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Virgin Money profits dive after larger than expected jump in bad loan provisions

Virgin Money has made a bigger than expected provision for bad loans, which hit the UK lender’s profits and sent its shares down by 10 per cent on Thursday, as the cost-of living crisis dents customers’ ability to pay their credit card balances.

Provisions for bad loans at the challenger bank increased nearly sixfold to £144mn in the six months to March 31, from £21mn in the same period in 2022 and above expectations of £129mn.

Statutory pre-tax profits fell 25 per cent to £236mn, beating analysts’ estimates of £226mn. Revenues rose 10 per cent to £933mn, the bank said on Thursday. The consensus was for £911mn.

“We are seeing a modest pick-up in arrears, said chief financial officer Clifford Abrahams. “They’re not spiking but there is more normalisation which you would expect.”

The group increased its model for expected credit losses by £83mn to £455mn in the first half of the year, against £372mn in 2022 as it factored in updated economic conditions such as UK GDP, inflation, unemployment rates and house prices.

Abrahams said data from credit bureaus, which signalled higher levels of customer indebtedness, had also driven changes in the model. High utility bills, meanwhile, dented customers’ affordability, reducing the amount of new business for the lender.

Virgin Money said it anticipated a “continued increase” in arrears, notably in its credit cards portfolio, which was the “primary driver” behind the downgrading of some of its unsecured loans.

The amount of relief — such as an extension in repayment terms — the bank granted to customers struggling to pay their credit card bills totalled £73mn across more than 18,000 accounts in the first half, up from £62mn across nearly 16,000 accounts in the previous six months. The volume of credit card balances reaching 180 days past due also increased, driving a slight rise in write-offs for unsecured loans, the bank said.

Nearly 90 per cent of the FTSE 250 lender’s impairment charges were linked to its unsecured book. Impairment charges related to unsecured lending rose nearly two-fold from the same period last year to £126mn.

Chief executive David Duffy, however, insisted the challenger bank was seeing “no sign of stress” in its mortgage book and no “material deterioration” in any asset classes across its portfolio.

“What we’ve done is update our model . . . anticipating the stresses in the economy,” he said.

The board of the FTSE 250 lender, which in November announced a 7.5p per share dividend for 2022, recommended an interim dividend of 3.3p per share.

It plans to reward investors with a 30 per cent full-year dividend payout ratio this year and expects further share buybacks throughout the year, subject to the Bank of England’s stress tests.

The group upgraded the full-year outlook for its net interest margin — the difference between the interest it receives on its loans and the rate it pays for deposits — which it now expects to reach 1.9 per cent in 2023.

Shares in Virgin Money have fallen 16 per cent this year, having been hit by fears of wider contagion in the banking sector after the collapse of Silicon Valley Bank and trouble at other lenders, including Credit Suisse.

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