Virgin Money sunny despite the clouds

Virgin Money (VMUK) has made a great deal of progress over the past few years in building its regulatory capital and returning sustainable cash flows to the business. Against the backdrop of rising interest rates rebuilding margins for the banking sector, along with a notable rise in unsecured lending, Virgin has fared better than many had forecast. However, the share price attrition over the past 12-months suggests that doubts remain over the resilience of the bank’s profits at a point when the economic picture is darkening.

Under normal circumstances, a rise in lending would not draw much attention – Virgin Money is a bank, after all – but the fact that unsecured lending was the only category to see significant growth says something about the finances of ordinary consumers. Anecdotal evidence suggests that consumers, having now spent their lockdown savings, are starting to use unsecured lending to bridge the gap on massive price rises for everyday essentials – a cost-of-living crisis made worse by Russian aggression and Chinese stubbornness over zero Covid. In these results, borrowing on cards and short-term loans rose by 7 per to £5.8bn, while business lending declined, and mortgage lending was essentially flat at £57.8bn. Interestingly, it still looks like the bank will book lower levels of impairment this year; the impairment charge fell by £25mn to £479mn in these results.   

But the essentially uncertain economic outlook was the reason for the bank’s cautious outlook for net interest margin this year of between 180-185 basis points, though this is a small upgrade, and management could not offer any further rallying cry beyond being “prudently provisioned.” Core tier one capital (CET1), a measure of its capital ratio, was 14.7 per cent, though Virgin aims to operate within the range 13 to 13.5 per cent. The excess capital will be determined at an annual stress test and will probably be used to guarantee its 30 per cent of dividend pay out ratio.

Trying to work out Virgin Money’s place in a unloved banking sector is not difficult. Under the circumstances, management has done well to reposition the balance sheet and restore shareholder income, but the lowly forward PE of 4 times consensus forecasts for 2022 tells its own story. With dividends back in play, the shares will receive support, but there is no compelling reason to change our view considering serious headwinds ahead for the whole sector. Hold.

Last IC view: Hold, 175p, 24 Nov 2021