Virgin Money cost of risk rises

In the three weeks ahead of its full-year results, shares in Virgin Money (VMUK) rallied harder than any other listed UK lender. With a trough-to-peak share price increase of 235 per cent since March, few stocks in any sector have seen such an abrupt swing in sentiment.

It was perhaps inevitable, then, that the temperature would dip once the lender published predictably loss-making numbers for the 12 months to September, and investors were once again reminded of the profound uncertainty facing UK banks.

In the event, Virgin Money also missed several analyst forecasts for its second half. Though costs matched consensus estimates, a dip in income and a higher-than-expected rise in impairments produced an underlying pre-tax profit of £4m for the period, short of the £23m expected.

Given the scale of sector-wide loan loss impairments, the miss does not look too terrible, even if income headwinds are a concern.

For the whole year, total provisions came to £501m, which explains the heavy statutory loss and a rise in the cost of risk from 21 to 68 basis points. However, investors can take some reassurance from management’s claim that “asset quality remains resilient, with no signs of deterioration yet seen”.

On average, analysts expect tangible book value to nudge up to 248p per share for the September 2021 year-end, which at the current price amounts to a 44 per cent discount. By comparison, the better-capitalised and more profitable Lloyds Banking Group (LLOY) trades at 0.77 times’ forward book value, though we prefer Virgin’s growth-oriented market focus and lower cost of risk at this point in the downturn. Buy.

Last IC View: Buy, 73.8p, 1 Oct 2020