It cannot be denied that Virgin Money has taken a hit of a beating over the past couple of months, having dropped from 334px as recently as April, to wallow around 266gpx as at today’s date – a drop of more than 20%
Concern was raised in April over its credit card balances, as Virgin aims for £3bn of prime balances by the end of the year – the balance having risen by £200m to £2.65bn between the end of last year and March 31. As Virgin increases its credit card balances, the Bank of England’s Financial Policy Committee warned in April “potential vulnerabilities stemming from interest-free offers on credit cards” as the latest official figures showed card debt hit a record £67.3bn in February, an annual growth rate of 9.3pc.
The Bank of England has commenced a review into consumer credit lending standards and prompted the Financial Conduct Authority (FCA) to enforce new rules on card providers, particularly in respect of this in ‘persistent debt’ i.e. those who spend more on interest and charges than on repaying capital over an 18 month period. Virgin Money claims that only 2pc to 3pc of the lender’s credit card customers are “people that tend to pay their minimum monthly payment or just the interest and leave the capital outstanding” – so a very small portion of the total credit card portfolio would appear to be affected.
Since this news in April, shares in Virgin have been on a downward trajectory. It would seem that its peers of Barclays, RBS and Lloyds are also out of favour, particularly in light of the recent scandal that has wracked Barclays – the former boss of Barclays faces up to 22 years after he and three other ex-directors of the lender became the first British bankers to face criminal charges for actions taken during the financial crisis.
In light of the fact that several major banks are suffering despite no inkling of profit warnings leads me to believe that there is a sombre mood towards the banks by virtue of the Brexit negotiations. Indeed if past trends for Virgin Money are anything to go by, one could forecast profits for 2017 to be in the £270-£290m range. This forward valuation of 4.3-4.5X is laughable for a banking share, with the general multiple range being anything from 9-14X
Despite the recent hit to the share price, I have a medium term price target of 425gpx, and welcome the bottom of the trough, wherever it may be, as an opportunity to increase my holding.