By Scott Wright

SHARES in Virgin Money, owner of the former Clydesdale Bank, closed up more than 13 per cent last night after the lender returned more cash to investors and upgraded its earnings expectations for the current year – despite the worsening economic outlook.

The bank, which merged with Glasgow-based Clydesdale in 2018, became the latest high-street lender to underline the benefits from rising interest rates applied by the Bank of England to dampen surging inflation, as pre-tax profits increased by 43% to £595 million in the 12 months to September 30.

And it took steps to ease the inflation crisis for its employees by announcing a 10% pay-rise for the majority of its 7,500 staff, in addition to a one-off £1,000 cost-of-living payment in August.

While the economic outlook for the UK continues to darken, Virgin said “credit quality indicators remain benign”, with the bank booking a “minor” impairment charge of £52m during the period to reflect “updated macroeconomics”. This compares with a provisions release of £131m at the same time last year, which came as the economy reopened after Covid restrictions were lifted.

However, Virgin warned that it remains “cautious on the outlook”, adding that it stood “ready to support customers further if needed”.

“Against this backdrop, impairment charges were muted as provisions taken for Covid-19 impacts were unwound,” said chief executive David Duffy. “Despite a modest reduction, we have retained above pre-Covid levels of coverage with a potentially challenging economic outlook in mind, and to reflect worsening macroeconomic forecasts.”

With the Bank of England responding to soaring inflation by gradually increasing the base rate, which now stands at 3%, in recent months, Virgin highlighted the benefit of higher borrowing costs to earnings last year.

Total underlying operating income climbed by 12% to £1.75 billion as net interest margin – broadly the difference between how much interest it earns on loans and the interest it pays on deposits – increased to 1.85% from 1.62%. And the lender is forecasting further expansion in its NIM this year, based on current rate expectations.

Virgin responded to the rising income it has been generating by further increasing pay-outs to shareholders. The bank declared a final dividend of 7.5p per share and announced a £50m share buyback, adding to the £75m buyback that it started in June. It took total shareholder distributions to £267m for the year.

Russ Mould, investment director at AJ Bell, said: “Everyone seems to be talking down the UK’s economic prospects, but no-one has told Virgin Money UK. The bank is increasing cash returns to shareholders as net interest margins rise, loan losses remain modest and cost control is good.

“The FTSE 250 firm does expect increased sour loan provisions in its new fiscal year to September 2023, but analysts have already pencilled in a big drop in profits and the shares trade at a huge discount to net asset value, so this is hardly a shock either and that may be why the shares are rising sharply.

“Virgin Money UK’s share price is 160p, but the firm’s latest net asset, or book, value per share figure is 383p, so investors are effectively buying £1 of assets per share for 42p.”

Mr Duffy said: “2022 has been a milestone year for Virgin Money. We have good momentum while delivering a strong performance and improved returns for our shareholders. We’ve changed the game in purpose-led flexible working to create an engaged, high-performing organisation that’s cost efficient and agile, which will underpin targeted growth through further digital innovation.

“While we have solid credit quality across our lending, we are aware that some customers will have to make difficult decisions in this environment, and we are proactively offering them help and support.”

Virgin reported that overall lending had grown by 0.8% to £72.6bn, with credit cards driving a 13.8% rise in unsecured lending to £6.2bn. Mortgage lending remained stable at £58.2bn while business lending dipped by 2.7% to £8.2bn. Relationship deposits were up 13% year-on-year at £34.6bn.

The bank meanwhile said the staff pay hike, which was announced internally earlier this month, will be made in two instalments, the first in January and the second in July, with staff being paid between 9% and 11% extra.

Shares in Virgin Money closed up 19.55p at 165.15p.