Virgin Money has been out of the news recently, just plodding along in the background whilst HSBC (target price £6.50 http://bit.ly/2dOpSiP) has been subject to news relating to its American Assets and cost savings progress, Lloyds is mentioned nearly everyday in some capacity and RBS is touted as one of the biggest victims of Brexit. Being in the background, Virgin Money hasn’t moved too much over the past month.
But what is the case for Virgin as an investment moving forwards. Certainly the bank did better than expected in the first half of 2016 and, despite taking a hammering after Brexit, it has recovered significant ground since, with a way to go before reaching post referendum levels of 366gpx. In the first half results,
Jayne-Anne Gadhia, Chief Executive stated “Since the vote to leave the EU we have experienced continued strong customer demand and no evidence of changes in customer behaviour. Virgin Money is in a strong position to deal with a period of post-referendum uncertainty as a low risk retail bank with a high-quality asset base and unburdened by legacy conduct issues”.
One could argue she makes a good point. This is not a major high street back with legacy issues, or a bank whose lending is reliant on taking on debt. This is a growing challenger bank which is asset strong and able to respond swiftly to threats as they occur. Much like Easyjet (report at: http://bit.ly/2dhcEWQ) the management appears to be focused and on the ball when it comes to cost cutting, and this is evident in the H12015 results “Total costs reduced by 2 per cent to £170.4 million compared to H1 2015”
There are significant positives moving forward, namely:
- Profit for H12015 was £102m, 53% higher than F12014, and the bank is confident in growing further into 2017.
- Credit card balances increased by 31% and is forecast to reach £3bn by the end of 2017.
- Mortgage balances have increased 9% to £27.7 billion,
- The Net interest Margin (NIM)is 1.6%, supported by a loan to deposit ratio of 109.6%.
The only significant news affecting the bank is a cut in interest rates to 0.25%, with scope for further reductions. However, a quick perusal of price comparison websites will show the deals available for Virgin with headline rates of 1.44% and fees of £995.00 using a LTV ration of 59%. This represents a APR of 4.1% on a 2 year fixed deal. Even taking out the commission that would be paid to brokers for the recommendation, the 1.6% NIM looks perfectly achievable in the current interest rate environment.
Of course, things are not all rosey for challenger banks such as Virgin Money. The biggest issue was the government proposal to levy an 8% charge on all banking profits (government paper can be viewed here http://bit.ly/1PS0djf).
The second is a secondary affect on challenger banks caused by the low interest rate environment. Low interest rates penalise smaller banks as they are required to hold higher levels (as a %) of capital reserves than their larger peers, meaning funds are not availbale to be lent out, reducing the NIM achievable.
Analysts in the city have revised down Virgin’s earnings per share growth from 40% to 33% this year, and from 31% to 9% in 2017. I cannot identify any evidence to support such a low level of growth for 2017. If anything, the brexit vote has not affected consumer sending at all yet, and I find no reason to doubt the banks own original forecasts.
With the banks profits forecast to be £200m this year alone, is Virgin Money really worth only £1.45bn? I think not.
I hold a position in Virgin Money.