Virgin Money returns to profit as bad debt charges fall

High street lender Virgin Money has returned to profit in its first half after setting aside less for bad debts as the economy recovers from lockdown.

The group – formerly known as CYBG – reported pre-tax profits of £72 million for the six months to March 31 against losses of £7 million a year earlier.

On an underlying basis, interim pre-tax profits more than doubled to £245 million from £120 million a year ago.

Profits were boosted as impairments for bad debts fell to £38 million from £232 million a year earlier at the height of the initial lockdown, which offset lower retail banking income due to rock-bottom interest rates.

But it did not follow the lead of bigger banking rivals Lloyds Banking Group and HSBC in releasing some of the mammoth cash put by last year for loan losses, instead maintaining provisions at £721 million.

It took a further £59 million for the payment protection insurance (PPI) scandal after a higher level of internal reviews into complaints led to payouts.

The group also missed out on the mortgage boom that boosted many of its rivals in the first quarter amid the stamp duty holiday, with its mortgage balance remaining flat at £58.3 billion.

It said it chose to focus on profit margins rather than chasing higher mortgage sales, but has started to see lending pick up, with lending surging 50% between February and March.

Personal loans dropped 3.2% to £5.1 billion in its first half as households reined in spending and saved instead, with business lending also down 0.6% at £8.9 billion.

The group saw its net interest margin – a key performance measure for retail banks – fall due to record low interest rates.

But it hiked its margin outlook for the full year due to an improving picture as the economy is set to bounce back strongly from the latest lockdown, though shares still fell 5%.

David Duffy, chief executive of Virgin Money, said: “We are cautiously optimistic about the improving outlook as the impact of the vaccination programme in the UK delivers positive revisions to economic expectations.

“We’re continuing to manage through what is still an uncertain economic backdrop, but the bank is well placed, with a strong balance sheet.”

The group said the “vast majority” of its Clydesdale and Yorkshire Bank sites have been rebranded under the Virgin Money banner.

It pushed ahead with plans to shut or merge 52 branches last autumn under plans to shift the focus from high street lending to digital services.

Mr Duffy said: “We’re now at an inflection point for the business – we want to emerge as a leading digital bank supported by a physical footprint.”

But he added the group had “no additional plans to do anything around branches” in 2021.

John Moore, senior investment manager at Brewin Dolphin, said: “The question is what the next big move for this evolving bank will be – whether that takes the form of accelerated investment in digital and fintech, buying in small books of mortgages and loans, or consolidating and cost-cutting within the existing business.”