Good morning. Thank you for joining the Virgin Money U.K. PLC 2022 full year results fixed income an opportunity to ask questions at the end of the call following a brief presentation. If you'd like to ask a question, please press star followed by one on your telephone keypad. I'm now gonna hand you over to Justin Fox to commence the call.
Hello and good morning, everyone. Thank you for taking the time to join us today. I hope you're all well and having a good start to the week. As Jordan just said, I'm Justin Fox, Group Treasurer. Today, as usual, I'm joined by Richard Smith, our Head of Investor Relations. Matthew Harrison, our Head of Treasury Debt Capital Markets, and Gareth McCrorie, our Debt Investor Relations and ESG Manager. Yesterday, we presented our full year 2022 results in person at the London Stock Exchange. I hope some of you managed to make it along. For those who didn't, if you haven't already done so, please take a look at the financial results section of the website, where you will find a webcast of yesterday's presentation.
Today's fixed income slides, which Richard and I will go through, and then some additional appendices which contain an awful lot of useful information. As always, we hope these sessions cover the right topics in the right level of detail, and we remain grateful for any feedback you have. Today's slides will provide an overview of our full year financial performance, walk you through the key elements of our capital funding and liquidity position, update you on our issuance plans for the coming year, and a few other key themes of interest that we feel are worth sharing. At the end, we'll open up for Q&A. I'll now hand over to Richard to talk you through our full year results. Richard.
Thanks. Good morning. In the middle column,
Richard, Richard perhaps i can intervene your line is really poor, I was wondering if I could step in and just cover that back over again. So let me start over again with slide four. In the middle column you will see we've delivered a RoTE of 10.3%. This is a good outcome in a difficult environment and is underpinned by a cost income ratio of 52%. On the left-hand side, you can see that we delivered on target annualized cost savings of GBP 69 million, a full year NIM of 1.85% and a broadly stable cost outcome in line with our guidance.
Given the benefits of higher interest rates on NIM and the progress of our cost-saving program, we are confident that we will deliver on our cost income ratio targets over the next few years. Our unsecured and BAU business lending has grown by an average of 7%, and our mortgage business has returned to growth in H2. Though pleasing to note that our relationship deposits have grown 13% year-on-year.
Our balance sheet is robust. We have a low risk profile and strong coverage levels of 62 basis points. We believe we are appropriately provisioned for the next phase of the economic cycle. Our CET1 ratio of 15% at full year 2022 is also in a strong position, reflecting ongoing delivery of statutory profitability. Given the strong performance and our capital surplus, the board intends to recommend a dividend of GBP 0.10 per share and a further buyback of GBP 50 million, bringing the total buyback for 2022 to GBP 125 million. Combined, dividends and buybacks totaled GBP 267 million for 2022. We're also pleased to be able to revise our guidance upwards.
Our 2024 RoTE is now expected to be around 11%. This increase will be underpinned by a cost income ratio of less than 50%. We'll move to our target CET1 range of 13%-13.5% by 2024. Our shareholder distributions will reflect that. In short, we are delivering on growth, we're delivering on costs and delivering on digital initiatives. We have a robust balance sheet that will support our delivery of targeted growth going into 2023. Now let me turn to slide five and touch on the broader macro environment that will influence our performance next year. As you can see on slide five, the macroeconomic environment has deteriorated over the course of the year. You can see the impact of recent events on our current economic forecast compared to much earlier in the year.
You can see that the revisions show a deterioration in activity levels and a significant reduction in GDP expectations. Inflation is expected to peak in 2022 and decline thereafter. Rates will remain higher for longer and therefore GDP shows a downward trend. Although unemployment is forecast to rise, it does remain low by historical standards. We've also noted recent updates from the Bank of England and the OBR last Thursday, which remain within the range of expectations set out amongst our IFRS 9 scenarios, which you can see in more detail in the appendices to the equity presentation from yesterday. Despite an unsettled economic outlook, we believe there are opportunities for growth in 2023, supported by further innovative propositions that leverage the brand and offer our customers compelling value and a strong customer experience, all of which are underpinned by a unique loyalty program.
Moving on to slide six, where I will detail our lending performance for the year. We've targeted growth in unsecured and BAU business lending, and we are pleased with our progress this year. You'll see here that we have increased overall volumes with strong growth in unsecured, offsetting a modest reduction in business and with mortgages stable. In our mortgage business, we took advantage of stronger spreads in Q4 to grow prior to the September rate volatility. You can see that we have also delivered growth in the BAU business book in the second half of this year, broadly offsetting ongoing reductions in government-backed balances. We've been particularly pleased with the growth in our unsecured, reflecting prudent growth and our high-quality cards book. Looking forward, we will continue to diversify the balance sheet and grow overall lending balances in FY 2023.
Having grown the mortgage book in the second half of this year, we expect to develop further modest growth in FY 2023. In business, we expect growth in the BAU book next year, while government-backed balances will continue to run off. In unsecured, we will look to take further market share but expect growth to slow, reflecting our tightened affordability criteria. At this point, I will now hand back to Richard. Richard?
Thanks very much, Justin. Apologies for the technical difficulties. Hopefully this is better. Now moving on to asset quality on slide seven. As detailed in this slide, we reported a modest cost of risk this year of 7 basis points. That performance reflects our solid credit quality, which has remained resilient, with lower risks and default levels throughout the financial year, with some normalization more recently. On the left, we've set out our ECL over time. You can see that we have started the year retaining significant COVID-related post-model adjustments. Given our experience through the year, we have now released these. At the same time, we've increased our model provision, reflecting a deterioration in the macroeconomic outlook. We also now have in place targeted PMAs relating to potential cost of living impacts for both our retail and business customers.
The net impact of all of this is that at a headline level, total provisions have reduced slightly from FY 2021. Nonetheless, we remain very well provisioned with coverage above pre-pandemic levels, as you can see on the chart on the right-hand side. At this stage, our best judgment for FY 2023 is that our cost of risk normalizes to around or through the cycle level, which we consider to be 30 to 35 basis points. While our credit quality indicators remain benign, we are well positioned for the uncertainty that lies ahead, as I'll now explain on slide 8. We're confident in the quality of our book, and you can see here why we are comfortable with our resilience. Starting with the overall portfolio, top left and cycling through.
Our total portfolio is defensively positioned with balances strongly weighted towards mortgages at around 80% of loans. Our mortgage book is a low-risk prime book weighted towards owner-occupied, originated with strict affordability assessments, with only 3% above 80% LTV and largely on fixed rates. In unsecured, our underwriting criteria are prudent, and we have tightened further during the second half of 2022 to reflect affordability stresses on customers. Our unsecured customers are generally more affluent, with lower debt to income than the industry average. Their retail spend has picked up over the year and continues to be weighted to discretionary or luxury items. Their repayment rates remain stable. All of these are indicators of the credit quality of the book. Finally, our business portfolio remains well-diversified with strong collateral levels and skews to lending to resilient sectors.
We've provided additional detail through the appendices demonstrating the underlying strength of each of the portfolios, which gives us confidence in the current economic climate. Turning now to our progress on ESG on slide nine. Our ESG agenda continues to gain momentum with significant progress made across all of our ESG goals. Alongside a 12% reduction in Scope 1 and 2 emissions, we delivered financed emissions calculations and net zero roadmaps and targets for 82% of our lending book and have committed to at least a 50% reduction in carbon emissions across everything we finance by 2030. You can see more about this progress and commitments on slide 24. Commercially, we've embedded our Sustainable Business Coach into new lending greater than GBP 2.5 million. We've launched our Agri E Fund and extended our Greener Mortgages product.
We continue to also focus on ensuring that no Virgin Money customer pays a poverty premium. We are pleased to identify more than GBP 1.1 million of support for our customers through the Turn2us benefit calculator. We're making good progress in supporting a more sustainable future. The slide details some of our highlights from the year. However, there has been more significant, often underappreciated focus on the ESG disclosures. It's pleasing to see the recognition of all of this work through upgraded ratings in terms of our ESG providers, sustainability from MSCI, where we're now classified as low risk and leader status, respectively.
Preempting a question in Q&A in terms of our green funding plans, it's something that we continue to look at, but for the time being, we're focused on further improving our disclosure and ESG ratings, meeting our net zero roadmaps and targets, and demonstrating lending against our new ESG products, which should allow you as investors to have a truly holistic view of our ESG credentials. I'll conclude with our guidance on slide 10. On this slide, we summed up our guidance for FY 2023 on the left and the upgraded outlook for FY 2024 on the right. Our guidance reflects up-to-date expectations for inflation and a realistic view of interest rates, which have come down more recently.
In FY 2023, we expect NIM to remain strong on a larger balance sheet, with further improvements in the cost income ratio alongside higher impairments to be around through the cycle average. We remain committed to distributing surplus capital, though we will maintain a CET1 ratio greater than 14% during FY 2023. Now turning to the medium term and FY 2024. We remain committed to our targets set out in November 2021, including a RoTE target of above 10% for FY 2024 and a cost income ratio of less than 50%. Inflation rates, whilst volatile, are clearly structurally higher than they were last year, but the macroeconomic outlook is somewhat weaker.
While we're not specifically guiding, it is fair to say that our income outlook for FY 2024 is stronger, and we are confident that we will deliver less than 50% cost income ratio in FY 2024, notwithstanding higher cost inflation. Finally, we expect to operate within our target range of, for CET1, enabling further buybacks. Taken together, whilst our RoTE target remains greater than 10%, we are pleased to confirm that our statutory RoTE guidance in FY 2024 is around 11%. Overall, it's been a strong year for Virgin Money. Our outlook is positive. I'll now hand back to Justin to talk through the capital funding and liquidity positions in more detail. Justin.
Thanks, Richard. Turning to slide 12. Our capital generation has been robust this year, reflecting solid statutory profits and stable RWAs, resulting in 195 basis points of underlying capital generation. Excluding the software benefit from the opening capital position grew our CET1 by around 60 basis points, having achieved this despite 90 basis points of shareholder distributions. We announced our capital framework at our half year results and started buybacks alongside our 30% dividend payout. In FY 2022, we've announced total distributions equivalent to 57% of statutory profits after AT1 service costs through a combination of dividends and buybacks, including the additional GBP 50 billion buyback announced yesterday. We finished the year at 15% CET1, well above our target range, which we will discuss further in slide 14. First, let's move to slide 13.
As you can see, our capital position remains robust across all metrics. We've got a total capital ratio of 22%, which remains strong relative to a 13.6% requirement. Our leverage ratio of 5.1% remains in excess of minimum requirements. MREL end state requirements have applied since first January, requiring us to hold capital resources and eligible debt instruments equal to the greater of 2 times the total capital requirement. As to say, two times Pillar 1 plus Pillar 2A requirements on an RWAs basis or 6.5% of leverage exposure measure. The year-end total MREL resources available as a percentage of RWAs was 32.1%, well in excess of the GBP 24.9 lakh requirement. From a leverage perspective, total MREL resources available as a percentage of U.K. leverage exposure measure was 9.2%.
Now turning to our CET1 outlook on slide 14. At the half year, we stated that our target CET1 range was between 13%-13.5%. We ended the year at 15%, as I've already said. We expect to stay above 14%, as Richard mentioned, in FY 2023, reflecting current economic uncertainties and this takes into account an expected GBP 1 billion-GBP 1.5 billion of additional risk-weighted assets from the implementation of hybrid mortgage models in the second half of 2023. We expect to operate within the target range at full year 2024. Relative to the top end of our range, we have currently around GBP 375 million surplus CET1 before future organic capital generation.
That means further sustainable buybacks alongside dividends through FY 2023 and FY 2024, starting with GBP 50 million buyback extension that we announced yesterday. Future buyback announcements are also likely aligned to Q4 of next year, given the stress testing timetable that we're going through. They are also dependent on profitability, RWA growth through FY 2024, and of course, regulatory approval. Turning now to the breakdown of our total capital stack on slide 15. We've mentioned this in prior presentations, it's well worth emphasizing. Compared to others in the market, we have a very straightforward capital structure. All the group's regulatory capital in MREL is issued by a holding company, VMUK PLC. It's fully eligible, there are no issues around grandfathering. There's also no FX exposure in the capital structure, providing stability during periods of market volatility.
We have excess total capital of 8.5% over our regulatory minimum or buffer of circa GBP 2 billion. While we don't have a target level of AT1 or Tier 2 per se, we're always looking to manage our buffers in an efficient manner while maintaining headroom above regulatory optimum levels to support future growth, any potential headwinds, or to reflect stress test outcomes. Over the medium term then, our AT1 and Tier 2 stack will evolve as we manage buffers within the parameters I've just mentioned, primarily through re-redemptions and refinancing activity.
We were really pleased to issue GBP 350 million in new AT1 in the year, while at the same time purchasing GBP 377 million of our existing AT1 securities that are callable this December. One point to note, we have subsequently announced our intention to redeem the remaining GBP 73 million of those AT1 securities which will reduce the AT1 headroom detailed on the slide by around 30 basis points on a pro forma basis. As a reminder, our core policy remains unchanged. Future capital core decisions will be assessed on a broad economic basis, i.e., with balance factors including balance sheet movements, relative funding costs, current and future regulatory capital and MREL value, rating agency treatment, wider wholesale funding needs and prevailing circumstances at the relevant time.
Of course calls are subject to PRA approval with whom we have an active dialogue. Turning to our MREL position. As I've already mentioned, our MREL ratio of 32.1% comfortably exceeds our 24.9% requirement as a percentage of our RWAs. We do aim to maintain a suitable buffer over end- state requirements to help better manage maturity risk. Our view on issuance guidance remains consistent. That is, we don't see a need for incremental capital issuance in FY 2023 over and above refinancing, and the timing of refinancing reflects a broad spectrum of factors, not least having stable market conditions. With respect to our HoldCo senior issuance plans, given our comfortable MREL resources, issuance will remain broadly limited to maintain the current surplus to regulatory requirements.
On MREL call decisions given the recent market focus to confirm our policy is exactly the same as it is for our AT1 and Tier 2 securities. Finally, it's worth noting that our total capital and MREL buffers would remain comfortable even our target operating CET1 range and fully optimized AT1 and Tier 2 buffers. Turning now to funding on slide 16. Our compelling deposit propositions supported by our Brighter Money Bundle and cashback offers have helped grow our relationship customer base further, with relationship deposits now 53% of total deposits, and this represents a 13% increase year-on-year and a 20% increase since 2019. Our strong performance has helped maintain our cost of funds year-on-year despite much higher policy rates.
On TFSME when the scheme closed in October of last year, we had drawn our full initial allowance of GBP 7.2 billion whilst repaying all of our TFS drawings. As with FLS and TFS, we plan to repay TFSME about one year ahead of contractual maturity and having almost GBP 1 billion eligible for tenor extension of six to 10 years helps reduce the cliff edge risk further. We've also successfully accessed the wholesale markets in FY 2022 despite challenging markets, issuing a total of GBP 2.5 billion secured funding across Atlantic RMBS and cover bond programs. Looking ahead, we will continue to target growth in our relationship deposits. We will also participate in the market for term deposit funding where it is advantageous to do so and continue to access the wholesale market to maintain a diversified funding base.
In the latter regard, we expect to issue about GBP 1.5 billion-GBP 2.5 billion secured issuance in FY 2023, and that's subject to deposit flows and relative costs. We've made a good start with a successful GBP 400 million Atlantic trade in October, which reopened the sterling financials market post recent volatility. Quickly on liquidity, the group's LCR of 138% continues to perform comfortably exceed both regulatory requirements and the more prudent internal risk appetite metrics, ensuring a substantial buffer in the event of any outflows. Moving to slide 17. We set out here again, once again our structural hedge alongside our rate sensitivities.
You can see on the left that our structural hedge has driven and will continue to drive sustainable net expansion, as one-sixth of our hedge rolls per month and is reinvested at current higher rates. The yield on the hedge increased from 30 basis points at the start of the year to around 70 basis points at the end. With reinvestment rates closer to 4% at the end of the year, we expect total yield will continue to expand. On the right, we set out our interest rate sensitivity using our standard pass-through assumptions. The year one impact reflects the benefit of reinvesting the structural hedge at higher rates, given we assume a parallel shift in rates. There's also some additional benefit from lead-lag as managed rate assets contractually reprice before managed rate liabilities.
The benefit in years two and three relates entirely to the rollover of the structural hedge, which builds up meaningfully over time. In practice, we have benefited more significantly from recent rate rises as deposit pass-through has been lower than assumed in this sensitivity. You know our rate sensitivity remains positive in year one even in the 25 basis point down scenario. This reflects our assumptions on product pricing for more elevated rates that are available today. Moving finally to slide 18. In concluding, let me quickly recap. Many of you will heard me say that we are in the category one between the large O-SII banks and the challengers or larger mutuals. I think positioning us in these markets can be tricky. I reflect back on the market and hear feedback from yesterday.
I was struck by the Financial Times description of us as mature allure, which for me instantly conjures up some debonair eau de cologne that might have been made available by Yardley. Doesn't kinda help if it gives you formative years, back in the 80s. Look, bear with me here. There's a current ad running right now for French car company which says that allure is hard to define. Why don't I have a go given the headline? We often get challenged about our size, within the U.K. context. You know, are we in a sort of Goldilocks predicament of trying to find out what is just about the right size? A much broader context, I think our size does work for us because it allows us to adapt and flex to market conditions as needed.
I think our performance across 2022 has demonstrated that we are beginning to find our operating rhythm, which sets us up well for a more challenging backdrop in 2023. We have a robust balance sheet across all metrics. CET1's improved thanks to solid underlying capital generation. We remain very well positioned with coverage above pre-pandemic levels. We have a creditor supportive capital framework. The combination of our ability to grow our relationship franchise while maintaining our presence in the wholesale markets reflects that. Now, while we remain of the view that we can deliver targeted growth across all of our products, we will maintain prudence appetite and a further tightened underwriting criteria to reflect affordability stresses on customers.
We are accelerating our digital capabilities to support targeted growth and expect further NIM expansion from a combination of higher rates and mix optimization. At the same time, we will continue to manage our costs, deliver our cost income ratio of circa 50% in FY 2023. We've also managed that transition to being a Tier 1 bank reasonably well. Stress test result with resolvability assessment outcome and our performance over the last couple of years demonstrates that. When it comes to thinking about our debt stack, we think there's an inherent strength to a simpler, less complex bank that has enough scale to operate competitively in the markets it likes with the risk appetite it is comfortable with.
We're very focused on managing down the overall difference to larger peers, and we remain consistent in our views that current levels are not reflective of where the fair value point is relative to those peers. What that differential should be is something for us to work out with all of you. Hopefully, what you've heard today makes a pretty compelling investment proposition and supports further spread convergence peers. That concludes the presentation. Thank you for your attention. We'll now open up the lines for question. Jordan, please go ahead. Thank you.
As a reminder, if you'd like to register a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two, and please ensure you're unmuted when speaking. Again, for any questions, that's star followed by one on your telephone keypad. We have no questions on the phone line, so I'll hand back for any closing remarks.
Appreciate that, Jordan. Hopefully then, the absence of questions means that we've covered the right things. I know we're gonna be coming out to meet a number of sort of London-based accounts over the next two or three days, so we're really looking forward to that. As ever, we're here to help. If you have any feedback, please do come back to us. Thank you very much, everybody, for attending this morning.
This concludes today's call. Thank you for joining. You may now disconnect your line.