Virgin Money restarts dividends

Investors had consistently chased shares in Virgin Money (VMUK) higher prior to the full-year results, betting that the diverse financial services group, which encompasses Clydesdale Bank, Yorkshire Bank and the Virgin Money brand, would benefit from higher margins and a general recovery in its core lending markets. To a certain degree, these results confirmed the substance of that analysis with VMUK delivering on its forecast of improved margins – the net interest margin widened by six basis points to 1.62 per cent. Combined with a return to a dividend, the general impression of the company’s prospects was more positive than it has been for some time.

That is not to say that VMUK’s traditional vices did not make an appearance. Unexpected costs, for example, a perennial bugbear for Virgin Money, made their regular cameo. This time a total of £384m, of which £275m is for additional restructuring charges connected to its digital banking upgrade; these will be booked over the next two years. Also included was £75m set aside to settle payment protection insurance claims, in a legacy issue that must now be older than some of its customers, and a £68m write-down on internally developed software. In common with all other banks, the results were also flattered by the release of impairment reserves – in Virgin’s case this had a £131m benefit for the full year.

RBC Capital Markets forecasts adjusted EPS for 2022 of 42p, falling to 29p in 2023, giving price to earnings ratios of just four and six, respectively, comfortably the cheapest of the big five bank shares. Recovery will depend on whether management can get costs under control, while bringing down the cost of equity. Hold.

Last IC View: Hold, 189p, 5 May 2021