Glasgow-headquartered Virgin Money suffered a dip in mortgage and business lending in the final three months of last year but hailed what it described as an otherwise “robust” performance, adding that it remains optimistic about the pace of economic recovery.

Weakened public financial support saw business lending decline by 2.2 per cent from the previous quarter to £8.3 billion as the Government’s Covid support schemes began to wind down. Mortgage balances also fell amid heavy market competition and the end of the stamp duty holiday that was introduced in mid-2020 to support the property sector.

The group – formerly known as CYBG, owner of the Clydesdale and Yorkshire banks – saw mortgage balances fall by 0.5% to £57.8bn. The decline comes after UK mortgage lenders have enjoyed a boom in home loans driven by rock-bottom interest rates and increased buyer demand for larger properties with gardens.

However, credit card spending during the period – which marks the beginning of Virgin Money’s financial year – rebounded to pre-Covid volumes with unsecured balances up 3% on the previous quarter. The number of new accounts opened was in excess of 132,000, the highest since the start of the pandemic.

“The group continues to expect good momentum in unsecured balance growth through the remainder of [the year], supported by new digital propositions and an ongoing recovery in the economic backdrop,” Virgin said.

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The group is also forecasting a higher net interest margin – a key measure of a bank’s profitability – driven partly by the latest hike in interest rates. This higher-yielding lending will be partially offset by the competitive mortgage market and “normalisation” of the savings market.

In December, the Bank of England (BoE) raised the UK’s benchmark interest rate from a historic low of 0.1% to 0.25% amid concerns about rising inflation, which has hit a near 30-year high of 5.4% and is expected to reach 6% by April. Analysts are predicting a further increase in rates to 0.5% at the BoE’s monthly meeting tomorrow.

Higher interest rates will boost profit margins across the retail banking sector, but could further dampen mortgage demand as it becomes more expensive to borrow money to purchase homes. Despite this, Virgin chief executive David Duffy was upbeat about the group’s prospects, highlighting low levels of unemployment.

"Virgin Money's performance in the first quarter has been strong,” he said. “Our balance sheet is performing well, asset quality remains robust and we have increased guidance on net interest margin for 2022.

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“We are optimistic about the pace of recovery of the UK economy based on growing consumer and business confidence, underpinned by lower unemployment."

The group progressed with controversial plans announced in September to close a further 30 of its high street bank branches across the UK, including 12 in Scotland. A total of 28 closures have been completed, cutting its network from 162 to 134 as of the end of January.

“We’ve continued our strong delivery of new digital propositions, including the launch of our fee-free digital business current account and innovative new unsecured lending products, with more to come later this year,” Mr Duffy added.

Shares in Virgin Money edged slightly higher to close yesterday’s trading at 190.2p.