Virgin Money extends share buyback as net margin increases

Virgin Money’s (VMUK) statutory profits have been boosted by a combination of rising interest rates and a lower level of impairments. The net interest margin, the difference between loan and savings rates, increased by 23 basis points to 1.85 per cent. Management expects it to rise further, pitching it at 185-190 basis points for FY 2023.

The deteriorating set of circumstances bedevilling the UK economy has yet to impact performance. But management remains cautious over prospects, even though it notes that “credit quality remains robust with low and stable arrears; provision coverage of 62-basis points above pre-pandemic levels”.

Overall lending balances returned to growth, finishing up 1 per cent at £72.6bn, as the group continues to improve the mix of its deposit base, evidenced by a 13 per cent increase in relationship deposits. Operating costs edged up slightly through the year, but inflationary pressures could weigh more heavily on the group’s clientele as the year progresses. Chief executive David Duffy noted "the potential affordability issues that higher living costs will cause for households and [Virgin] is ready to continue to support customers, as was the case throughout the pandemic”. At least many of the previsions taken against Covid-19 have been unwound.

The CET1 capital of the institution as a percentage of its total risk-weighted assets increased by 10-basis points to 15 per cent and management highlighted the “strong outcomes” from Virgin’s inaugural participation in the Bank of England’s stress testing regime.

On the balance of risks, management felt justified in awarding shareholders with a final dividend of 7.5p per share, together with a £50mn extension to the £75mn share buyback announced in June. However, we remain circumspect given wider macroeconomic challenges. Hold.

Last IC view: Hold, 151p, 09 May 2022