Virgin Money profits lifted by rate rises but fires warning on outlook

The upgrade came on the day the Bank of England lifted the base rate by a further 0.25 per cent to 1% as it bids to combat surging inflation, which has thrown the UK into a cost-of-living crisis. Annual UK consumer prices index inflation climbed to 7% in March and is now forecast to rise above 10% by the end of the year as energy prices surge and supply-chain disruption forces up the price of goods.

Virgin highlighted the benefit of rising interest rates, alongside “record” credit card sales and the growth in personal current account openings, as it reported a “significant increase” in profits to £315 million in the six months to March 31, up from £72m last time.

The bank said profits had also been boosted in the first half from lower impairment levels compared to last year, though chief executive David Duffy warned that the “macroeconomic outlook is uncertain” given the inflationary conditions facing consumers, which will limit economic growth. He noted that the bank “does not have any direct lending exposure in Ukraine or Russia” but said it was “monitoring carefully for any second-order impacts arising from the conflict”.

Mr Duffy said: “We have made good progress against our strategy, while delivering a significant increase in profit. We have positive momentum in attracting new customers to Virgin Money through record credit card sales, good growth in personal current account openings and a strong uptake of our new digital fee free business current account.

“We have upgraded our net interest margin guidance given strong growth in unsecured lending, combined with the rising interest rate environment. Looking ahead, while the macroeconomic outlook is uncertain and there are increased cost pressures on consumers, we remain prudently provisioned and are confident in the quality of our loan portfolio.”

Virgin Money incorporates the historic Glasgow-based Clydesdale Bank, which became part of Virgin through its £1.7 billion merger with CYBG in 2018. The Clydesdale name has now been phased out in favour of the Virgin brand.

The bank has steadily been reducing its branch footprint since the merger, with the most recent cuts coming in September when it announced the closure of a further 12 branches in Scotland, reducing its total to 43. Virgin said the decision to reduce its footprint reflects decreasing visits to branches, which was hastened during periods of lockdown.

The bank noted that its net interest margin – in broad terms the difference between the interest it pays on deposits and interest received on loans – expanded to 1.83% in the first half from 1.56%. Virgin has further upgraded its guidance on NIM for the second half, declaring that it now expects a “stronger outlook for FY22 NIM of between 180 and 185bps (basis points)”.

Unsecured lending was reported by the bank to have grown by 7% to £5.8 billion in the first half, supported by “record” credit card account openings. Around 175,000 credit card accounts were opened in the second quarter, which Virgin said had beaten the previous record set in the first quarter. Lending to businesses dropped by 2.5% to £8.5bn, which the banks said was driven by reductions in government-backed lending schemes which continued to be repaid. Customer deposits dropped by 3.7% to £64.4bn.

The bank declared an interim dividend of 2.5p per share, amounting to £36m, which it noted would be paid to investors in June.

Analysts at Shore Capital said: “ H1 results to 31 March 2022 show profits have smashed consensus expectations driven by a higher-than-expected NIM (rate rises), lower-than-expected impairment ratio (including updated macro assumptions) and lower-than expected restructuring costs (timing).

“The group also declared a larger than expected interim dividend. Following a sectoral trend, full year NIM guidance has been upgraded recent rate rises, which we expect to drove forecast upgrades. The beat and upgrade should be well received.”

Shares in the bank closed…