised cost or fair value principles.
collateral	The assets of a borrower that are used as security against a loan facility.
collective impairment provision	Impairment assessment on a collective basis for homogeneous groups of loans that are not considered individually significant and to cover losses which have been incurred but have not yet been identified on loans subject to individual assessment.
Combined Group	CYBG, now Virgin Money UK PLC, and its controlled entities following the acquisition of Virgin Money Holdings (UK) PLC.
commercial paper	An unsecured promissory note issued to finance short-term credit requirements. These instruments have a specified maturity date and stipulate the face amount to be paid to the investor on that date.
Common Equity Tier 1 capital (CET1)	The highest quality form of regulatory capital that comprises total shareholders' equity and related non-controlling interests, less goodwill and intangible assets and certain other regulatory adjustments.
Company/CYBG	CYBG PLC up until 31 October 2019 and thereafter Virgin Money UK PLC.
Conduct Indemnity Deed	The deed between NAB and CYBG setting out the terms of: the Capped Indemnity; and certain arrangements for the treatment and management of Relevant Conduct Matters.
conduct risk	The risk of treating customers unfairly and/or delivering inappropriate outcomes resulting in customer detriment, regulatory fines, compensation, redress costs and reputational damage.
counterparty	The other party that participates in a financial transaction, with every transaction requiring a counterparty in order for the transaction to complete.
Coverage ratio	Impairment allowance as at the period end shown as a percentage of gross loans and advances as at the period end.
covered bonds	A corporate bond with primary recourse to the institution and secondary recourse to a pool of assets that act as security for the bonds on issuer default. Covered bonds remain on the issuer's balance sheet and are a source of term funding for the Group.
CRD IV	European legislation to implement Basel III. It replaces earlier European capital requirements directives with a revised package consisting of a new Capital Requirements Directive and a new Capital Requirements Regulation. CRD IV sets out capital and liquidity requirements for European banks and harmonises the European framework for bank supervision. See also 'Basel III'.
Credit conversion factor (CCF)	Credit conversion factors are used in determining the exposure at default in relation to a credit risk exposure. The CCF is an estimate of the proportion of undrawn and off-balance sheet commitments expected to be drawn down at the point of default.
Credit impaired financial assets	Financial assets that are in default or have an individually assessed provision. This is also referred to as a 'Stage 3' impairment loss and subject to a lifetime expected credit loss calculation. The Group considers 90 days past due as a backstop in determining whether a financial asset is credit impaired.
Credit risk mitigation (CRM)	Techniques to reduce the potential loss in the event that a customer (borrower or counterparty) becomes unable to meet its obligations. This may include the taking of financial or physical security, the assignment of receivables or the use of credit derivatives, guarantees, credit insurance, set-off or netting.

Additional information

Glossary

Term	Definition
credit risk adjustment/credit valuation adjustment	An adjustment to the valuation of financial instruments held at fair value to reflect the creditworthiness of the counterparty.
customer deposits	Money deposited by individuals and corporate entities that are not credit institutions, and can be either interest bearing, non-interest bearing or term deposits.
CYBI	CYB Investments Limited.
default	A customer is in default when either they are more than 90 DPD on a credit obligation to the Group, or are considered unlikely to pay their credit obligations in full without recourse to actions such as realisation of security (if held).
delinquency	See 'arrears'.
Demerger	The demerger of the Group from NAB pursuant to which all of the issued share capital of CYBI was transferred to CYBG by NAB in consideration for the issue and transfer of CYBG shares to NAB in part for the benefit of NAB (which NAB subsequently sold pursuant to the IPO) and in part for the benefit of NAB shareholders under a scheme of arrangement under part 5.1 of the Australian Corporations Act.
Demerger date	8 February 2016.
derivative	A financial instrument that is a contract or agreement whose value is related to the value of an underlying instrument, reference rate or index.
earnings at risk (EaR)	A measure of the quantity by which net interest income might change in the event of an adverse change in interest rates.
effective interest rate (EIR)	The carrying value of certain financial instruments which amortises the relevant fees over the expected life of the instrument.
encumbered assets	Assets that have been pledged as security, collateral or legally 'ring-fenced' in some other way which prevents those assets being transferred, pledged, sold or otherwise disposed.
exposure	A claim, contingent claim or position which carries a risk of financial loss.
Exposure at default (EAD)	The estimate of the amount that the customer will owe at the time of default.
fair value	The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions.
Financial Ombudsman Service	An independent body set up by the UK Parliament to resolve individual complaints between financial businesses and their customers.
Financial Services Compensation Scheme (FSCS)	The UK's compensation fund of last resort for customers of authorised financial services firms and is funded by the financial services industry. The FSCS may pay compensation if a firm is unable, or likely to be unable, to pay claims against it. This is usually because it has stopped trading or has been declared in default.
forbearance	The term generally applied to the facilities provided or changes to facilities provided to assist borrowers, who are experiencing, or are about to experience, a period of financial stress.
funding risk	A form of liquidity risk arising when the liquidity needed to fund illiquid asset positions cannot be obtained at the expected terms and when required.
Group	CYBG, now Virgin Money UK PLC, and its controlled entities.
hedge ineffectiveness	Represents the extent to which the income statement is impacted by changes in fair value or cash flows of hedging instruments not being fully offset by changes in fair value or cash flows of hedged items.
IFRS 9	The new financial instrument accounting standard which was adopted by the Group with effect from 1 October 2018.
impairment allowances	An expected credit loss provision held on the balance sheet for financial assets calculated in accordance with IFRS 9. The impairment allowance is calculated as either a 12-month or a lifetime expected credit loss.
impairment losses	The expected credit losses calculated in accordance with IFRS 9 and recognised in the income statement with the carrying value of the financial asset reduced by creating an impairment allowance. Impairment losses are calculated as either a 12-month or lifetime expected credit loss.
interest rate hedging products (IRHP)	This incorporates: (i) standalone hedging products identified in the Financial Services Authority (FSA) 2012 notice; (ii) the voluntary inclusion of certain of the Group's more complex tailored business loan (TBL) products; and (iii) the Group's secondary review of all fixed-rate tailored business loans (FRTBLs) complaints which were not in scope for the FSA notice.
Internal Capital Adequacy Assessment Process (ICAAP)	The Group's assessment of the levels of capital that it needs to hold through an examination of its risk profile from regulatory and economic capital viewpoints.
Internal Liquidity Adequacy Assessment Process (ILAAP)	The Group's assessment and management of balance sheet risks relating to funding and liquidity.

Additional information

Glossary

Term	Definition
Internal Ratings-Based approach (IRB)	A method of calculating credit risk capital requirements using internal, rather than supervisory, estimates of risk parameters.
investment grade	The highest possible range of credit ratings, from 'AAA' to 'BBB', as measured by external credit rating agencies.
Level 1 fair value measurements	Financial instruments whose fair value is derived from unadjusted quoted prices for identical instruments in active markets.
Level 2 fair value measurements	Financial instruments whose fair value is derived from quoted prices for similar instruments in active markets and financial instruments valued using models where all significant inputs are observable.
Level 3 fair value measurements	Financial instruments whose fair value is derived from valuation techniques where one or more significant inputs are unobservable.
Lifetime expected credit loss	The expected credit loss calculation performed on financial assets where a significant increase in credit risk since origination has been identified. This can be either a 'Stage 2' or 'Stage 3' impairment loss depending on whether the financial asset is credit impaired.
Listing Rules	Regulations applicable to any company listed on a United Kingdom stock exchange, subject to the oversight of the UK Listing Authority (UKLA). The Listing Rules set out mandatory standards for any company wishing to list its shares or securities for sale to the public.
loan to value ratio (LTV)	A ratio that expresses the amount of a loan as a percentage of the value of the property on which it is secured.
Loss given default (LGD)	The estimate of the loss that the Group will suffer if the customer defaults (incorporating the effect of any collateral held).
medium-term notes	Debt instruments issued by corporates, including financial institutions, across a range of maturities.
Minimum Requirement for Own Funds and Eligible Liabilities (MREL)	MREL is a minimum requirement for institutions to maintain equity and eligible debt liabilities, to help ensure that when an institution fails the resolution authority can use these financial resources to absorb losses and recapitalise the continuing business.
net interest income	The amount of interest received or receivable on assets, net of interest paid or payable on liabilities.
Net Promoter Score (NPS)	This is an externally collated customer loyalty metric that measures loyalty between a provider, who in this context is the Group, and a consumer.
operational risk	The risk of loss resulting from inadequate or failed internal processes, people strategies and systems or from external events.
Overall Liquidity Adequacy Rule (OLAR)	An FCA and PRA rule that firms must at all times maintain liquidity resources which are adequate both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due. This is included in the Group's risk appetite and subject to approval by the Board as part of the ILAAP.
pension risk	The risk that, at any point in time, the available assets to meet pension liabilities are at a value below current and future scheme obligations.
Personal lending	Lending to individuals rather than institutions and excludes mortgage lending which is reported separately.
PPI redress	Includes PPI customer redress and all associated costs excluding fines.
probability of default (PD)	The probability that a customer will default over either the next 12 months or lifetime of the account.
regulatory capital	The capital which the Group holds, determined in accordance with rules established by the PRA.
Relevant Conduct Matters	The legacy conduct issues covered by the Capped Indemnity, including certain conduct issues relating to PPI, standalone IRHP, voluntary scope TBLs and FRTBLs and other conduct matters in the period prior to the Demerger date whether or not known at the Demerger date.
residential mortgage-backed securities (RMBS)	Securities that represent interests in groups or pools of underlying mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and principal).
ring-fencing	A new regime of rules which require banks to change the way that they are structured by separating retail banking services from investment and international banking. This is to ensure the economy and taxpayers are protected in the event of any future financial crises.
risk appetite	The level and types of risk the Group is willing to assume within the boundaries of its risk capacity to achieve its strategic objectives.
risk weighted assets (RWA)	On and off-balance sheet assets of the Group are allocated a risk weighting based on the amount of capital required to support the asset.
sale and repurchase agreement ('repo')	A short-term funding agreement that allows a borrower to create a collateralised loan by selling a financial asset to a lender. As part of the agreement, the borrower commits to repurchase the security at a date in the future repaying the proceeds of the loan. For the counterparty (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement or a reverse repo.

Additional information

Glossary

Term	Definition
Scheme	The Group's defined benefit pension scheme, the Yorkshire and Clydesdale Bank Pension Scheme.
secured lending	Lending in which the borrower pledges some asset (e.g. property) as collateral for the lending.
securitisation	The practice of pooling similar types of contractual debt and packaging the cash flows from the financial asset into securities that can be sold to institutional investors in debt capital markets. It provides the Group with a source of secured funding than can achieve a reduction in funding costs by offering typically 'AAA' rated securities secured by the underlying financial asset.
Significant increase in credit risk	The assessment performed on financial assets at the reporting date to determine whether a 12-month or lifetime expected credit loss calculation is required. Qualitative and quantitative triggers are assessed in determining whether there has been a significant increase in credit risk since origination. The Group considers 30 days past due as a backstop in determining whether a significant increase in credit risk since origination has occurred.
specific impairment provision	A specific provision relates to a specific loan, and represents the estimated shortfall between the carrying value of the asset and the estimated future cash flows, including the estimated realisable value of securities after meeting securities realisation costs.
standardised approach	In relation to credit risk, a method for calculating credit risk capital requirements using External Credit Assessment Institutions (ECAI) ratings and supervisory risk weights. In relation to operational risk, a method of calculating the operational capital requirement by the application of a supervisory defined percentage charge to the gross income of eight specified business lines.
stress testing	The term used to describe techniques where plausible events are considered as vulnerabilities to ascertain how this will impact the own funds or liquidity which a bank holds.
structured entities (SE)	An entity created to accomplish a narrow well-defined objective (e.g. securitisation of financial assets). An SE may take the form of a corporation, trust, partnership or unincorporated entity. SEs are often created with legal arrangements that impose strict limits on the activities of the SE. May also be referred to as an SPV.
subordinated debt	Liabilities which rank after the claims of other creditors of the issuer in the event of insolvency or liquidation.
Term Funding Scheme (TFS)	Launched in 2016 by the BoE to allow banks and building societies to borrow from the BoE at rates close to base rate. This is designed to increase lending to businesses by lowering interest rates and increasing access to credit.
Tier 1 capital	A measure of a bank's financial strength defined by CRD IV. It captures CET1 capital plus other Tier 1 securities in issue, subject to deductions.
Tier 2 capital	A component of regulatory capital, including qualifying subordinated debt, eligible collective impairment allowances and other Tier 2 securities as defined by CRD IV.
unaudited	Financial information that has not been subject to validation by the Group's external auditor.
underlying capital generation	The amount of capital generated by the business in basis points over a given period, before non‑underlying items are included.
unsecured lending	Lending in which the borrower pledges no assets as collateral for the lending (such as credit cards and current account overdrafts).
value at risk (VaR)	A measure of the loss that could occur on risk positions as a result of adverse movements in market risk factors (e.g. rates, prices, volatilities) over a specified time horizon and to a given level of confidence.
Virgin Money	Virgin Money UK PLC
Virgin Money Holdings	Virgin Money Holdings (UK) PLC

Additional information

Abbreviations

Investors and Analysts
Andrew Downey Head of Investor Relations	+44 20 3216 2694 +44 7823 443 150
	[email protected]

Media (UK)
Christina Kelly	+44 7484 905 358
Senior Media Relations Manager	[email protected]

Simon Hall	+44 7855 257 081
Media Relations Manager	[email protected]

Press Office	+44 800 066 5998
	[email protected]

Powerscourt
Victoria Palmer-Moore	+44 7725 565 545
Andy Smith	+44 7872 604 889

Media (Australia)
Citadel Magnus
James Strong Peter Brookes	+61 448 881 174 +61 407 911 389

Statutory loss after tax	Underlying profit before tax	Underlying Return on Tangible Equity
£(194)m	£539m	10.8%
2018: £(145)m	2018: £581m	2018: 11.0%
Net Interest Margin (NIM)	Underlying cost to income ratio	Cost of risk
1.66%	57%	21bps
2018: 1.78%	2018: 59%	2018: 15bps
CET1 ratio	Asset growth	Relationship deposit growth
13.3%	+2.9%	+7.1%
2018: 15.1%	2018: N/A	2018: N/A

	2019				2018
	Mortgages bps	Business bps	personal bps	Total bps	Mortgages bps	Business bps	personal bps	Total bps	Total Change (bps)
Gross cost of risk	1	45	333	27	1	36	250	20	7
Specific provision releases and recoveries				(6)				(5)	(1)
Net cost of risk				21				15	6

AIRB	Advanced internal ratings-based
ALCO	Asset and Liability Committee
API	Application programming interface
ASX	Australian Securities Exchange
AT1	Additional Tier 1
BCAs	Business current accounts
BCBS	Basel Committee on Banking Supervision
BoE	Bank of England
bps	Basis points
BTL	Buy-to-let
CAGR	Compound Annual Growth Rate
CCB	Capital Conservation Buffer
CCF	Credit conversion factor
CCyB	Countercyclical Capital Buffer
CET1	Common Equity Tier 1 Capital
CIR	Cost to income ratio
CMA	Competition and Markets Authority
CPI	Consumer Price Index
CRD IV	Capital Requirements Directive IV
CRM	Credit risk mitigation
CRR	Capital Requirements Regulation
CSR	Corporate Social Responsibility
DEP	Deferred Equity Plan
DPD	Days past due
DTR	Disclosure and Transparency Rules
EAD	Exposure at default
EaR	Earnings at risk
EBA	European Banking Authority
ECL	Expected credit loss
EIR	Effective interest rate
EPS	Earnings per share
FCA	Financial Conduct Authority
FIRB	Foundation internal ratings-based
FPC	Financial Policy Committee
FRC	Financial Reporting Council
FSCS	Financial Services Compensation Scheme
FSMA	Financial Services and Markets Act 2000
FTE	Full time equivalent
FVOCI	Fair value through other comprehensive income
FVTPL	Fair value through profit or loss
GDPR	General Data Protection Regulation
GHG	Greenhouse Gases
GMP	Guaranteed Minimum Pension
HMRC	Her Majesty's Revenue and Customs
HQLA	High Quality Liquid Assets
IAS	International Accounting Standard
IASB	International Accounting Standards Board
ICAAP	Internal Capital Adequacy Assessment Process
IFRS	International Financial Reporting Standard
ILAAP	Internal Liquidity Adequacy Assessment Process
ILO	International Labour Organisation
IPO	Initial Public Offering
IRB	Internal ratings-based
IRHP	Interest rate hedging products
IRRBB	Interest rate risk in the banking book
ISDA	International Swaps and Derivatives Association
JV	Joint venture
LCR	Liquidity coverage ratio
LDR	Loan to deposit ratio
LGD	Loss Given Default
LIBOR	London Interbank Offered Rate
LSE	London Stock Exchange
LTIP	Long-term incentive plan
LTV	Loan to value ratio
MREL	Minimum Requirement for Own Funds and Eligible Liabilities
MRT	Material Risk Takers
NAB	National Australia Bank Limited
NIM	Net interest margin
NPS	Net promoter score
NSFR	Net stable funding ratio
OLAR	Overall liquidity adequacy rule
PBT	Profit before tax
PCA	Personal current accounts
PD	Probability of Default
PILON	Payment in lieu of notice
POCI	Purchased or originated credit impaired
PPI	Payment protection insurance
PRA	Prudential Regulation Authority
RAS	Risk Appetite Statement
RMBS	Residential mortgage-backed securities
RMF	Risk Management Framework
RoTE	Return on Tangible Equity
RPI	Retail Price Index
RWA	Risk weighted assets
SICR	Significant increase in credit risk
SIP	Share Incentive Plan
SME	Small or medium sized enterprises
SRB	Systemic Risk Buffer
SVR	Standard variable rate
TCC	Transactional Credit Committee
TFS	Term Funding Scheme
TNAV	Tangible net asset value
TSA	Transitional Services Agreement
TSR	Total Shareholder Return
VAA	Virgin Atlantic Airways
VaR	Value at risk

	2019 UK
Average FTE employees (number)	8,703
Total operating income (£m)	1,749
Loss before tax (£m)	232
Corporation tax paid (£m)	7
Public subsidies received (£m)	-