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Virgin Money brags about its high quality loan book as BoE warns against credit complacency

Published: 05:19 25 Jul 2017 EDT

Monopoly mortgage cards
Gross mortgage market share at the end of May was 3.5%

Virgin Money Holdings (UK) PLC (LON:VM.) shares tumbled as it said full-year net interest margin would be at the lower end of its guidance range.

The lender, which is one of many seeking to challenge the dominance of the Big Five banks in Britain, said its decision to accelerate draw-downs from the Bank of England’s term funding scheme to support additional lending would result in full-year net interest margin (NIM) being towards the lower end of its guidance range of 1.57 to 1.6 percentage points (i.e. 157-160 basis points).

The half-year update from Virgin Money came in the wake of speech last night in Liverpool by Alex Brazier, the director for financial stability at the Bank of England, who indicated the central bank is getting increasingly worried at the complacency of banks over the rise in household debt.

“Lenders have been the lucky beneficiaries of the benign way the economy has evolved. In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions,” Brazier said.

Brazier noted that over the last year, household incomes have grown by 1.5%, whereas outstanding car loans, credit card balances and personal loans have risen by 10%.

For its part, Virgin Money highlighted the quality of its mortgage book, bragging that only 0.15% of its mortgage customers were more than three months in arrears, against an industry average of 0.91%.

Credit card accounts that had missed two or more repayments in succession represented 0.82% of all credit card accounts at Virgin Money, which was up from 0.78% at the year-end but well below the industry average of 2.4%.

The shares fell 5.8% to 288.6p in early deals, despite a solid performance from the challenger bank in the first half of 2017, before recovering to around 292p in mid-morning - down 4.8% on the day..

Virgin Money said it enjoyed “strong high-quality” lending growth, with underlying profit before tax rising to £128.6mln from £101.8mln the year before.

Retail deposit balances rose 5% from the level at the end of 2016 to stand at £29.6bn at the end of June.

Mortgage balances over the same period rose 7% to £31.8bn.

READ: Virgin Money reaffirms its full-year guidance after solid first quarter

Gross mortgage lending totalled £4.3bn, with the group enjoying a market share of 3.5% at the end of May. Net lending clocked in at £2.1bn, with the market share standing at 11.9%.

The interim dividend has been bumped up 19% to 1.9p.

“Our deposit franchise is flourishing; we have maintained our stringent focus on the prime segment of the credit card market, and continue to deliver high-quality mortgage lending growth,” said Jayne-Anne Gadhia, Virgin Money’s chief executive.

“The development of our digital banking platform, in collaboration with 10x Future Technologies, is progressing to time and budget and we believe will be transformational for the business.

“We will continue to drive growth, quality and returns, put customers at the heart of everything we do, and we remain on track to sustain a solid double-digit return on tangible equity (RoTE) in 2017," she added.

The lender announced a strategic partnership with Virgin Atlantic that will see it becomes the airline’s UK retail financial services partner next year.

Meanwhile, having joined in May 2015, chairman Glen Moreno has signalled his intention to retire from the role in 2018 and head back home to the USA.

The search is on for a replacement.

In other board room news, chief financial officer Peter Bole has, as expected, become a board member.

Shore Capital said the first half numbers were slightly ahead of its forecasts.

“The outlook statement remains confident in the prospects of the group and its ability to continue delivering strong balance sheet growth while not sacrificing credit quality; however, the market is concerned about the accounting for credit card balances whereby revenue is booked before cash is received due to the prevalence of interest free balance transfer products,” noted Shore’s Gary Greenwood. 

“This is assumption based, with the proportion of customers staying beyond the initial promotion period being key. The group has a number of promotions that come to an end in H2 and this should provide a good steer as to whether management’s assumptions are correct,” he added.

--- adds comments from BoE official; details on quality of VIrgin's loan book and updates share price ---

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