Virgin Money will struggle to re-rate, says Berenberg

Virgin Money tumbled on Monday as Berenberg re-established coverage of the shares at ‘hold’ from ‘under review’, saying the bank will struggle to re-rate given potential revenue headwinds and a sector-lagging return on tangible equity.

In a broader note on the sector, Berenberg initiated coverage of OSB Group at ‘buy’, and upgraded Close Brothers to ‘buy’ from ‘hold’.

"These three UK banks have two unifying features, in our view," it said.

"First, they are small, with a market capitalisation of £1.5bn-2.1bn. Second, they are cheap. In other respects, however, they are more different than they are alike. We believe that these differences can be a source of strength.

"Specifically, the business models of Close Brothers and OSB Group - i.e. the special ones - support attractive pricing (including as interest rates rise) and growth. While cyclical headwinds exist, we believe that this structural strength is undervalued, which drives our buy rating for both banks - OSB Group is our preferred small UK bank.

"By contrast, we expect Virgin Money to experience falling revenues and a sector-lagging RoTE, impeding its ability to rerate and motivating our hold rating."

Berenberg noted that Virgin Money operates in mainstream lending markets, but lacks the low-cost deposit funding advantage of larger peers.

"While the bank’s strategy implicitly recognises these weaknesses, plans to grow low-cost deposits may face headwinds that, in turn, could further impede SME and mortgage lending growth," it said.

At 1040 BST, Virgin shares were down 9.6% at 127.90p.