Virgin Money UK : Clydesdale Bank PLC - 2024 Interim Financial Report

CLYDESDALE BANK PLC

INTERIM FINANCIAL REPORT

SIX MONTHS TO 31 MARCH 2024

Clydesdale Bank PLC is registered in Scotland (company number: SC001111) and has its registered office at 177 Bothwell Street, Glasgow, G2 7ER.

BASIS OF PRESENTATION

Clydesdale Bank PLC (the 'Bank'), together with its subsidiary undertakings (which together comprise 'the Group') operate under the Clydesdale Bank, Yorkshire Bank and Virgin Money brands. It is the main operating subsidiary of its immediate parent, Virgin Money UK PLC (Virgin Money). This release covers the results of the Group for the six months ended 31 March 2024.

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

Excluding notable items basis: Management exclude certain items from the Group's statutory position to arrive at an 'excluding notable items' basis. The exclusion of notable items aims to remove the impact of one-offs and other volatile items which may distort period-on-period comparisons. Rationale for the notable items is shown on page 69. This basis is classed as an alternative performance measure, see below. Previously, items adjusted from the Group's statutory position resulted in an 'underlying basis' of performance. The Group no longer presents results on an underlying basis, moving instead to a statutory presentation of its income statement, whilst still providing details of notable items of income and expenditure. Comparative periods have not been restated as the 'excluding notable items basis' is directly comparable to the previously disclosed 'underlying basis'. Further information on this change is shown on page 69.

Alternative performance measures (APMs): the financial performance measures used in monitoring the Group's performance and reflected throughout this report are determined on a combination of bases (including regulatory and APMs), as detailed at 'Measuring financial performance - glossary' on page 181 of the Group's 2023 Annual Report and Accounts. APMs are closely scrutinised to ensure that they provide genuine insights into the Group's progress, however, statutory measures are the key determinant of dividend paying capability.

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

FORWARD-LOOKING STATEMENTS

This document and any other written or oral material discussed or distributed in connection with the results (the 'Information') may include forward-looking statements, which are based on assumptions, expectations, valuations, targets, estimates, forecasts and projections about future events. These can be identified by the use of words such as 'expects', 'aims', 'targets', 'seeks', 'anticipates', 'plans', 'intends', 'prospects', 'outlooks', 'projects', 'forecasts', 'believes', 'estimates', 'potential', 'possible', and similar words or phrases. These forward-looking statements are subject to risks, uncertainties and assumptions about the Group and its securities, investments and the environment in which it operates, including, among other things, the development of its business and strategy, any acquisitions, combinations, disposals or other corporate activity undertaken by the Group, trends in its operating industry, changes to customer behaviours and covenant, macroeconomic and/or geopolitical factors, the repercussions of the outbreak of coronaviruses (including but not limited to the COVID-19 pandemic), changes to its Board and/or employee composition, exposures to terrorist activity, IT system failures, cyber-crime, fraud and pension scheme liabilities, risks relating to environmental matters such as climate change including the Group's ability along with the government and other stakeholders to measure, manage and mitigate the impacts of climate change effectively, changes to law and/or the policies and practices of the Bank of England (BoE), the Financial Conduct Authority (FCA) and/or other regulatory and governmental bodies, inflation, deflation, interest rates, exchange rates, tax and national insurance rates, changes in the liquidity, capital, funding and/or asset position and/or credit ratings of the Group, future capital expenditures and acquisitions, the repercussions of the UK's exit from the European Union (EU) (including any change to the UK's currency and the terms of any trade agreements (or lack thereof) between the UK and the EU), Eurozone instability, the repercussions of Russia's invasion of Ukraine, the conflict in the Middle East, any referendum on Scottish independence and any UK or global cost of living crisis or recession.

In light of these risks, uncertainties and assumptions, the events in the forward-looking statements may not occur. Forward-looking statements involve inherent risks and uncertainties and should be viewed as hypothetical. Other events not taken into account may occur and may significantly affect the analysis of the forward-looking statements. No member of the Group or their respective directors, officers, employees, agents, advisers or affiliates (each a 'Clydesdale Bank PLC Party') gives any representation, warranty or assurance that any such projections or estimates will be realised, or that actual returns or other results will not be materially lower than those set out in the Information. No representation or warranty is made that any forward-looking statement will come to pass. Whilst every effort has been made to ensure the accuracy of the Information, no Clydesdale Bank PLC Party takes any responsibility for the Information or to update or revise it. They will not be liable for any loss or damages incurred through the reliance on or use of it. The Information is subject to change. No representation or warranty, express or implied, as to the truth, fullness, fairness, merchantability, accuracy, sufficiency or completeness of the Information is given.

Certain industry, market and competitive position data contained in the Information comes from official or third party sources. There is no guarantee of the accuracy or completeness of such data. While the Group reasonably believes that each of these publications, studies and surveys has been prepared by a reputable source, no member of the Group or their respective directors, officers, employees, agents, advisers or affiliates have independently verified the data. In addition, certain industry, market and competitive position data contained in the Information comes from the Group's own internal research and estimates based on the knowledge and experience of the Group's management in the markets in which the Group operates. While the Group reasonably believes that such research and estimates are reasonable and reliable, they, and their underlying methodology and assumptions, have not been verified by any independent source for accuracy or completeness, and are subject to change. Accordingly, undue reliance should not be placed on any of the industry, market or competitive position data contained in the Information.

The Information does not constitute or form part of, and should not be construed as, any public offer under any applicable legislation or an offer to sell or solicitation of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments. The distribution of the Information in certain jurisdictions may be restricted by law. Recipients are required to inform themselves about and to observe any such restrictions. No liability to any person is accepted in relation to the distribution or possession of the Information in any jurisdiction.

No statement in the Information is intended as a profit forecast, profit estimate or quantified benefit statement for any period and no statement in the Information should be interpreted to mean that earnings per share for the Company for the current or future financial years would necessarily match or exceed the historical published earnings or earnings per share for the Company or the Group.

Interim financial report

For the six months ended 31 March 2024

Contents

Business and financial review	1
Risk management	4
Risk overview	5
Credit risk	7
Financial risk	31
Statement of Directors' responsibilities	43
Independent review report to Clydesdale Bank PLC	44
Financial statements	45
Interim condensed consolidated income statement	45
Interim condensed consolidated statement of comprehensive income	46
Interim condensed consolidated balance sheet	47
Interim condensed consolidated statement of changes in equity	48
Interim condensed consolidated statement of cash flows	49
Notes to the interim condensed consolidated financial statements	50
Additional information	69

Business and financial review

Principal activities

The Group operates a full service UK-focused retail and commercial banking business under the brand names 'Clydesdale Bank', 'Yorkshire Bank', 'and 'Virgin Money'. The bank is a strong, low risk bank focused on providing residential mortgages, personal and business current accounts, savings, personal loans and credit cards, loans for small and medium businesses, and payment and transaction services.

Business review
Summary balance sheet
		As at
		31 Mar 2024	30 Sep 2023
		£m	£m
Customer loans		72,674	72,754
Other financial assets		19,058	17,760
Other non-financial assets		1,390	1,370
Total assets		93,122	91,884
Customer deposits		(68,184)	(66,609)
Wholesale funding		(16,322)	(16,680)
Other liabilities		(2,961)	(2,906)
Total liabilities		(87,467)	(86,195)
Ordinary shareholders' equity		(4,820)	(5,095)
Additional Tier 1 (AT1) equity		(835)	(594)
Equity		(5,655)	(5,689)
Total liabilities and equity		(93,122)	(91,884)
Summary income statement
	6 months to	6 months to	12 months to
	31 Mar 2024	31 Mar 2023	30 Sep 2023
	£m	£m	£m
Net interest income (excluding notable items)	869	855	1,715
Non-interest income (excluding notable items)	71	80	158
Total operating income (excluding notable items)	940	935	1,873
Notable items in income	(18)	(20)	(47)
Statutory total operating income	922	915	1,826
Operating and administrative expenses (excluding notable
items)	(502)	(477)	(971)
Notable items in expenses	(49)	(57)	(202)
Statutory operating and administrative expenses	(551)	(534)	(1,173)
Statutory operating profit before impairment losses	371	381	653
Impairment losses on credit exposures	(93)	(144)	(309)
Statutory profit on ordinary activities before tax	278	237	344
Tax expense	(43)	(52)	(95)
Statutory profit attributable to equity holders	235	185	249

1

Business and financial review (continued)

Notable items

	6 months to	6 months to	12 months to
	31 Mar 2024	31 Mar 2023	30 Sep 2023
	£m	£m	£m
Operating income:
Acquisition accounting unwinds (net interest income)	(10)	(3)	(29)
Hedge ineffectiveness (non-interest income)	(8)	(16)	(16)
Other (non-interest income)	-	(1)	(2)
Total notable items in statutory operating income	(18)	(20)	(47)
Operating expenses:
Restructuring charges	(33)	(53)	(131)
Financial crime prevention programme	(15)	-	-
Legacy conduct	4	(4)	(12)
Other	(5)	-	(59)
Total notable items in statutory operating expenses	(49)	(57)	(202)
Operating profit before impairment losses (excluding notable items)	438	458	902

Summary

Over the first six months, we have continued to deliver on our strategic ambitions in line with expectations. The Group delivered continued business momentum during H1, supported by ongoing strategic execution, with trading broadly as anticipated. The Group believes the acquisition of Virgin Money by Nationwide presents an exciting opportunity to build on our significant strategic progress by combining two complementary businesses that together can offer more great products and services to a larger customer base, while delivering value for our shareholders. While we expect there to be headwinds through the second half of the year, we remain well placed to deliver growth in our target segments.

Balance sheet summary

The Group's balance sheet remains strong with a robust funding and liquidity position. The Group delivered further lending growth in its target areas during the first half of the year, while overall customer lending was stable at £72.7bn. Mortgage balances reduced 1.5% during the period to £56.6bn, as the rate environment and wider cost of living pressures tempered purchase activity, albeit with signs of improved market activity levels since January. Business lending increased 6.7% overall, as growth in BAU balances offset ongoing reductions in government-backed lending. Unsecured balances increased 3.2% during H1 to £6.7bn, driven by 5.3% growth in the credit card portfolio. Credit quality remained resilient in H1, with provision coverage stable when compared with FY 2023. We continued to attract new deposits during the first half of the year, supporting overall deposit growth of 2.4%, while the mix of deposits remained broadly stable.

Profit and loss summary

Statutory profit before tax in H1 2024 was £278m, which was 17% higher compared to last year (H1 2023: £237m), reflecting higher operating income and lower impairments, offsetting growth in operating and administrative expenses. The Group has continued to grow customer accounts and delivered further growth in its target lending segments of business and unsecured, while broadly maintaining its deposit mix. This, alongside ongoing credit card EIR adjustments, reflecting strong customer activity and updated assumptions, supported 1% growth in total operating income relative to H1 2023. Operating and administrative costs of £551m were 3% higher when compared to H1 2023 as gross cost savings from the restructuring programme were more than offset by inflation and the new BoE Levy. Operating and administrative costs included £49m of notable expenditure during H1, primarily relating to the financial crime prevention programme and ongoing restructuring activity. Credit impairments of £93m were significantly lower year-on- year, reflecting updated macroeconomic assumptions and the ongoing review of the application of SICR on the credit card portfolio, which reduced the ECL provision by £31m during the period.

Capital

The Group has maintained a robust capital position with a Common Equity Tier 1 Capital (CET1) ratio (International Financial Reporting Standard (IFRS) 9 transitional basis) of 14.3%, and a total capital ratio of 20.6%, as capital generation more than offset RWA growth in the period. The Group's CET1 ratio on an IFRS 9 fully loaded basis remained stable at 14.2%. The Group's latest Pillar 2A requirement has a CET1 element of 1.9%. Overall, the Group's Capital Requirements Directive (CRD) IV minimum CET1 requirement is 10.9%.

Funding and liquidity

Funding and liquidity remain strong, with the 12-month average liquidity coverage ratio (LCR) increasing to 151% (FY23 12-month average: 146%) and 12-month average net stable funding ratio (NSFR) stable at 135% (FY23: 136%).

2

Business and financial review (continued)

Outlook

Following a strong H1, during the second half of the year, the Group expects downward margin pressure relative to H1, primarily reflecting a lower expected contribution from cards EIR adjustments, ongoing competition, and lower interest rates. The Group also anticipates cost pressures from inflation and investment in the second half, which will only be partially mitigated by the ongoing cost savings programme, where certain restructuring activities have now been deferred in light of the proposed acquisition by Nationwide. In the medium term, the Group remains focussed on delivering growth in return accretive segments, continued cost-efficiency and ongoing balance sheet resilience and believes the proposed acquisition by Nationwide will support its strategic ambitions, leveraging Nationwide's scale and pace of investment, as well as Virgin Money's capabilities and strengths.

Key performance indicators

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

3

Risk management

Risk overview

Risk overview	5
Credit risk	7
Financial risk	31

4

Risk management

Risk overview

The objective of risk management is to keep the bank safe, to ensure resilience and to put the customer interests at the centre of our decision making. Effective risk management supports the delivery of our strategic objectives and fulfils our Purpose.

This report provides information on developments during the period relating to the Group's risk exposures, including how those risks

are managed or mitigated. These risk disclosures support, and should be read in conjunction with, the Risk report in the Annual Report and Accounts 2023.

During H1, Risk have continued work to enhance risk management practices and reporting capabilities, with focus on determining risk and control libraries aligned to our recently launched risk taxonomy, to support reporting from our incoming Integrated Risk Management system. This investment will increase monitoring of controls testing and drive improvements to our capability to execute control effectiveness assessments, which will support more robust risk management and better outcomes for our stakeholders.

We have also remained committed to proactively supporting our customers through the higher-rate environment and cost of living pressures that continue to prevail, and which have the potential to affect customer resilience and debt affordability. Close portfolio monitoring and assessment of aggregate risks is in place to highlight any signs of portfolio deterioration or affordability stress.

Managing execution risk and delivering change sustainably has continued to be a priority for the Group and we have supported the launch of the financial crime prevention programme, to further improve risk controls and strengthen technology, striving to meet evolving regulatory obligations and aligning to our purpose. Fraud and scams continue to become more sophisticated and incidence rates continue to rise across the sector, this investment will bolster our fraud controls and cyber defences, providing customers with improving protections against criminal actors. Risk teams have continued to carry out detailed risk assessments, assurance and oversight activity to support the business in management of fraud and cyber risks. Activity to strengthen oversight of the technology and data risk profile has continued and will remain a focus area, as we work towards adoption of the BCBS 239 data standard.

Building on progress in FY23, we have remained committed to ensuring good customer outcomes, with focus on overseeing the effective implementation and embedding of the FCA's Consumer Duty across the Group, including compliance with the requirements for closed book review and reporting by 31 July 2024. Good customer outcomes are at the heart of our purpose and central to our culture, business objectives and strategy.

Principal risks

Principal risks are those which could result in events or circumstances that might threaten the Group's business model, future

performance, solvency, liquidity or reputation. The Group's principal risks are listed below and remain as disclosed in the 2023 Annual Report and Accounts.

Principal risks	Definitions
Credit risk	The risk that a retail or business customer or counterparty fails to pay the interest or capital due on a loan
	or other financial instrument. Credit risk needs to be managed through the life cycle of each loan from
	origination to repayment, redemption, write-off or sale. It manifests in the products that the Group offers
	and in which it invests and can arise in respect of both on- and off-balance sheet exposures.
Financial risk	Financial risk includes capital risk, funding risk, liquidity risk, market risk and pension risk, all of which
	have the ability to impact the financial performance of the Group, if not managed correctly.
Model risk	The potential for adverse consequences from decisions based on incorrect or misused model outputs
	and reports.
Regulatory and	The risk of failing to comply with relevant regulatory requirements and changes in the regulatory
compliance risk	environment, or failing to manage a constructive relationship with our regulators, by not keeping them
	informed of relevant issues, not responding effectively to information requests or not meeting regulatory
	deadlines.
Conduct risk	The risk of undertaking business in a way which fails to deliver good customer outcomes in line with the
	FCA's Consumer Duty, and causes customer harm, and may result in regulatory censure, redress costs
	and/or reputational damage.
Operational risk	The risk of loss or customer harm resulting from inadequate or failed internal processes, people and
	systems or from external events, incorporating the inability to maintain critical services, recover quickly
	and learn from unexpected/adverse events. Operational risk includes: change risk; third-party risk; cyber
	and information security risk; physical and personal security risk; IT resilience risk; data management
	risk; payment creation, execution and settlement risk; and people risk.
Economic crime risk	The risk that the Group fails to detect and prevent its products and services from being used to
	facilitate economic crime, resulting in harm to customers, the Group and its reputation, or third parties.
	This includes money laundering, terrorist financing, sanctions, fraud, and bribery and corruption.
Strategic and	The risk of significant loss of earnings or damage from decisions or actions that impact the long-term
enterprise risk	interests of the Group's stakeholders; or from an inability to fund or manage required change projects, or
	adapt to external developments.
Climate risk	The risk of exposure to physical and transition risks arising from climate change.
	5

Risk management

Risk overview

Emerging and evolving risks

Emerging and evolving risks are current or future risks arising from internal or external events, with a material unknown or unpredictable component, and the potential to significantly impact the future performance of the Group or prevent delivery of good outcomes for our customers. Emerging and evolving risks are continually assessed through a horizon scanning process, considering all internal and external factors, with escalation and reporting to the Board.

The emerging and evolving risk classifications reported in the Group's 2023 Annual Report and Accounts have been reviewed and remain broadly unchanged, noting the key developments outlined below. Areas of enhanced risk attention include the risks associated with the proposed acquisition by Nationwide Building Society and the continued development of Technology and Data Risks, with a streamlined and refocused emerging risk now defined.

Risks	Description
Deal risk associated to	While the Board has recommended the proposal to shareholders, there are a range of strategic &
acquisition by	enterprise, financial and people risks should the deal not succeed, which could include:
Nationwide Building	Strategic & enterprise risk - There could be: impacts from adjustments to the pace of the Group's cost
Society
saving and change programmes; share price volatility and reputational damage, as the market reacts to
	the Group's revised positioning and strategic outlook; increased scrutiny on the Group's capabilities to
	execute on its strategic ambitions; and, impacts to FY24 guidance and targets from short term costs
	related to the transaction.
	Financial risk - There would be impacts to the Group's funding and financial plans if the deal were not
	to proceed. Spreads for listed debt could widen due to market uncertainty and the outlook for the Group's
	credit ratings could change, with the potential for downside risk to reflect a lack of clarity on the Group's
	strategy in the short to medium term.
	People risk - During the transition period, there are people risks associated to talent retention and
	attraction against the Group's shifting strategic outlook. Significant people risk challenges could affect
	operations, growth, costs and resilience.
Technology and Data	The pace of technological change, in areas such as Generative AI and cloud solutions, continues to
Risks	accelerate and risks and opportunities need to be fully understood. These technologies have broad and
	potentially growing applications, with supporting regulatory frameworks under continuous review.
	The Group's operations and strategy are increasingly dependent on the use of quality and timely data,
	within scalable and secure architecture, to support decision making and to underpin our digital
	capabilities. Stakeholder expectations in relation to the effective governance, management and
	protection of data continue to evolve.
	In turn, the landscape of security and cyber threats we face into continues to change and is becoming
	more sophisticated in terms of frequency, impact, and severity, with potential that AI-assisted tools such
	as voice and image generation create further risks.
	The Group is investing in capabilities to defend against cyber threats, with key initiatives in place to
	upgrade propositions across areas such as financial crime prevention and cyber defence.

6

Risk management

Credit risk

Section	Page	Tables	Page
Credit risk overview	8
Group credit risk exposures	8	Maximum exposure to credit risk on financial assets,	9
		contingent liabilities and credit-related commitments
Key credit metrics	9	Key credit metrics	9
		Gross loans and advances ECL and coverage	10
		Stage 2 balances	12
		Credit risk exposure and ECL, by internal probability of	13
		default (PD) rating, by IFRS 9 stage allocation
		IFRS 9 staging	14
Mortgage credit performance	15	Breakdown of Mortgage portfolio	15
Collateral	16	Mortgage portfolio interest rate breakdown	15
Forbearance	16	Average LTV of Mortgage portfolio by staging	16
IFRS 9 staging	17	IFRS 9 staging	17
Unsecured credit performance	18	Breakdown of Unsecured credit portfolio	18
Forbearance	19
IFRS 9 staging	19	IFRS 9 staging	19
Business credit performance	21	Breakdown of Business credit portfolio	21
Forbearance	22
IFRS 9 staging	22	IFRS 9 staging	22
Macroeconomic assumptions, scenarios, and weightings	24
Macroeconomic assumptions	24	Scenarios	24
		Key macroeconomic assumptions	24
		Five-year simple averages on unemployment, GDP and	26
		HPI
The use of estimates, judgements and sensitivity analysis	26
The use of estimates	26	Economic scenarios	26
The use of judgement	27	Impact of changes to significant increase in credit risk	27
		(SICR) thresholds on staging
		Impact of management adjustments (MAs) on the Group's	28
		ECL allowance and coverage ratio
		Macroeconomic assumptions	29

7