Virgin Money books increased bad debt provision

In keeping with its updated capital framework and approach to shareholder distributions, Virgin Money (VMUK) announced a £150mn share buyback alongside full-year figures, which foreshadowed further cost-cutting measures and a planned £130mn outlay on artificial intelligence (AI) and technology to fight cyber crime.

Spending on the AI upgrade will span three years, dragging on financial performance in the process, although chief executive David Duffy insists that it is designed to “future proof” the business against the gathering cyber threat, a reasonable enough digital ambition given the number of branch closures undertaken by the bank. Virgin Money said it would need to cut costs by £200mn a year, a £25mn increase on the previous estimate, driven, in part, by further rationalisation of the group’s property portfolio.

The bank’s full-year figures reveal that the inflationary surge has cancelled out some of the advantages normally ascribed to the sector when interest rates are on the rise. Lending margins have been under pressure, while persistent inflation has constrained returns within the sector. It’s clear that some customers have been feeling the pinch as reported profits were held in check by £309mn that has been set aside in expectation of a sizeable increase in loan defaults. Even on an underlying basis, pre-tax profits slumped 24 per cent to £593mn.

The increased provision for bad debts suggests that the retail banking industry has yet to feel the full knock-on impact of the cost of living crisis. Although total customer lending held firm at £72.8bn, it’s conceivable that this could falter in the early part of 2024. And Virgin could also be subject to increased margin pressure, hence the intensified focus on cost savings. Virgin’s cost-to-income ratio is expected to decline through to 2025, according to FactSet consensus.

Last IC view: Hold, 142p, 04 May 2023