28 November 2019

Virgin Money UK PLC - results for the full year to 30 September 2019

Note: this summary is on a pro forma basis as if Virgin Money was acquired on 01-Oct-17 (actual completion 15-Oct-18)

David Duffy, Chief Executive Officer:

"In the first year of our newly combined business, we have delivered a good operating performance in challenging conditions and made great progress on the integration and rebrand to Virgin Money.

Our statutory result was significantly affected by additional PPI provisions, driven by the unprecedented surge in PPI information requests in August, along with anticipated Virgin Money acquisition-related costs.

Our customer divisions have performed well - we have delivered a further c.£2bn in net lending to support UK SMEs and consumers, attracted c.£3bn in customer deposits, and made marked improvements to our customer experience.

We achieved all the required approvals in 2019 to enable us to operate as one bank, with one brand, and are ready to deliver our strategy to disrupt the status quo with brilliant customer service and unique Virgin Money products. In December we are launching Virgin Money's first digital personal current account and three new Virgin Money concept stores. A unique loyalty and rewards programme for customers featuring a number of Virgin Group companies will follow in 2020, along with the launch of our brand new Virgin Money business account."

Key financial highlights

·    Resilient operating performance in a challenging environment - NIM of 1.66% in line with guidance and 6% reduction in underlying costs to £942m; pre-provision operating profit improved +1% in 2019

·    Underlying profit of £539m down 7% due to higher impairments from IFRS 9 adoption and normalisation

·    Transformation on track - £53m of run rate net cost savings achieved; on track for c.£200m FY22 target

·    Statutory loss after tax of £194m due to legacy conduct costs and restructuring & acquisition costs; Q4 PPI provision of £385m is within the Group's previous guidance range

·   Robust capital position with CET1 ratio of 13.3%; provides capacity to execute our strategy and deliver all of the targets announced at our Capital Markets Day (CMD) in June

·  Dividend suspended for FY19 in light of additional PPI provisions; the Board will reconsider dividends for FY20 in line with normal practice

Delivering our strategic priorities

·   Pioneering Growth - strong growth in lending and deposits in line with our strategy - above market asset growth in Business (+4.5%) and Personal (+16%), and disciplined growth in Mortgages (+1.7%); good growth in lower-cost relationship deposits (+7%) across both Business and Personal

·   Delighted Customers & Colleagues - improved Group NPS of +37 (2018: +34), with B digital banking service NPS of +52, and customer experience enhancements such as the new Virgin Money credit card app, our JV with Salary Finance offering workplace personal lending and an energy switching partnership with GoCompare; colleague engagement score of 76% despite major change agenda

·   Super Straightforward Efficiency - significant progress made in the first year of the Virgin Money integration; all 6.6m customers can now be served under the Virgin Money brand after successful completion of the FSMA Part VII process

·   Discipline & Sustainability - robust capital position supports delivery of CMD strategy and targets; cost of risk of 21bps was stable through the year and we maintained our prudent underwriting approach

Significant new developments for customers as our full rebrand is launched

·    First ever Virgin Money digital current account ready to launch in December, built on our innovative FinTech-friendly digital platform

·    First three new concept Virgin Money stores will also open in December

·    New Digital Disruption Hub in Newcastle will accelerate customer experience and digital functionality improvements from January 2020 in support of our target for Top 3 CMA service quality rankings

·   Plans to launch a unique personal rewards and loyalty programme leveraging the wider Virgin Group and a business banking proposition in 2020 are progressing well

 ·    FY20 guidance in line with medium-term strategic and financial targets

Full Year 2019 financial results summary

Above market growth in Business and Personal; good growth in relationship deposits

·    Customer lending growth of 2.9% to £73.0bn, all within our existing risk appetite:

-     Business lending growth of 4.5% to £7.9bn; supported by originations of £2.2bn during 2019

-     Personal lending growth of 16.1% to £5.0bn driven by high-quality Virgin Money credit card growth, new balances from our Salary Finance partnership and an improved online personal loan proposition

-     Mortgage lending growth of 1.7% to £60.1bn, maintaining market share at c.4% in line with strategy

·    Deposit growth of 4.6% to £63.8bn, with 7.1% growth in lower-cost relationship deposits to £21.3bn

·    Robust asset quality with a cost of risk of 21bps stable through 2019 but increased on FY18 (15bps) largely due to the adoption of IFRS9 and normalisation

Resilient operating performance; statutory loss due to conduct, restructuring & acquisition costs

·      Statutory loss after tax of £194m reflects legacy conduct costs and restructuring & acquisition costs

·      Additional PPI provisions of £385m taken in Q4 (FY18: £415m); c.9% information request complaint conversion rate

·      Underlying profit of £539m is 7% lower YoY due to higher impairments; pre-provision operating profit increased 1%:

-     FY19 NIM of 1.66% in line with guidance (Q4: 1.60%) reflecting competitive market conditions

-     Non-interest income reduced 10% primarily due to a £12m lower contribution from our Investments business and £9m of hedging-related adverse fair value movements

-     Costs down 6% to £942m in line with guidance; cost:income ratio of 57% and positive jaws of 3%

·      Underlying Return on Tangible Equity (RoTE) of 10.8% (FY18: 11.0%)

Integration on track with great progress made during the year

·      Integration is progressing well with FSMA Part VII banking business transfer completed in October 2019; can now begin the integration of our customer propositions and platforms, and commence our rebrand

·      Run rate net cost savings of £53m delivered; on track for c.£200m net cost savings target by FY22

·      £156m of restructuring costs includes accelerated office closures and redundancies; c.£360m estimate for FY19-21 remains

·      Acquisition costs of £189m comprises £102m of one-off costs and £87m of acquisition accounting unwind

Robust capital position supports execution of strategy and delivery targets; ordinary dividend suspended

·      CET1 ratio of 13.3% reflects legacy conduct and restructuring & acquisition costs (FY18: 15.1%)

·      Ordinary dividend suspended for FY19; progressive and sustainable dividend ambition remains and the Board will reconsider dividends for FY20 in line with normal practice

·      CET1 ratio above medium-term operating level of c.13%; retains a significant buffer to CRD IV regulatory requirement of 11.0%, supports delivery of CMD strategy and targets

·      TNAV per share of 249.2p; down 10.8p vs FY18 due to PPI

Capital Markets Day strategy on track and all targets re-affirmed

·      Guidance for FY20:

-     NIM of c.160-165bps

-     Underlying operating costs of <£900m

-     CET1 ratio operating level of c.13%

·    CMD strategy remains on track with all targets re-affirmed, including: modest improvement in NIM by FY22, <£780m FY22 operating costs and statutory RoTE of >12% by FY22

Contact details

For further information, please contact:

Virgin Money UK PLC will be hosting a presentation for analysts and investors covering the 2019 full year financial results starting at 08:30 GMT (19:30 AEDT) and this will be webcast live and available at:

https://webcast.openbriefing.com/virginmoney-FY19/

Alternatively, a conference call facility will be available to listen to the meeting. The dial in details for the call are:

Conference Call Details:

·      Australia 02 8417 2995

·      United Kingdom 0800 640 6441

·      United Kingdom (Local) 020 3936 2999

·      United States 1 646 664 1960

·      All other locations +44 20 3936 2999

Participant Access Code - 391935

A recording of the webcast and conference call will be made available on our website shortly after the meeting at:

https://www.virginmoneyukplc.com/investor-relations/results-and-reporting/financial-results/

Business and financial review

Chief Executive Officer's review

"In 2019 we refreshed our strategy, launched our three new divisions and delivered significant integration milestones. We are now one Bank with the culture and capabilities to deliver on our strategy of disrupting the status quo."

2019 has seen us build our platform for the future. Designing our refreshed strategy was crucial and developing it with our new Purpose and Values at its core gives us a clear direction in support of our ambition to disrupt the status quo.

The combination of Virgin Money and CYBG has created a unique digitally-enabled competitor that combines the strengths of both the major banks and the neo banks, enabling us to offer a differentiated customer proposition.

Working closely with the Board, we formulated our strategy and targets, which we announced to a positive reception at our Capital Markets Day (CMD) in June. This strategy will support what we believe is a compelling investment case and positions us to compete effectively with current and alternative providers of customer propositions in the banking models of the future.

Our integration programme has been a key focus throughout the year. The critical achievement of this work was the FSMA Part VII banking business transfer approval in October 2019, which we delivered faster than expected. This means we can now begin the integration of our customer propositions and offer the full range of products and services from across the combined business. We can also now launch the Group rebrand activity and proceed with the platform integration activities that support our cost savings targets.

Our Group strategy will be brought to life for our customers through our three new customer-facing divisions: Business, Personal and Mortgages, each with their own customer-focused ambitions, strategies and KPIs.

We have also made good progress in realising some of our initial integration cost savings, including addressing senior management duplication, starting the rationalisation of our office and branch footprints, and commencing deduplication of suppliers. This has enabled us to deliver £53m of run-rate net cost savings in 2019, a strong start towards our targeted c.£200m of net cost savings.

In line with the balance sheet optimisation strategy we outlined at our CMD, we grew above market in Business (+4.5%) and Personal (+16%), but tempered our growth in Mortgages. We also delivered 7% growth in relationship deposits, as we optimise our funding mix.

This strategy contributed to the delivery of a resilient operating performance in a competitive environment. Although we increased operating profit by 1% through our initial cost savings, underlying profit before tax reduced by 7%, due to higher impairments from IFRS 9 and normalisation.

We, like the rest of the industry, were surprised by the scale of the PPI information requests and complaints during August. We have moved swiftly to address the issue and are leveraging innovative technology solutions to enable us to deal with genuine customer complaints as quickly, and as cost effectively, as we can. It is nonetheless frustrating to incur a further £385m in provisions in Q4 as we look to close out this legacy issue.

The scale of PPI provisions and acquisition costs incurred during the year led to a statutory loss of £194m for FY2019. However, as outlined at our CMD, we have a clear path to statutory profitability and a statutory return on tangible equity of >12% by FY2022.

Although the sizeable PPI provision did impact our capital position, the Board and I are confident that our CET1 ratio of 13.3% retains both a significant buffer to our regulatory requirement of 11% and provides the capacity to deliver our strategy. We have however taken the difficult decision to suspend the dividend in 2019. The Board, incorporating feedback from our major shareholders, believes this is the right short-term action to enable us to deliver on our longer-term strategy and targets.

We have almost completed the transfer of all CYBG customers and products onto our FinTech-friendly banking platform, and we can now commence the integration of the Virgin Money customer platforms too. We have launched EZBob as an SME solution, Salary Finance for unsecured lending and a money-saving utility app with GoCompare. We want to accelerate the pace of these and other initiatives and we have therefore announced the creation of a new digital disruption hub in Newcastle. This scaled capability will allow our three business divisions to deliver disruptive propositions to enhance the customer experience in a rapid and agile manner, with our innovations benchmarked to all markets and industries globally.

Our ambition is to deliver the product and service diversity and benefits of a large-scale bank with the customer experience and innovation of the neo banks, and we will also expand our partnership platform to facilitate the delivery of further value-based propositions like GoCompare. We are working on new propositions with a number of the 25+ other Virgin Group companies and plan to launch reward and loyalty offerings.

Ultimately, we hope to demonstrate the unique advantages of being linked to the broader Virgin Group. We will be the only bank that offers a full range of banking and lifestyle services through a linked rewards programme that offers value back to our customers. We will begin bringing these capabilities to market during 2020.

We recognise the continuously changing landscape in financial services and will evaluate partnerships where we believe there is an opportunity to provide our customers with a unique proposition, a class-leading service and a value for money outcome. We need to remain vigilant around the competitive landscape while at the same time delivering a significant amount of change in our organisation. Finally, we are reinforcing our governance to ensure compliance with the regulatory requirements as a new Tier 1 bank.

We are a Purpose-driven organisation with a refreshed strategy and priorities. We have a clear path to statutory profitability and a statutory return on tangible equity of >12% by FY2022. We are also focused on an ambitious sustainability strategy centred on inclusion, community engagement and protecting and nurturing the environment. Our Virgin Money Giving platform and charitable foundation will help us to achieve our goals in these areas.

2019 has been a year of immense work to build the foundations for our future success across the Board, my Leadership Team and all of our colleagues, and I would like to thank everybody for their efforts. I am excited about what we will achieve together in 2020 as we start to deliver on our ambition to disrupt the status quo.

David Duffy

Chief Executive Officer
27 November 2019

Business and financial review

Chief Financial Officer's review

"In 2019 we delivered a resilient operating performance and made good progress against our financial targets. We have a strong balance sheet and are well placed to deliver our strategy."

2019 has seen the combined Group make a strong start. We delivered a resilient operating performance in a challenging environment, while executing on key integration milestones that now enable us to commence the customer and platform integration programme. We have also made good initial progress in the delivery of our refreshed strategy and targets that we set out at our Capital Markets Day (CMD) in June. The Group experienced an unwelcome and unexpected surge in PPI claims ahead of August's complaint deadline, but we have been able to absorb the additional cost impact and remain focused on implementing our CMD strategy.

Our strategy to reshape the balance sheet is off to a good start with asset growth of 2.9%. This was achieved through above market growth in Business and Personal lending, with more muted growth in Mortgages as we optimised for value in line with our strategy. We also delivered strong growth of 7.1% in relationship deposits as we look to rebalance our funding away from less sticky and more expensive non-linked savings and term deposits.

The Group delivered a resilient operating performance with pro forma underlying profit before tax of £539m (2018: £581m) and underlying return on tangible equity of 10.8% (2018: 11.0%).

The Group delivered slightly lower income of £1,639m (down 3% year-on-year) in a challenging environment, but more than offset this with reduced costs of £942m (down 6%) to deliver an increased operating profit of £692m (up 1%). Impairments rose to £153m (up 44%) following the adoption of IFRS 9 and normalisation, but underlying asset quality remains strong. As a result, underlying profit before tax was 7% lower than 2018.

In line with the rest of the industry, we received an unprecedented surge in PPI information requests and complaints during August, which required us to take additional PPI provisions of £385m in the second half of the year (£415m for the full year).

The scale of the PPI provision, coupled with the restructuring and acquisition costs incurred this year (£345m), meant that the Group has reported a statutory loss after tax of £194m (2018: £145m loss after tax).

While the PPI provision clearly had a significant impact on the Group's capital position, thanks to the significant buffer the Group was prudently holding, we have been able to absorb the impact and remain robustly capitalised. However we have, incorporating feedback from our major shareholders, taken the prudent decision to suspend the dividend in 2019.

Our CET1 ratio of 13.3% as at 30 September 2019 retains a significant buffer to our CRD IV regulatory requirement of 11.0% and provides sufficient capacity to deliver our CMD strategy.

2019 has been a year of building our foundations for the future, while seeking to close out legacy issues. Our refreshed strategy is predicated on actions within our own control and leverages the key strategic advantages available to us. We look forward to another year of strong delivery and progress in 2020.

The information and commentary in this section presents the Group results on a pro forma basis as if CYBG PLC and Virgin Money Holdings (UK) PLC had always been a combined group. This assists in explaining trends in financial performance by showing a full 12-month performance for the combined group for both the current and prior year.

The acquisition has had a significant impact on the Group's statutory results and financial position and we believe that it is most helpful to provide historical information which is more readily comparable with the results of the combined businesses.

The statutory results, which include the results of Virgin Money Holdings (UK) PLC from the date of acquisition on 15 October 2018 are set out at the end of this section on pages 18 to 21.

A reconciliation between the results on a pro forma basis and a statutory basis is also included on page 20.

Business and financial review

Chief Financial Officer's review

Business and financial review

Chief Financial Officer's review

Total income of £1,639m was 3% lower year-on-year, reflecting competitive market conditions impacting net interest income, a lower contribution from our investments business, and adverse fair value movements within non-interest income.

Net interest income and NIM

Net interest income declined 2% year-on-year reflecting the continued competitive pressures in the marketplace.

In Mortgages, sustained competition in recent years has driven front book mortgage pricing well below average back book rates. This has impacted our book more than others over the past few years as we have a less seasoned, shorter duration book. The average yield on the mortgage book declined 12bps due to a negative c.30bps average front book vs. back book variance during 2019. However, growth in average mortgage balances helped mitigate these pressures to deliver broadly stable mortgage interest income. In Business, expanding yields due to higher rates and growth in average balances has driven increased interest income. In Personal, better yields due to the seasoning of the credit card book and growth in average balances also increased interest income.

Our customer deposit costs increased by 10bps in 2019 to 98bps, 4bps of which relates to the full year impact of the base rate increase in August 2018. The remainder of the increase is due to increased deposit pricing pressure on non-linked savings and term deposits. Wholesale funding costs increased primarily due to rate increases and additional MREL issuance.

As a result, and as expected and guided, the Group's Net Interest Margin (NIM) declined by 12bps to 1.66%. Mortgage pricing pressures reduced NIM by 8bps and deposit pricing, including the base rate increase impact, led to a further 10bps of NIM reduction. This was offset by 7bps of benefit from growth in Business and Personal lending, with a further 1bps of net reduction from other items, including wholesale funding and liquidity impacts.

The Group manages the risk to its earnings from movements in interest rates centrally, by hedging assets, liabilities and equity which are less sensitive to movements in rates. The weighted average life of this structural hedge was unchanged at 2.5 years (2018: 2.5 years), in line with the expected life of liabilities of 5 years. The average hedge balance increased to £24.0bn (2018: £21.5bn) due to the alignment of the treatment of some administered rate deposits acquired from Virgin Money with the Group's policy. Total structural hedge balances generated gross incremental net interest income of £228m (2018: £198m), representing a yield of 0.9% (2018: 0.9%).

(1) Includes loans designated at fair value through profit or loss.

Business and financial review

Chief Financial Officer's review

Non-interest income

Non-interest income reduced £22m year-on-year (down 10%). Fee income across Personal and Business was broadly stable. The major drivers of the reduction were the contribution from our Investments business, which was £12m lower in 2019 as a result of our post-acquisition decision to reduce asset management fees (c.£9m), and the initial impact of the transfer of the business into the JV with Aberdeen Standard Investments (c.£3m). In addition, there were adverse fair value movements relating to hedge accounting ineffectiveness, which should equalise over time, but reduced non-interest income by £9m year-on-year.

Underlying operating and administrative expenses reduced by 6% year-on-year to £942m, in line with our guidance for <£950m for the year, as our integration programme gathers pace.

Personnel expenses reduced 14% reflecting early action to address senior management deduplication as well as initial benefits from our other integration workstreams. Other operating expenses increased by 3% as we continued to invest in our customer propositions and also reflected the cost of running two separate banks ahead of the FSMA Part VII approval in October 2019.

Net cost savings target on track

We have made good initial progress in delivering against our target of c.£200m of net cost savings by the end of FY2022, with £53m of annual run-rate net cost savings achieved already. This has been delivered primarily through deduplication of senior management (c.£20m of run-rate savings), as well as the realisation of initial central costs synergies such as harmonisation of suppliers (c.£27m of run-rate savings) and operational efficiency initiatives including deduplication of head office functions (c.£12m of run-rate savings). This was partly offset by a £7m increase in the Virgin Money brand trademark licence fee.

Improving efficiency

The 6% reduction in costs more than offset the 3% reduction in income delivering positive jaws of 3%. This enabled the Group to reduce its cost:income ratio by 2%pts to 57%, as we progress on the path towards our target for a mid-40s% ratio by FY2022.

Business and financial review

Chief Financial Officer's review

(1) IFRS 9 transitional disclosures are available in note 5.4 within the notes to the consolidated financial statements

The impairment charge increased by 44% or £47m, in line with expectations. This reflected the full adoption of IFRS 9 across the Group, portfolio seasoning and a return to more normal levels of impairment in Business. The cost of risk of 21bps was therefore 6bps higher than FY2018, but was stable across the year as asset quality has remained resilient.

Divisional performance

Mortgage impairment levels remain very low with no signs of asset quality stress in the portfolio.

Business gross cost of risk increased to 45bps, which reflected a more normalised level following an abnormally low level of impairments in FY2018 with no significant one-off charges. We remain focused on managing our Business risk profile through maintaining a diversified portfolio, leveraging our sector specialist underwriting experience and applying strict client exposure limits. The underlying credit quality of the book remains strong, with the probability of default improved on origination in 2019 and unchanged across the portfolio relative to 2018.

Gross cost of risk in Personal increased by 83bps, reflecting the adoption of IFRS 9 and the seasoning of the credit card portfolio. Our focus in Personal is to grow our underweight position through better accessing our existing customer base and leveraging the Virgin Money brand to target more affluent segments of the external market.

Asset quality in the credit card portfolio remains strong, with 30-day arrears of 1.1% well below the industry average of 2.3% and customer affordability remaining robust. Customer indebtedness is also lower than the industry with a debt to income of c.23% vs. c.30% for the industry.

Performance in the personal loan portfolio has benefited from enhanced scorecards and credit tightening strategies, with growth in high-quality customers reducing 90 days past due rates on the book to 0.6% from 0.7% a year ago.

Business and financial review

Chief Financial Officer's review

(1) In order to reconcile the pro forma (loss)/profit to the statutory loss, the pre-acquisition results of Virgin Money Holdings (UK) PLC are removed.

The Group's pro forma loss before tax was £265m, reflecting £804m of exceptional costs incurred during the year, which have been excluded from the underlying performance of the business. These included significant legacy conduct costs, one-off acquisition costs, as well as the first full year of restructuring costs to achieve integration.

Restructuring costs

As outlined at the CMD in June the Group expects to incur c.£360m of restructuring costs across FY2019-21. The Group had anticipated incurring this evenly over the period with c.£120m expected in 2019, however, due to the acceleration of redundancy initiatives and property closures into September 2019, we have incurred £156m of restructuring costs during the year. We will see the synergy benefits of these initiatives in FY2020. The Group expects to incur a further c.£140m in 2020 as we accelerate initiatives to mitigate the timing of investments and inflation, and the remainder in 2021. We continue to expect total restructuring costs to be c.£360m over the three-year period.

Acquisition costs

The Group incurred acquisition costs of £189m during the year.

This included a one-off charge of £127m for intangible asset write-offs following a review of the Group's software estate. This identified a number of 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 were therefore required to be written down. However, this charge is capital neutral.

Other one-off impacts include £55m of transaction-related costs incurred by Virgin Money Holdings (UK) PLC and an effective interest rate (EIR) adjustment credit of £80m relating to the mortgage portfolio following the harmonisation of accounting policies.

The Group recognised fair value acquisition accounting adjustments of £270m net that will be unwound through the income statement over the lives of the related assets and liabilities (c.5 years) and £87m was charged in 2019.

Legacy conduct

Legacy conduct costs of £433m include £415m of PPI provisions, with an additional £385m taken in Q4 following the unprecedented industry-wide surge in information requests and complaints in August ahead of the PPI time bar deadline. This provision reflects the costs of additional complaints (including those from the Official Receiver), processing costs in relation to the large volume of information requests, and the costs to process and remediate valid complaints arising from the information requests. While we still have a residual volume of requests to process, detailed sampling has informed the provision we have taken and this is our best estimate. The Group also incurred £18m of provision costs in relation to a number of other smaller legacy items.

Other items

The Group incurred several other one-off exceptional costs during the year, including £30m of costs in preparation for participating in the RBS Incentivised Switching Scheme, an £11m charge for GMP pensions equalisation, and an £18m charge for consent solicitation fees incurred in relation to changing the obligor on Virgin Money Holdings (UK) PLC's outstanding debt instruments to the Group's holding company. These were partially offset by a £35m gain on sale of c.50% of Virgin Money Unit Trust Managers to Aberdeen Standard Investments.

Business and financial review

Chief Financial Officer's review

Underlying RoTE of 10.8% was slightly lower than the prior year, reflecting lower underlying profit, but with a minimal impact on average tangible equity from the conduct charges as the bulk of those costs were incurred on the last day of the financial year. Statutory RoTE was negative reflecting the significant legacy conduct, restructuring and acquisition costs during the year.

TNAV per share reduced c.11p in 2019 to 249.2p, with TNAV build of 31p from underlying profit after tax being more than offset by 28p of legacy conduct charges and a net 14p negative impact from other movements including restructuring and acquisition related adjustments.

(1) Current account and linked savings balances.

The Group began the execution of its balance sheet optimisation strategy in 2019 in which we seek to rebalance our asset mix towards higher-margin lending and to grow our lower cost relationship deposits to enable us to replace more expensive non-linked savings and term deposits.

Continued customer balance growth

Customer lending balances increased by 2.9% during 2019 with above market growth in Personal and Business lending, and more muted growth in Mortgages. Our lending continues to be underwritten within our prudent risk appetite and approach.

Customer deposits increased by 4.6%, including a strong 7.1% growth in our lower cost relationship deposits. We also continued to grow our non-linked savings balances (+17.6%) to enable us to replace our more expensive term deposits and to help fund the balance sheet.

The stronger relative growth in our customer deposits meant that our Loan to Deposit ratio reduced to 114%.

Business and financial review

Chief Financial Officer's review

Further progress on our wholesale funding strategy

Wholesale funding balances were broadly flat during the year, although there were significant movements within the component parts. Supported by strong deposit and wholesale funding generation we repaid £1.3bn of TFS, as we follow a prudent repayment schedule ahead of contractual maturity.

We were also active in other wholesale funding markets, with a number of successful and over-subscribed transactions during the year, including Virgin Money PLC's inaugural Covered Bond issuance. This new Covered Bond programme raised over £1bn in funding across Euro and Sterling markets across two separate trades. We also issued two further successful transactions from our Lanark mortgage-backed securities platform, raising c.£1.1bn.

These were supported by £250m of Additional Tier 1 (AT1) issuance in March 2019 and £250m of Tier 2 subordinated debt issuance in December 2018 which strengthened our capital stack, as well as £400m of senior unsecured debt issuance in August 2019 as we build towards meeting our final MREL requirements in 2022.

Our balance sheet strength was also underpinned by the consent solicitation activity undertaken to change the obligor on Virgin Money Holdings (UK) PLC's outstanding MREL and AT1 instruments to the Group's parent company. 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.

Further issuance in secured and unsecured formats is expected in 2020, and we continue to expect that we will issue between £1.5bn and £2.0bn of MREL eligible senior unsecured funding by December 2021.

Liquidity and LCR

LCR remained strong at 152%. While the current position reflects some excess liquidity to mitigate the risks from the FSMA Part VII process and Brexit uncertainty, the 9%pts reduction in LCR highlights the ability of the combined Group to operate more efficiently while continuing to meet regulatory and internal risk appetite metrics.

Risk weighted assets

RWAs have grown by 4.8% during the year, with overall risk weight density increasing slightly, largely reflecting the shift in the mix of the Group's lending towards higher RWA density lending in Business and Personal.

Mortgage RWAs remained stable due to lower lending in the year, along with model improvements that have reduced the portfolio risk weight density. RWAs in our Personal portfolios have grown broadly in line with assets, while Business RWAs have increased slightly above asset growth largely reflecting model updates undertaken as part of the final implementation of IRB. Non-credit risk RWAs of £2,989m were broadly stable year-on-year.

Despite heavy capital utilisation during the year from legacy conduct and restructuring and acquisition costs, the Group maintained a robust capital position with a CET1 ratio of 13.3% and a total capital ratio of 20.1% as at 30 September 2019.

Capital requirements

Following completion of the Group's ICAAP the PRA has updated the capital requirements for the Group. The Pillar 2A CET1 requirement was reduced from 3.6% to 3.0% and the Group's fully-loaded CRD IV minimum CET1 capital requirement is now 60bps lower at 11.0%.

CET1 capital movements

Underlying capital generation in the period was 77bps, largely driven by strong underlying profits of 234bps, offset by growth in lending, AT1 distributions and ongoing investment as we continue to invest in developing the business to achieve our strategic ambitions.

Restructuring and acquisition costs, which are elevated this year due to the one-off elements, absorbed 84bps of capital demonstrating that the Group's underlying capital generation of 77bps was sufficient to fund its ongoing strategy. However, the scale of the legacy conduct charge consumed 172bps of capital, leaving the Group's CET1 ratio at 13.3%.

Robust capital position supports strategy

While the PPI provision did have a significant impact on the Group's capital position, thanks to the significant buffer the Group was prudently holding, we have been able to absorb the impact and remain robustly capitalised.

However, after incorporating feedback from our major shareholders, the Board has concluded that it is prudent to conserve capital through the suspension of an ordinary dividend for 2019.

Our closing CET1 ratio of 13.3% remains above our medium-term operating level of c.13% and retains a significant management buffer to our CRD IV regulatory requirement of 11.0%. The Group has assessed its revised capital plan and determined that it has sufficient capacity to deliver the strategy and targets as outlined at the CMD in June.

Business and financial review

Chief Financial Officer's review

MREL

The Group's MREL ratio increased to 26.6%, reflecting £400m of senior unsecured debt issuance in August 2019 and £250m of Tier 2 subordinated debt issuance in December 2018. We are comfortably ahead of our interim 2020 MREL requirement of 21.5%, and while the final MREL requirements are not yet confirmed, we expect to issue between £1.5bn and £2.0bn of further MREL eligible senior unsecured between now and 2022 to meet our estimated final MREL requirements.

On track to deliver targets