Virgin Money UK was expecting “strong” financials for the full year, it said in a trading update on Thursday, with statutory profit before tax expected to be £417m, and its statutory return on tangible equity expected to swing to a positive 10.2% from a negative 6.2%.
The FTSE 250 banking group said underlying profit before tax was anticipated to improve 546% for the 2021 financial year, to £801m from £124m, driven by “strong” financial momentum and an improved macro outlook.
It said asset quality and an improving outlook drove an expected credit loss (ECL) release of £131m, compared to a £501m charge in 2020, while income grew 2% to £1.57bn, as net interest income improved 5%, more-than-offsetting the firm’s 16% lower other income.
Virgin Money said its net interest margin improved six basis points to 162 basis points for the financial year, increasing to 170 basis points in the fourth quarter, as lower deposit costs, structural hedge benefit and growth in higher yielding assets more than offset mortgage spread pressures.
Other income at £160m was 16% lower, due to reduced activity levels, but with improved momentum in the fourth quarter.
Costs were down 2% at £902m, which the board said was driven by the group’s cost savings programme, although that was partly offset by higher variable remuneration in the fourth quarter compared to a year ago.
Expected credit loss provisions now totalled £504m, down from £735m at the end of the 2020 financial year, although the total coverage ratio of 70 basis points, while down from 102 basis points, was still above pre-pandemic levels.
Virgin Money’s CET1 ratio increased by about 150 basis points to 14.9%, including a 50 point software benefit, with “strong profitability” and a “benign” risk-weighted asset backdrop.
The directors announced their intention for a dividend of 1p per share, subject to the finalisation of the full-year results and shareholder approval.
Looking to the 2022 fiscal period, Virgin Money said it was expecting to benefit from higher rates, offset by inflation and investment.
Its net interest margin was expected to be about 170 basis points, supported by the “ongoing optimisation” of funding, expansion of its structural hedge, and a rising rate environment.
Underlying operating costs for the new year were expected to be “broadly stable” against 2021, given an acceleration of investment.
Virgin Monet was expecting its cost of risk to rise through the cycle range, while restructuring charges were expected to be around £275m across the 2022 to 2024 financial years, with around half taken in 2022.
The board said it was expecting an SST outcome around December, adding that its impairment outlook remained key considerations for its long-term capital framework and dividend policy, with an update expected at the end of the first half of the new financial year.
“We performed very strongly in the 2021 financial year, with an expected return to statutory profit before tax underpinned by significant underlying profit growth,” said chief executive officer David Duffy.
“We increased our net interest margin, reduced costs, improved impairments and delivered a strong capital progression which enabled the proposed reinstatement of a dividend.”
Duffy said the firm’s accelerated digital strategy wou;d result in new propositions, including a digital wallet, and would deliver efficiency and agility improvements.
“The combination of these factors will help us to become a growth-oriented digital bank that offers a best-in-class experience and unique loyalty rewards for customers, and delivers double-digit returns for shareholders.”
At 0921 GMT, shares in Virgin Money U K were down 4.45% at 187p.
