VM Cards Spotlight

1

April 2016

2

Agenda

Introduction – Jayne-Anne Gadhia Introduction – Jayne-Anne Gadhia

Cards Business Overview – Michele Greene

Q&A – Michele Greene, Jayne-Anne Gadhia, Dave Dyer

3

Myth busting Dispelling the top 10 key concerns upfront

Myth Reality

Balance transfer only business where customer makes initial

transfer, minimum payments at 0% then pays down in full 4% of book, over 40% stick rate

Book dominated by transactors where customers make only

retail purchases and pay in full each month Less than 1% of book are ‘pure transactors’

New business where data and knowledge to support EIR

assumptions and financial projections is limited

15+ years of transactional and P&L data via

MBNA partnership agreement

Book with 0% interest and no cash yield Back book yield greater than 12%

First year interest yield of 2%

Book dominated purely by 0% cash (balance / money

transfers) £1bn cash + £0.5bn retail in 2015

Book built only on 0% market leading products 0% market leading offers were 48% of new

accounts in 2015

Book is essentially a 3 year fixed loan 82% activity rate in 2015 vs. industry avg. of 70%

Portfolio where EIR yield is only earned post promo In 2015, 66% of EIR income earned, interest and

fees earned on ongoing cash basis

A product customers dislike Flexible, low cost, easy to switch

Less than one complaint per 1,000 transactions

A high risk product Positive selection increases quality

Average loss rate per account matures at 2%

1

2

3

4

5

6

7

8

9

10

Myth Reality

4

0% Balance Transfer Card A compelling economic profile in NPV terms – historic single card view

Year 1 Year 2 & 3

70% of retail incur interest at contract rate : 2% each year 1-3

Promo expiry

Stable revenues,

characterised by

large degree of

certainty

Cost to acquire £30

Adjustment for funding and capital costs

Low credit losses

Year 1 NCL 0.4%

5 year average NCL 2%

Low costs

NPV averages £58

70% of accounts transact cash on an ongoing basis

Interest yield expiry: 16%

Settles at 12%

Initial Balance Transfer £3,500

Further Cash Transactions

Average £700

+

Retail use

Average £650

Ongoing cash use

Average £700

+

Continued retail transactions

Average £650

Ongoing cash use

+

Continued retail transactions

Average Balance at expiry

£2,000 Ongoing Engagement

Initial Balance Transfer

Year 1 Fee £122

Further Balance Transfer Fee

£36

Further Balance Transfer Fee

Servicing cost £27

Source: Company data

5

Strong profit metrics evidence quality of returns Material contribution from older vintages

Portfolio composition (2015 £m) Key drivers of profitability

2015 contribution of £51m = RoA 3%

460

235

890

2002-2009 2010-2012 2013-2015

Outstandings

Yield

NCL 2.3% 2.8% 1.1%

12% 9% 2.5%

Interest bearing balances

Delivering yield generated from both back book and

front book

Cash volumes (new advances )

cash fees plus interest on non-0% cash balances

Retail spend

interest income plus interchange income

Low cost of risk

Low cost base

Source: Company data

75% 15% 10%

2015

Mixed balances Retail spend only BT / MT only

Strong profit metrics evidence quality of returns An engaged portfolio - 75% of the book is mixed use

Behavioural view

0.5% pay in full

New advances and retail spend

on ongoing basis

Attrition c.8% p.a. Back book stimulation slows down natural attrition

Activity rate 82% (520k active accounts) 520k customers actively engaged with the portfolio

Transaction value £1.5bn Mix of transactions…not cash only

- new advances 65%; avg. £1,500 balance Revenue generating mainly through cash fee

- retail 35%; avg. £75 transaction Revenue generating through full rate interest & interchange

Total payments £1.1bn Paying portfolio

- average paydown rate 7.5% Low payment rate relative to industry benchmark; engaged portfolio

Paid by direct debit 15% High % utilising the flexible payment options

Average line / utilisation £7,500 / 47% Room to utilise the card for spend as well as for cash

Default fee £9 (lowest in market) Evidence of the low operating cost

Cost to serve £27 Low cost allows investment in promo offers to customers

KPIs & Implications

75% transact both cash and retail on an ongoing basis

15% use the card for retail only but on an ongoing basis

0.5% of the book pay in full

10% use facility for cash only transactions but on a frequent basis

4% of the book use for cash once and pay in full

6 Source: Company data

60%

40%

2015 card assets

Non EIR accounted

EIR accounted

2012 and prior vintages

2013-15 vintages

7.0% 7.0% 7.0% 7.0% 7.0%

4.4%

3.1% 3.4%

13.4% 13.6%

Year 1 Year 2 Year 3 Promo expiry

Post promo

EIR rate

Cash yield

7

An overview of EIR Focus on certainty of delivery and reliability of estimations

2015 assets split by accounting treatment Percentage of 2015 EIR earned in cash

Assumptions underlying EIR accounting (2012) Spread between EIR rate and cash yield

66%

34%

Total income

Income recognised under EIR accounting

Income earned in cash terms

A validation check Actual metrics (2012 vintage) higher than estimated

VM estimate 2012 actual

Initial BT £3,500 £3,502

Year 1 yield 2% 2.8%

Post promo yield 12% 13%

Stick rate 40% 45%

Source: Company data

8

An Overview of EIR sensitivities There are three key sensitivities underlying our EIR analysis

EIR most sensitive to reduction in the yield curve

Sensitivity Impact to EIR

Reduction in promo balance curve (10%) (15bps)

Reduction in post-promo stick rate (5%) (10bps)

Reduction in full interest yield curve, all years (100bps) (50bps)

EIR relatively stable vs. variation in stick rate

Source: Company data

9

An overview of EIR Performance based on management of three key categories

Expected life

Degree of certainty

Reliability

Prudent 7 year assumption

Auditor approved

Early cash earnings

Customer value management

Estimation stability

Asset make up

Assumptions

Based on mature data

30% of outstanding balances from 2009 and

prior

Yr 1 4.3% cash yield (3.1%/3.4% Yr 2/3)

Targeted stimulation for rest of life of good

standing account

40%+ stick rate

Not concentrated in one product or year

Effective tracking and performance metrics

Element(s) Source of confidence

Strong understanding and management of model mean no material true ups to date,

and continued protection against earnings volatility

Early indicators easily measurable

Sensitivity analysis conducted

Source: Company data

10

A strong and experienced executive team 90 credit card experts with collective focus on results, data, and fact based analysis

Michele Greene

Director of Credit Card

Prior experience

KPMG

Credit Lyonnais

Goldman Sachs

CFO, MBNA Europe,

17 years

John Natalizia

Director of Product

Strategy & Operations

Prior experience

KPMG

Strategic Change

Executive,

MBNA Europe, 9 years

Will Loughnane

Director of Business

Insights

Prior experience

Price Waterhouse

Grant Thornton Corporate

Finance

Head of Business

Analysis,

MBNA Europe, 8 years

Chris Taylor

Director of Credit

Operations & Strategy

Prior experience

Associates Capital

Corporation

Citigroup

Customer Risk

Management Executive,

MBNA Europe,

6 years

£1.6bn

£1.1bn

£4.6bn at peak

11

An unrivalled foundation versus peers A unique start up built on mature data, deep credit card experience & unencumbered by legacy issues

Significant future opportunities Target £3bn

by end 2017

2013

2014

2015

January acquisition of £1bn of VM branded cards

from MBNA

Operations build initiated No legacy issues

No PPI

No cards with 30d+ arrears

User acceptance test commenced

Second closing of £300m cards

Finalise build

Migrate >675k mature accounts

Launch front book offering

Balances Timeline of events

No delays

Delivered on time and on budget

2002 Established cards business with MBNA

Source: Company data

Acquired Portfolio

£1bn + £0.3bn balances 675k mature custoer accounts

12

Migration Acquired not only balances and relationships, but also a deep transactional history

Acquired Data

15 years of data

Transactional Vintage

Segmentation P&L history

Application scores

15 years of data underlying current forecasts of future performance

Acquired Portfolio

£1bn + £0.3bn balances

12% yield

675k mature customer accounts

Outsourced operating model to

TSYS enables flexible, scalable

growth

Robust build

Deep foundations

Financial Performance 2015 2014

Income Statement (£m)

Total income 115.6 100.3

Total costs (37.1) (40.5)

Net impairments (27.3) (14.6)

Contribution 51.2 45.2

Balance Sheet (£bn)

Balances (£bn) 1.6 1.1

RWAs 1.3 1.0

Source: Company data

13

Target of £3bn in balances by end of 2017 Confidence in tried and tested features of model - origination engine and customer stimulation

£60m/month; c.20% lower than

monthly average growth in 2015

Outstandings M

ay

Ju

ne

Ju

ly

Au

gu

st

Se

pte

mb

er

Octo

be

r

No

ve

mb

er

De

ce

mb

er

Ja

nu

ary

Fe

bru

ary

Ma

rch

Monthly outstandings growthMonthly average since launchTargeted monthly average

£60m

£70m

Originations

200-250k accounts/yr; 2015 250k

annualised, historic high >600k

2002

2003

2004

2005

20

06

2007

2008

2009

2010

20

11

2012

2013

2014

2015

Target origination band Annual originations 2015 annualised

250k

200k

600k+

Source: Company data

14

Philosophy behind prime credit card business Data driven, execution focused, monoline business, benefitting from Virgin brand

Operational excellence and scalability

Deep understanding of profitability drivers

End to end view of the business

Virgin brand marketing edge

Data and Analytics

Delivering strong and sustainable returns

Philosophy combined

with brand delivers:

• Stronger quality

customer

• Higher average

balances

• Low cost to acquire

27%

7%

25%

9%

10%

5%

8%

3%6%

Balancing Budgets Bright Futures Career Climbers Cautious Retirement Comfortable TransitionGolden Retirement Mainstream Wealth Secure Futures Striving Families

15

A high quality customer profile We aim to attract those can both afford to repay their balance and are very likely to do so

VM cards customer UK population1

Average age 45yrs

>75% homeowners

Majority mid to high affluence

Average age 40yrs

64% homeowners

Average affluence distribution

Affluence is a key

driver of quality

Average income >£38k Average income £26k

Overrepresented in affluent segments

VM targets prime customers

Market financial strategy segmentation (FSS)2

Source: Company data

Note: (1) ONS data (2) Experian

2.6m 1.1m2015

Digital Non digital

7% avg 1m2015

16

Virgin Money in market context Plenty of opportunity for future growth

1.1bn

1.6bn

2014 2015

Strong growth with

significant headroom

in market context

Virgin Money

+45%

2.5% 1.8%

62bn

65bn

2014 2015

2015 Issuance (cards)

3.7m

Outsized share in digital

distribution channel

Market share of balances Balances

VM market share

18% high

Balances (£ bn)

Market

+5%

Not just BT, and potential for

future product extensions

2015 Portfolio breakdown (%)

Market Leading Cash BT

Low Fee BT

Matched Offer

0% Purchase

Other Retail

Credit Builder

Low Rate

Source: Company data, Experian

17

Customer acquisition overview Almost exclusively online means low cost of acquisition

75%

25%

Aggregators Direct (homepage)

c.50% of

aggregator

volume

Customer acquisition cost of only £30 in 2015

Represented

on the top 12

aggregators

at any point in

time

Note: VM 2015 origination split by channel

18

Broad range of competitive products All products designed to ensure a fair value exchange with customers

Customer needs met by a broad range of cards with positive NPV

Consistent foundations

Transparency Affordability Simplicity

Debt Consolidation

Long duration

Balance Transfer

cards

Borrowing for

purchases

Low rate card

Money transfer card

Everyday spending

All round card

65% of originations 35% of originations1

Note: (1) at 31 December 2015

19

Customer value management Monoline enables comprehensive in house analytics for successful portfolio management

Monoline model Best in class analytics Portfolio management

Facilitates

understanding of

customer through

the life cycle:

Application

decisioning

Customer usage

Customer

behaviour

System

configuration

Risk analytics

+

Customer analytics

+

Commercial analytics

+

Digital analytics

Aims to:

Maintain customer

engagement & increase

share of wallet

Through targeted stimulation:

Eligibility criteria for existing

customers aligns with new

customer risk appetite

~85% of existing customers

qualify for marketing

stimulation

20

Validation of VM cards’ financial returns VM 2015 risk adjusted return 14% higher than average card in the market

Source Argus report 4Q 2015

Metric VM Benchmark Variance

Performance

Balance per active account £3,523 £1,692 +108%

Interest income £52 £47 +11%

Total revenues £84 £60 +40%

Average credit line £7,550 £6,282 +20%

2 cycles past due asset delinquency 1.2% 1.7% (0.5)%

Repayment rate 7% 26% (73)%

Line utilisation 47% 27% +20%

Outcome

Risk adjusted return £42 £37 +14%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

NCL %

21

Financial Impact of Credit Quality Conservative risk appetite and strong credit quality combined provide superior performance

Strong NCL performance (NPV basis) Impairment performance

Metric 2015 2014

Impairments (£m)

Gross 34.2 23.5

Net 27.3 14.6

Debt sales 6.9 8.9

Cost of risk

Inc. debt sale 2.00% 1.51%

Ex. debt sale 2.50% 2.43%

A simple collections model

focused on matching

customer circumstances to

long term sustainable

payment options

Source: Company data

Note: (1) Smoothed for the impact of the migration event on collections

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

M1

M4

M7

M10

M13

M16

M19

M22

M25

M28

M31

M34

M37

M40

M43

M46

M49

M52

M55

M58

Gross Credit Loss Rate (before Recoveries)

Net Credit Loss Rate (after Recoveries)

Portfolio losses1

Bulk sale of debt

22

Managing Risk Strong framework aligns with VM’s conservative risk appetite

•

• Conservative loss recognition and forbearance

Risk appetite

Approach

Tools

• Prime, low risk, <10% NCL

appetite at the margin

Notes: (1) Financial strategy segments (2) Month on Book

Consistent risk appetite across customer life cycle

• Early MOB2 delinquency

targets

• Credit bureau

tools

• Behavioural data

• Robust lending limits

• Non-performing

accounts charged

off after 180 days

• Data driven

• Automated

Credit

Quality

Standards

23

Credit Quality A robust underwriting process underpinned by diligent credit scoring and strict policy rules

Aggregator Market position a key driver of quality

Custom risk scoring

Credit bureau data Experian: (1) industry sample of BT product applicants (2) enhanced indebtedness (i.e. changing

credit usage)

Delphi: depth of credit history and repayment performance at trade line level

Behavioural and transactional information

Affordability test We use information to assess each applicant’s ability to repay

Cash flow analysis

Automated Predictable and consistent

Acceptance Peak of 50% in 2015

Risk appetite Predictable performance

Targeted stimulation of existing customers Origination

Application

Analytical

Approach

Decision

24

Downturn experience Risk appetite optimised for affluent segments, key indicators closely monitored and managed

Same risk scoreband does not mean same credit risk

Key leading indicators are monitored closely

1

2

1 Reduced payment rates

unrelated to usage

2 Transactions skewed to

essential spend

3 Fewer missed payments of

greater consequence

A high quality portfolio with improved resilience throughout economic cycle

-10%

-5%

0%

5%

10%

15%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Rate of change1: unemployment vs. credit loss performance

VM gross write offs

UK unemployment

Note: (1) Trends lines for both series reflect moving average over 2 quarterly periods. The UK unemployment series is lagged by one period

Source: Company data

Migrated portfolio has inbuilt resilience 3

Behavioural indicators

% c

ha

ng

e g

ross w

rite

off

s

% c

ha

ng

e u

ne

mp

loym

en

t ra

te

30 million customers

£61 billion debt outstanding

Consumers value flexibility credit cards offer

Disclosure

Technology

Income data sharing

Increased transparency and comparability

Improved affordability and debt control

Market importance

Product flexibility

Benefits to consumers

25

Regulatory environment Initial findings of the FCA card market study confirm product valued by consumers

Encouraging interim focus

areas

Source: FCA interim report available at: https://ccms.the-fca.org.uk/

Broaden product range

Propositions for additional

customer segments

26

Further developing VM’s capability and reach Continued focus on quality and returns whilst staying relevant and driving value for customers

Rewards

based products

Continued

improvement of

operational

support model

Broaden

distribution

Maximise

use of

advanced

analytics

Rewards

based

product

Demonstrable track record of delivery

27

Delivery of financial performance 2015 was a strong year and we expect that strength to continue

Highlights Measurements

Completed business build

Disrupted market; innovative products and pricing

Market leading extended duration cash card and

intentionally market disrupting offers

Strong growth via new and existing customers

All time low delinquency and impairment levels

On time, on budget, migrated 675k accounts

Industry recognised, award-winning products

40 month offer, and ‘All Round’ 24/24 product; took

market share to 18% peak in September

50% portfolio growth; cash volumes of £600m in new

accounts, £400m from stimulation

8 successful debt sales (£6.9m in proceeds)

Source: Company data

Took 2.6% market share in 2015 Up from 1.8% in 2014

A credit card centre of excellence within a retail bank

28

29

An illustration of EIR The maths supporting the 7% rate

Year

One Account 1 2 3 4 5 6 7 Total

Interest 63 67 61 217 175 156 138 877

Cash Advance Fee 122 36 36 25 21 21 21 283

Acquisition Cost (31) 0 0 0 0 0 0 (31)

Total Net income 154 103 97 242 196 177 160 1,129

Average Balance 3,524 3,340 2,860 1,806 1,436 1,275 1,131 2,593

Ending Balance 1,110

Ending Balance + Asset 2,239

EIR (7 years) 7.20% 7.20% 7.20% 7.20% 7.20% 7.20% 7.20%

Cash Interest Rate 1.78% 2.01% 2.12% 12.03% 12.16% 12.25% 12.22%

Cash Fee Rate 3.47% 1.08% 1.27% 1.37% 1.48% 1.63% 1.90%

Marketing -0.88%

Blended Cash Rate 4.37% 3.09% 3.40% 13.40% 13.63% 13.88% 14.12%

NPV 58

Key assumptions

Market leading

product and related

behaviours

Modelling supports

NPV of £58

High level

mathematical

representation to

allow understanding

of calculation behind

EIR rate

Source: Company data

30

Disclaimer

This document contains certain forward looking statements with respect to the business, strategy and plans of Virgin Money Group and its current goals and expectations relating

to its future financial condition and performance. Statements that are not historical facts, including statements about Virgin Money Group’s or its directors’ and/or management’s

beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon

circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results to differ materially from the plans, objectives,

expectations, estimates and intentions expressed in such forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and

business conditions in the UK and internationally; inflation, deflation, interest rates and policies of the Bank of England, the European Central Bank and other G8 central banks;

fluctuations in exchange rates, stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to Virgin Money’s

credit ratings; the ability to derive cost savings; changing demographic developments, including mortality, and changing customer behaviour, including consumer spending, saving

and borrowing habits; changes in customer preferences; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability,

the potential for one or more countries to exit the Eurozone or European Union (EU) (including the UK as a result of a referendum on its EU membership), and the impact of any

sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; natural and other disasters, adverse weather and similar

contingencies outside Virgin Money’s control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war or hostility and responses

to those acts; geopolitical, pandemic or other such events; changes in laws, regulations, taxation, accounting standards or practices; regulatory capital or liquidity requirements and

similar contingencies outside Virgin Money’s control; the policies and actions of governmental or regulatory authorities in the UK, the EU, the US or elsewhere including the

implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; the extent of any future impairment

charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; market relating trends and developments; exposure to

regulatory scrutiny, legal proceedings, regulatory investigations or complaints; changes in competition and pricing environments; the inability to hedge certain risks economically;

the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and the success of Virgin Money in managing the risks of

the foregoing.

Any forward-looking statements made in this document speak only as of the date they are made and it should not be assumed that they have been revised or updated in the light

of new information of future events. Except as required by the Prudential Regulation Authority, the Financial Conduct Authority, the London Stock Exchange plc or applicable law,

Virgin Money expressly disclaims any obligation or undertaking to release publicly any updates of revisions to any forward-looking statements contained in this document to reflect

any change in Virgin Money’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.