Virgin Money: challenger bank has mature allure

Has Virgin Money been getting the respect it deserves? Its shares have trailed larger UK peers. Perhaps that is because the brand sounds more like a cryptocurrency promoted by Sir Richard Branson than a proper UK retail bank.

Monday’s full-year results forced the market to give Virgin Money a little more credit. Chief executive David Duffy said the retail-focused bank would offer a higher than expected dividend and share buyback. The shares jumped 14 per cent.

Unlike most UK bank bosses, Duffy had the benefit of reporting after last week’s UK Autumn Statement. That gave him an opportunity to gauge the mood of the markets.

Virgin can therefore confidently dole out largesse from its swelling pool of net interest income. This rose 13 per cent in the year to £1.59bn. The net interest margin, already up smartly this year to 1.85 per cent, should improve further.

That cheered investors nervous about recent gilts volatility. Some analysts rightly wondered why Duffy could not offer bigger payouts. After all, the bank has plenty of capital to spare.

Virgin Money’s common equity tier one capital ratio hit 15 per cent, against its own target of about 13 per cent. That should leave a maximum of £483mn of excess capital. This surplus should climb higher, too. On current profitability the bank would generate the same amount again in CET1 capital next year.

No wonder Duffy says Virgin Money is maturing. It has combined with CYBG while meeting regulatory stress tests. His cheering message was that payouts should follow next year, no matter the economic mood. Analyst upgrades should follow.

A conservative full-year result, without need of extra loan provisioning, shows Virgin Money has indeed grown up a good deal. The shares trade at 40 per cent of tangible book value. Even if roughly a fifth of its loan book is buy to let, that does makes them cheaper than stock in NatWest or Lloyds. The high-street giants have greater economies of scale. But there is scope for the valuation of Virgin Money to catch up further.