Virgin Money's profits plummet as it gears up for spate of bad debts

Virgin Money’s profits plummet as the lender braces for a £501m surge in bad loans stemming from the pandemic

  • Virgin’s annual profits have fallen by 77% to £124m, results today have revealed
  • End of furloughing and more mass job cuts on the cards next year 
  • Lender also thinks the housing market could slow once stamp duty holiday ends 

Virgin Money’s profits have fallen by 77 per cent to £124million in the last year, as the group braces itself for a surge in bad debts arising from the pandemic. 

The lender took a £501million impairment charge against an expected surge in bad loans as businesses and individuals battle to stay afloat financially.

David Duffy, chief executive of Virgin Money, said: ‘Although the vaccine news is a strong cause of hope for the future, the economic benefits are still some way off when considering the immediate reality of current restrictions and so have not yet been factored into our near-term forecasts.’

Plunging: Virgin Money's profits have fallen by 77% in the last year

Plunging: Virgin Money’s profits have fallen by 77% in the last year

Shares in Virgin Money have fallen sharply this morning and are currently down 7.38 per cent or 10.85p to 136.40p. 

The group said its ‘substantial’ charge for loan losses came as it prepares for a surge of borrowers falling behind with repayments due to the coronavirus crisis.

It said it has not yet seen significant arrears, but took the charge to reflect the ‘highly uncertain’ economic outlook and the fact restrictions look set to remain in many areas for some time.

On a statutory basis, the group saw pre-tax losses narrow to £168million, from losses of £265million the previous year.

Mr Duffy said: ‘While we are yet to see any material impacts of the pandemic on the credit quality of our loan book, our results reflect a cautious and conservative approach to the coming period as we refine our assessment of the uncertain economic outlook and the impact of the second lockdown.’

The group said it had dished out 67,000 mortgage repayment holidays this year, representing 20 per cent of all its balances. It also said it had granted 58,000 personal payment holidays over the period and supported around 30,000 businesses with lending support.

Its latest results showed mortgage lending fell 3 per cent to £58.3billion over the year as the spring lockdown temporarily hit demand. 

While the end of restrictions on the property market in May and the stamp duty holiday have since given the housing market a boost, Virgin Money said it was ‘more cautious’ in respect of its future short to medium term prospects.

The stamp duty holiday and the Government’s furlough scheme both come to an end on 31 March next year.   

Brace yourselves: Virgin Money said its 'substantial' charge for loan losses came as it prepares for a surge of borrowers falling behind with repayments

Brace yourselves: Virgin Money said its ‘substantial’ charge for loan losses came as it prepares for a surge of borrowers falling behind with repayments

Virgin Money said it was also axing its guidance for 2022 as a result of Covid-19 and the unpredictable outlook for the economy.

For next year, the lender forecasts that its net interim margin will be broadly flat on this year’s levels and non-interest income looks set to remain subdued, with underlying operating costs of £875million, inclusive of around £10million to £15million worth of Covid-19 related costs.

While the outlook remains uncertain, Virgin Money said it remained in a ‘position of strength.’ 

It added: ‘In the medium term, the board believes that, assuming no significant further deterioration in expectations for the economic outlook or change in interest rates, Virgin Money has a clear path to delivering a double digit statutory return on tiered equity over time, supporting future capital returns to investors.’

The group said it was moving ahead with its rebranding programme to bring all its Clydesdale and Yorkshire banks under the Virgin Money banner. To date, it has completed 37 rebrands and expects to have completed all by the end of next year.

Adam Vettese, an analyst at eToro, said: ‘These are exceptionally uncertain times for banks and the path to sustained profitability looks challenging. As Virgin Money’s results show, margins are being squeezed by perpetually low rates, a situation that would become radically worse should the Bank of England introduce negative rates.’

He added: ‘Virgin Money is bullish about coming out of this crisis strongly, but it will need helpful conditions if outcomes are to match its rhetoric. 

‘As an investor, banks are fraught with risk at the moment. However, there is one key attraction: they are ridiculously cheap. Therefore, they may appeal for a brave investor with a very long-term outlook.’