Virgin Money profits surge but margin outlook hits shares

Interim profits from Virgin Money were strong but the challenger bank's outlook statement warned of a lower than previously anticipated net interest margin due to its decision to accelerate drawings from the term funding scheme.

Virgin, which also announced the retirement of chairman Glen Moreno next year, generated total income of £327.2m in the six months to 30 June, which was up 13% on the same period last year and 10% on the second half of last year.

Adjusted profit before tax of £128.6m was up 26% on the same period last year, though impairments increased 28% and costs by 4%.

The dividend was increased by 19% to 1.9p.

NIM came in at 1.59%, only slightly below guidance of around 1.60%, but management has now lowered its guidance for the full year ratio to the bottom end of its 1.57-1.60% target range, with analysts saying every basis point was equivalent to around £3-4m profit.

The impairment ratio remained low at 0.13% and full year guidance was for this to edge up only slightly in the second half, while the Common Equity Tier 1 ratio was reduced to 13.8% from 15.2% at the end of last year due to the investment in growth, but still well ahead of the minimum 12% management have set.

The cost/income ratio shrank to 53.9% from 58.8% and management stated their confident that the business can exit 2017 with a ratio below 50%.

The adjusted RoTE increased by 1.1ppts to 13.3% with management reiterating full year guidance for a ‘solid double-digit’ return.

Chief executive Jayne-Anne Gadhia said: "The momentum of the business demonstrates the strength of our strategy and the focus we have on serving our customers."

She added: "We will continue to drive growth, quality and returns, put customers at the heart of everything we do, and we remain on track to sustain a solid double-digit return on tangible equity (RoTE) in 2017."

In a second announcement on Tuesday, chairman Moreno confirmed his intention to retire from the board in 2018 and to return home to the USA.

Chief financial officer Peter Bole has also been promoted to an executive director role on the board, six months after taking on the role.

Moreno said Bole brings "an extensive background in strategic financial management and has already made a strong contribution to our strategy aimed at delivering growth, quality and returns".

Shares in Virgin Money fell more than 7% on Tuesday morning to stand at 283.3p at just after 0900 BST.

The outlook statement remains confident in the prospects of the group and its ability to continue delivering strong balance sheet growth while not sacrificing credit quality, observed analysts at Shore Capital.

"However, the market is concerned about the accounting for credit card balances whereby revenue is booked before cash is received due to the prevalence of interest free balance transfer products.

"This is assumption based, with the proportion of customers staying beyond the initial promotion period being key. The group has a number of promotions that come to an end in H2 and this should provide a good steer as to whether management’s assumptions are correct.

"However, by way of simple sensitivity analysis. We estimate that simply moving the credit card book to cash accounting would reduce our 2017 income forecast by around 10% and our adjusted PBT forecast by around 25%."