By Scott Wright
SHARES in Clydesdale Bank owner Virgin Money have surged nearly 20 per cent, despite the lender making a “frustrating” provision for payment protection insurance (PPI) claims causing losses to widen and prompting it to cancel its dividend.
The maiden results for the bank, formed by the merger of Clydesdale Bank owner CYBG and Virgin Money, saw it set aside a further £385m for PPI pay-outs after receiving a surge in enquiries ahead of the August deadline. The provision for claims led losses to spiral to nearly £200m.
READ MORE: Demise of Clydesdale Bank name confirmed
The bank said the charge was in line with guidance, having told the City in September that it would up its provisions for “legacy PPI costs” by up to £450m. It comes shortly after Royal Bank of Scotland set aside a further £900m and Lloyds Banking Group, owner of Bank of Scotland, made extra provision of £1.8bn to deal with a scandal which is estimated to have cost the sector more than £50bn.
Virgin Money said its latest PPI charge, alongside costs of £189m related to CYBG merger, led it book a statutory loss of £194m after tax for the year ended September 30, following a loss of £145m the year before.
READ MORE: Royal Bank chief: We can't draw a line under PPI scandal yet
Chief executive David Duffy said: “We, like the rest of the industry, were surprised by the scale of the PPI information requests and complaints during August. We have moved swiftly to address the issue and are leveraging innovative technology solutions to enable us to deal with genuine customer complaints as quickly, and as cost effectively, as we can.
“It is nonetheless frustrating to incur a further £385m in provisions in Q4 (quarter four) as we look to close out this legacy issue.”
The merger of CYBG and Virgin Money will lead to the Clydesdale Bank name disappearing from Scottish high streets next year, a move which caused anger among some customers when it was first announced. Asked how customers in Scotland have responded to the change, Gavin Opperman, head of business banking, said he imagined the reaction would have been a “lot more negative” than it has been “because it is a heritage brand”.
He added: “I thought it (the reaction) would have been less favourable to it than it is, but the customers are relatively positive towards it.”
Stripping out exceptional items, the bank’s underlying profit dropped by 7% to £539m, as higher impairments weighed on the bottom line. The bank said charges for bad debts rose by 44% to £153m, following the adoption of the IFRS 9 accountancy standard, while noting that “underlying asset quality remains strong”.
Net interest margin, in essence the difference between what a bank pays on deposits and earns on loans, dipped to 1.66% from 1.78% amid continuing competition in the mortgage market.
The bank said mortgage income was broadly stable at £1.55bn, with lending up 1.7% at £60.1bn.
Lending to businesses increased by 4.5% to £7.9bn, while personal lending grew by 16.1% to £5bn, driven in part by Virgin Money credit card growth.
Mr Opperman said: “Mortgages is a small growth number, but it is really what we would refer to as controlled growth.”
He added: “We have to be more prudent. We have to realise there are less transactions that are coming through the market. There is a slowing down in the market and it’s pretty much in line with what’s happening in the industry.”
Alasdair Ronald, of stockbroker Brewin Dolphin, said: “Virgin Money would have hoped for better news on its maiden results as one company.
“The bank has taken a significant hit from additional PPI provisions and the cost of the merger, while pressure on UK domestic earners continues to take its toll.
“The suspension of the dividend and lack of clarity over 2020 will likely not be well received; although, the statutory loss is lower than some had feared.
“The decline in Virgin Money’s net interest margin is disappointing, but not surprising against previous guidance.
“There are undoubtedly further challenges ahead, with increasing competition from other challenger banks potentially eroding new business margins. However, the integration appears to be on track and significant costs savings should be achieved.”
Shares in Virgin Money closed up 18.9%, or 27p, at 170p. Shares were trading at 210p one year ago.
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