Bank investors are understandably a nervous bunch these days. The industry’s problems so far have focused on deposit-dependent regional US lenders. But questions are also being asked about smaller European banks, especially British retail bank Virgin Money.
Its share price, down 23% this year, has lagged far behind that of bigger banks such as Lloyds and the broader FTSE All-Share Index. Virgin Money’s interim results He didn’t temper frayed nerves on Thursday, emphasizing why the bank is trading at 36% of its tangible book value.
Higher-than-expected loan provisions caused its stock to fall 6% on the day. These are the result of gloomy economic models which, unlike its peers, Virgin money it hasn’t fumbled since last September, when a British gilt crisis was underway.
This meant higher provisions, partly due to higher arrears on credit card loans, which cut £144m from pre-tax profit to £312m, 16% less than a year ago. Meanwhile, most of its peers in the UK have not raised the cost of risk assessment substantially.
There has been some good news, namely an expansion in net interest margins along with deposit growth. Virgin Money’s second-quarter NIM rose to 1.94%, in line with its forecast, helped by rising rates. That’s well below what Lloyds and NatWest earned in the first quarter. The NIMs in both were above 3%. But Virgin Money has managed to increase deposits, unlike its bigger competitors. This was £2.6m or 4% more year-on-year than small declines elsewhere.
The fact that Virgin Money is attracting deposits should be reassuring given that its loan-to-deposit ratio is 108%, quite high compared to larger lenders. But these deposits presumably come at a higher cost given its relatively low NIM. Its share of buy-to-let loans — about one-fifth of loans — is also high enough to keep some shareholders on their toes.
Virgin Money has a cautious outlook and has acted accordingly. Investors looking for a higher-risk bet on UK banks will find its low valuation compelling, others may prefer more relaxed choices.
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