HIGH street bank Virgin Money yesterday warned of “headwinds” from interest rate cuts and pointed to cost pressures as it temporarily pauses restructuring efforts during its £2.9 billion acquisition by Nationwide Building Society.

The bank unveiled an 18% hike in pre-tax profits at £279 million for the half-year ending March 31. However, Virgin Money warned it is braced for its net interest margin to be lower over the second half, ahead of expected interest rate cuts and the competitive backdrop in UK banking.

Virgin Money generated net interest income of £2.3bn in the six months, up from £1.7bn in the same period last year. Total customer lending was 0.3% higher at £72.7bn in the first half. Notable expenditure included £33m from restructuring activities and £15m related to a new financial crime prevention programme.

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Mortgage balances dipped 2% in the lender’s first half to £56.6m, which Virgin said reflected a “subdued market for completions”. Its net interest income, the difference between what it pays out to savers and receives in interest from loans, rose to £868m from £855m. The group’s net interest margin increased by three basis points to 1.94%.

David Duffy, the bank’s chief executive, noted: “Over the first six months, we have continued to deliver on our strategic ambitions in line with expectations. While we expect there to be headwinds through the second half of the year, we remain well placed to deliver growth in our target segments.”

In a lengthy statement, Mr Duffy said the bank “continued to invest in our capabilities throughout the period and our planned cost-savings have helped partially mitigate ongoing inflationary pressure”, adding: “So far this financial year, the macroeconomic backdrop has modestly improved, with inflation continuing to fall, though remaining above the Bank of England’s target range.

“As a result, market interest rate expectations have been volatile through the period, but with continued low unemployment and wage inflation supporting customer affordability. Overall, while GDP growth remains low, the level of activity in key lending categories has shown some signs of improvement.”

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Rising wage bills and wider inflation also contributed to costs edging higher with limited scope to offset this due to the group is putting some restructuring activity on hold due to its impending takeover by Nationwide, which is headed up by Glasgow-born and raised chief executive Debbie Crosbie.

Mr Duffy noted: “Overall the business has had a positive first half of the year with good delivery across key areas. As we look out in to the second half, the group does expect downward pressure on net interest margin relative to H1.

"We also anticipate cost pressures from inflation and investment in H2, which will only be partially mitigated by the ongoing cost-savings programme, where certain restructuring activities have now been deferred in light of the proposed acquisition by Nationwide.”

Nationwide’s chairman Kevin Parry in March pledged to maintain branches, committing to keep one open in every location where the merged business operates until at least early 2028.

Virgin Money, meanwhile, which in February announced it had reached agreement to buy out its joint venture (JV) partner abrdn and take full ownership of Virgin Money Investments, has held back from announcing additional branch closures this year and has put a hold on previously declared intentions to further reduce its workforce.

The bank, which has around 6.6 million customers and is the sixth-largest on the high street, cut about 150 full-time jobs in the first quarter and in an update earlier this year had hinted at more cuts looming. Scottish branches which closed last year include Ellon, Fort William, Irvine, Lochgilphead, Newton Stewart and Turriff.

It is still expected that the Nationwide deal will complete towards the end of 2024 although the Competition and Markets Authority recently revealed it is investigating the takeover. The deadline for responses is today.

Several shareholders including Richard Branson’s Virgin Group have already backed the takeover deal at 220p a share for the bank that comprises parts of the old Northern Rock, Yorkshire Bank and Clydesdale Bank.