CLYDESDALE Bank owner Virgin Money has highlighted tough conditions in the mortgage market as it faces challenges in its attempt to lure business customers from Royal Bank of Scotland.

The group said the value of its mortgage book fell in the first quarter amid fierce competition from rivals during a challenging period for sector players.

“While sentiment improved following December’s election result, the UK banking market continues to face competitive pressures and uncertainty over the final Brexit settlement,” said Virgin Money’s chief executive David Duffy.

Clydesdale owner sets millions more aside for PPI

In an update on trading in the quarter to December 31 Virgin Money played down the significance of the shrinkage in the mortgage book, as it prepares to phase out the Clydesdale Bank name from its branch network.

The group said it had chosen not to compete aggressively in the mortgage market and expected to maintain its four per cent share.

But the update may raise questions about the growth prospects of a group that has portrayed itself as a challenger bank, with ambitions to win business from bigger players.

The pace of customers switching to Virgin from RBS under a scheme designed to encourage competition in the sector appears to have slowed.

The Banking Competition Remedies switching scheme will provide up to £275 million support to SME customers of Royal Bank to move to other lenders.

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Virgin Money said: “The overall pace of both asset and liability switching through the scheme remains slower than expected, reflecting weaker switching demand from RBS customers.”

But the group said it achieved strong growth in business lending in the quarter. It cited a strong contribution from customers switching from RBS, without saying how many had moved.

The former CYBG (Clydesdale and Yorkshire Bank Group) won a place on the switching scheme in July months after completing a £1.7bn takeover of Virgin Money.

Mr Duffy decided to ditch the Clydesdale and Yorkshire Bank names in the belief the Virgin Money brand had more potential. The group was renamed Virgin Money.

The 62 Clydesdale branches are to be rebranded Virgin Money by the end of 2021.

Mr Duffy has presided over a programme of branch closures and job cuts at Clydesdale Bank.

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The group said yesterday a programme to rebrand the entire network will accelerate during the second half of this year.

It launched the first ever Virgin Money digital personal current account in December. Three Virgin Money “concept stores” have been launched in England.

The transformation programme launched after CYBG acquired Virgin Money is progressing well. The group is on track to achieve £200 million annual cost savings by the 2022 financial year.

It has said it plans to reduce combined workforce numbers by 16% over a three-year period.

The group employs more than 5,000 people in Scotland.

Mr Duffy said: “In a difficult market, our own performance has remained on track and we continue to make strong progress on our ambition to disrupt the status quo.”

The value of customer deposits grew by 1.6 per cent in the first quarter, compared to the end of the preceding quarter, to £64.8bn.

The value of outstanding mortgage balances fell by 0.8% to £59.6bn. The margins on mortgage lending have been under pressure in an age of low interest rates. Tesco Bank pulled out of the market last year.

Virgin Money said a 3.7% growth in personal lending balances, to £5.2bn, was primarily due to high quality credit card growth. Business lending balances grew by 2.5% to £8.1bn.

The group is making progress in dealing with the surge in PPI enquiries received ahead of the deadline for claims in August. It did not increase its provision for claims in the quarter.

Clydesdale name to survive on bank notes

Virgin Money will continue to issue Clydesdale Bank -branded bank notes for the time being.

A new £20 denomination note will go into circulation next month.

The group has no plans to issue Virgin Money-branded notes.

Shares in the group closed up 4%, 7.05p, at 172.5p.

John Moore at wealth manager Brewin Dolphin, said the update provided evidence of stabilisation at Virgin Money but challenges lay ahead.