Virgin Money underwhelms as profits dive

Richard Branson had an indifferent start to the year with the failed Virgin Orbit launch in Cornwall. Now, Virgin Money (VMUK), in which the UK entrepreneur has a 13.8 per cent beneficial holding, has revealed that reported profits had fallen by a quarter at the half-year mark. The challenger bank took the decision to book £144mn in provisions for bad loans compared with just £21m in last year’s interim release. Profitability was also constrained by increased expenses, some of which were linked to mortgage digitisation.

The risk reassessment was obviously prudent given the general economic outlook, but it’s worth noting that management has yet to see any “significant deterioration” in any of the assets held by the bank. And in stark contrast to events across the Atlantic, Virgin Money, which controls both Clydesdale Bank and Yorkshire Bank, saw a 2.6 per cent increase in overall deposits to £67bn. In addition, the net interest margin – the difference between loan and savings rates – came in at 1.91 per cent, against 1.85 per cent at its September year-end. The underlying increase in interest income was predictable given the direction of the base rate over the past year.

The Common Equity Tier 1 (CET1) ratio was unchanged from last year at 14.7 per cent and Virgin Money expects to announce a buyback later in the year following Bank of England stress tests. The promise of the capital return did little to placate the market as the share price pulled back sharply on results day, possibly reflecting wider concerns over the sector, although the negative reaction probably had more to do with the 5.2 percentage point fall in the return on tangible equity since the year-end. Hold.

Last IC view: Hold, 168p, 21 Nov 2022