Virgin Money’s 28% rally is good news for Lloyds Bank

A month after adopting the Virgin name, this challenger bank is already making waves. Here's why.

No dividend and a £194 million loss failed to stop Virgin Money (LSE:VMUK) surging in value today as the lender's mission to disrupt the banking status quo received early City backing.

Shares jumped 28% to 183p following the full-year results by the UK's largest challenger bank, which was only created this year after combining with Yorkshire and Clydesdale owner CYBG.

Investors took a relaxed view on the suspension of Virgin's dividend and bottom-line loss - triggered by £385 million of additional PPI provisions -and instead focused on better-than-expected guidance for net interest margin (NIM) in the current financial year.

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Competitive market pressures had caused the NIM to fall to 1.60% in the fourth quarter and to 1.66% over the year, from 1.78% the previous year. Virgin now expects a 2020 figure of between 1.60% and 1.65%, which is better than the consensus of 1.59% and is likely to be taken as a sign that mortgage pricing pressures are starting to ease.

That's also welcome news for long-suffering investors in Lloyds Banking Group (LSE:LLOY), the country's largest mortgage lender, with shares in the Halifax owner creeping higher in recent weeks to stand at just below 62p.

Source: TradingView Past performance is not a guide to future performance

The other big positive from Virgin's results concerned a stronger-than-expected capital position. The CET1 ratio, which is a measure of the bank's financial strength, was 13.3% in today's results and should be 13% for the current financial year, which analysts at UBS said compared with their own forecast of 12.5% and was a significant buffer to the bank's regulatory requirement of 11%.

Virgin has protected the CET1 by pulling the dividend in light of the additional PPI provisions, which amounted to £415 million over the year after an unprecedented industry-wide surge in complaints in August ahead of the PPI time bar deadline.

Coupled with restructuring and acquisition costs, the company slumped to an after-tax loss of £194 million. The underlying profit of £539 million was also down 7% on a year earlier. The decision to suspend the dividend, which will be reviewed next year, was taken following consultations with major shareholders.

The scale of today's share price rally had analysts struggling to keep up, with a selection of early morning ‘buy’ notes from City brokers showing price targets below the current 180p.

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Much will now depend on how UK consumer confidence and Brexit arrangements are impacted by the result of next month's general election. There was some encouragement on this front earlier this week when investment bank Goldman Sachs upgraded its UK growth forecasts.

Despite the short-term challenges, Virgin has stuck by all the targets set at its capital markets day in June, including a return on tangible equity of above 12% by 2022, compared with 10.8% in today's results.

The group, which changed its name from CYBG at the end of last month, plans to launch its first Virgin Money digital current account next month, with three new concept stores also set to open about the same time.

It is seeing above market growth in business and personal banking, with full-year customer lending growth of 2.9% to £73 billion including a 1.7% rise in mortgages to £60.1 billion for a market share of 4%. Deposit growth was 4.6% to £63.8 billion.

Cost savings of £53 million from the CYBG merger were achieved in the year, with Virgin on track for its target of £200 million by 2022. Chief executive David Duffy said:

“We are now one bank with the culture and capabilities to deliver on our strategy of disrupting the status quo."