Interactive Investor

Optimistic Virgin spotlights upcoming bank results season

1st February 2022 15:38

Graeme Evans from interactive investor

Our companies expert talks us through Virgin Money’s figures, forthcoming annual results from the banking sector, plus a share price crash at fashion chain Joules.

Virgin Money UK (LSE:VMUK) set the scene for this month's UK banking sector results by reporting an improved margin outlook but continued tough competition in mortgage lending.

The FTSE 250-listed challenger bank said its overall performance in the first quarter had been strong, and that it is optimistic about the UK economy based on current levels of consumer and business confidence, underpinned by lower unemployment.

Its net interest margin (NIM) guidance for 2022 has been upgraded to 1.75% from 1.70%, but this excludes the benefit of any potential interest rate hikes this year.

The first increase by the Bank of England monetary policy committee is due on Thursday, and broker UBS expects Virgin's consensus NIM to go slightly beyond 1.75% to account for three rate rises this year and normalisation of the savings market.

UBS has a ‘buy' recommendation and target price of 230p, but analyst Jason Napier highlights two key questions facing the stock.

The first of these is whether Virgin can stabilise its NIM as management hopes in 2023, if mortgage market conditions remain challenging, particularly when bigger banks may use their relative funding cost advantage. In today's first quarter results, Virgin reported that its mortgage balances reduced by 0.5% to £57.8 billion as it maintained market share but prioritised margin in a competitive environment.

UBS notes that mortgage spreads are under pressure as industry swap rates have risen far faster than customer rates. The same data also confirm that deposit rates, particularly for smaller banks, are off their lows.

The other question for Napier is the dependability of Virgin's 2024 cost guidance of £815 million, given the current higher inflation environment. The group said today that costs were in line with expectations and that it continues to see £275 million of restructuring charges as it rolls out its digital growth strategy between 2022 and 2024.

Virgin's shares have recovered from 160p just before the Bank of England's surprise December rates hike to almost 200p in mid-January. They were today 0.65p lower at 189.3p, compared with the gains of more than 1% for FTSE 100-listed rivals including Lloyds Banking Group (LSE:LLOY).

Attention now turns to the 2021 results season and expectations that high levels of excess capital and reserves will enable banks to announce share buybacks or special dividends.

Lloyds Banking Group publishes its annual results on 24 February, while NatWest Group (LSE:NWG) is on 18 February, Barclays (LSE:BARC) on 23 February and HSBC Holdings (LSE:HSBA) on 22 February. Standard Chartered (LSE:STAN) kicks off the results season on 17 February.

Among the other corporate updates today, shares in AIM-listed Joules Group (LSE:JOUL) have slumped 43% to 67.8p after poor January trading caused the retailer to delay interim results.

Sales for the nine weeks to 30 January were 31% higher but below board expectations due to a range of factors, including the impact of the Omicron variant on retail footfall and delays to new stock arrivals as a result of supply chain challenges. The company also experienced costs increases, including at its third-party distribution centre.

It is taking a number of actions to improve its margin performance and is hopeful of better trading over the rest of the financial year. However, it now expects profits to be not less than £5 million, compared with £6.1 million last year and expectations at the time of December's trading update for between £9 million and £12 million.

Interim results for the six months to 28 November have been delayed from today in light of the January performance, given the need to update going concern analysis. Joules has net debt of £21.5 million but “sufficient liquidity headroom for the foreseeable future”.

Analysts at Liberum halved their price target to 150p, driven by poor earnings visibility and lack of near-term catalysts. However, the house broker remains supportive: “Longer term there is huge value to be had.”

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