- Underlying pre-tax profits ahead of expectations thanks to lower bad debt charge
- Return on tangible equity improves to 10.1 per cent
Virgin Money (VMUK) raised guidance for its net interest margin in 2021 to 1.61 per cent, up from 1.56 per cent flagged at the end of the first quarter.
Like rival lenders, an improved economic picture resulted in a lower charge for potential bad debts during the first six months of the year, which meant underlying profit came in ahead of consensus and more than doubled to £245m. Management said the cost of risk - the underlying impairment charge as a proportion of averager customer loans - would be “subdued” in the near term and through the year.
However, underlying operating expenses are expected to be below £890m this year, weaker than previous guidance of £875m. Costs during the first half also missed consensus expectations, due to a delay in realising some of the benefits from the tie-up between CYBG and Virgin Money in 2019.
Analysts at Investec forecast adjusted net tangible assets of 249p a share at the end of December, rising to 261p at the same time next year. A solid underlying return on tangible equity of 10.1 per cent and a cost of risk of just 0.11 per cent are encouraging. Persistent low rates also pose the risk of stifling income in the medium-term. The shares trading at almost 0.8 times forecast net tangible assets, a slight premium to mainstream domestic lender Lloyds (LLOY). Hold.