Virgin Money has said the new bank surcharge will slow its progress as it reports a continuing grab for market share grab in mortgages, but warns margins are now under pressure.
Virgin, which employs 200 in Edinburgh and is next month sponsoring the Fringe on the High Street and the Fireworks Concert, is providing one in every five new mortgages, and has reported a half year of solid progress in credit cards and savings. It sees growth prospects in its current account, digital offering, and SME lending.
But competitive pressures will tighten its focus on cost as it targets a 50per cent cost-income ratio, against the background of a taxation dent to its return on ‘tangible equity’ – the slightly more favourable measure than return on equity now used by many banks. The ratio improved from 66.7per cent to 62.2per cent.
Underlying pre-tax profit before tax increased by 37per cent to £81.8million in the first half, with underlying net interest margin up by 22 points to 1.65per cent. Core return on tangible equity was up by 2.6 points to 10.2per cent. Statutory pre-tax profit was up from £6.7m to £55m. The interim dividend is set to be 1.4p.
Jayne-Anne Gadhia, chief executive, said: “We remain confident that will deliver a full-year net interest margin slightly ahead of our guidance of up to 160 basis points (1.6per cent) in 2015.”
But she added: “The unexpected addition of the bank surcharge is expected to slow our progress to mid-teens returns on tangible equity and we now expect to achieve this by the end of 2017."
Mortgage balances increased to £23.6billion, up 8 per cent on the last full year, while net lending was £1.7bn in the first half and at 20.5 per cent market share at the end of May. Virgin's arrears ratio is 0.25 per cent compared with the latest industry average of 1.3 per cent.
However chief executive Jayne-Anne Gadhia said: “Competition in the mortgage market, reflected in asset spread compression, remains a headwind in the second half of the year. We will protect spread by a continued focus on managing volumes.”
Virgin’s retail deposit balances increased by 3 per cent to £22.8bn, in a market where new competitors such as Renault-owned RCI Bank are emerging with keen offers. Its new Essential current account is seen as a healthy competitor with its 1per cent interest rate on balances up to £100,000, and no overdraft.
The account, available in Scotland for 12 months, was rolled out nationally in April.
Ms Gadhia said: “Current account, digital and SME development give us significant potential and opportunity to drive the growth of the business. We have the brand, the capability and the flexibility to adapt to market conditions and to pursue new opportunities and, importantly, we have the capital to support our growth ambitions.”
Credit card balances stood at £1.1bn after the successful migration in March of 675,000 accounts from MBNA to Virgin’s own platform, and the launch of new cards.
“This puts us in a strong position to grow our credit card business to our target of £3bn of credit card balances by the end of 2018," Ms Gadhia said.
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