Virgin Money beats forecasts and eyes faster ROTE growth

The 'challenger' bank lifted underlying profit before tax 53% to £160.3, well ahead of a consensus for £151m, as costs and impairments were both lower than expected.

Revenues of £268.7m were as expected, with underlying net interest margin rising 15 points to 165 basis points over the year.

Year-end capital ratios were strong, as expected, with a core tier 1 ratio of 17.5% and a leverage ratio of 4.0%.

This was thanks to strong asset growth, with mortgage balances growing 16% to £25.5bn, the migration of credit card accounts to Virgin's own platform resulted in 44% growth to £1.6bn almost entirely in the second half.

Chief executive Jayne-Anne Gadhia said the success of the new credit card business has been such that she now expects to grow card balances to at least £3bn by the end of 2017, a year earlier than planned.

"Growth in our mortgage book outpaced the market as we continued to support demand for housing in the UK," she added, with internal analysis of the government's buy-to-let changes not expected to have much adverse effect. BTL lending represents 17% of the group’s mortgage book.

Virgin's savings franchise continued to flourish, with retail deposit balances up 12% to £25.1bn, versus market growth of 7%.

Management are conducting a feasibility study into personal current accounts with a view to expansion into the broader market.

On outlook, Gadhia said the bank would be able to absorb the impact of the new bank tax surcharge and was "well placed to achieve a mid-teens return on tangible equity by the end of 2017", versus the 10.9% reported for 2015.

Analysts were impressed, with Shore Capital's Gary Greenwood saying he expected the strong set of results to drive reasonable upgrades to his own and consensus earnings estimates and thus result in a positive share price reaction.

Numis's Jonathan Goslin said he believed there was a near-term opportunity for investors to benefit from a significant improvement in Virgin Money’s underlying fundamentals whilst markets remain favourable and mainstream competition is distracted/restricted.

"The group’s strategy is based on steady mortgage stock expansion and accelerated credit card growth, combined with a modest improvement in the NIM and a sharp reduction in the cost income ratio. We believe this will generate a steady improvement in the ROTE and EPS CAGR of circa 20% over the next three years."