THE owner of the former Clydesdale Bank has reported an increased charge for bad debts and signalled its expectation that arrears will rise amid the uncertain economic outlook, sending shares down nearly four per cent.

Virgin Money booked impairment losses on credit exposures of £144 million for the six months to March 31, higher than forecast, and up from £21m at the same stage last year.

The higher impairments, alongside a rise in investment costs, contributed to statutory profits for the first half falling by 25% to £236m from £315m – ahead of market consensus.

Profits fell despite total underlying operating income rising by 10% to £933m as the bank benefited from rising interest rates. The bank’s interest margin increased to 1.91% in the six months to March 31, from 1.83% in the corresponding period last year, and 1.86% in the six months to September 30, 2022.

READ MORE: Edinburgh: Royal Bank owner NatWest reports £20bn fall in deposits

And the lender raised its guidance for net interest margin for the full year, against the backdrop of higher interest rates.

The UK base rate currently stands at 4.25% following a series of increases by the Bank of England over the last year and a half to combat surging inflation, and speculation emerged a further rise could be on the way after official figures showed UK annual consumer prices index inflation was 10.1% in March.

Virgin noted that the economic backdrop covered by its first half had been “subdued, with several economic indicators forecast to remain weak in the near term before improving into FY24”. It highlighted the progressive increase in interest rates by the Bank of England and the impact on market sentiment following the collapse of Silicon Valley Bank and other regional lenders in the US, as well as challenges at some European banks.

READ MORE: State-backed Scottish bank will be closely watched as new boss arrives

The bank said: “Recent rate rises, and ongoing inflationary impacts have seen affordability tighten for many UK businesses and individuals, and the group remains ready to support our customers as required. Pleasingly for now, the number of customers in financial distress remains low, but we continue to expect arrears numbers to increase as the credit cycle normalises and have increased our provision coverage during H1.”

Underlying operating profit before impairment losses increased to £456m in the first half from £392m at the same stage last year.

Operating costs of £477m were 5% higher compared to the first half of last year as gross cost savings were offset by inflation, higher digital development spend, including costs linked to the implementation of the bank’s digital mortgage platform.

Virgin announced a dividend of 3.3p for the first half and pledged further buybacks, subject to Bank of England stress tests.

READ MORE: Scottish philanthropist funds new Social Bite cafe in Glasgow

David Duffy, chief executive of Virgin Money, said: “More people are choosing to bank with Virgin Money. While the past six months have seen turbulence in the economy and in the financial system, we have continued to focus on our target areas, growing customer numbers and deposits thanks to our new and existing digital products. Further customer-centric product launches are coming in the second half of the year.

“We have a strong capital position and we’ve significantly grown pre-provision profit, while continuing our prudent approach. As the UK economy stabilises in the months ahead, we have a high degree of confidence in our long-term plans.”

Virgin Money incorporates the former Clydesdale Bank, which came into the fold following the £1.7 billion acquisition of Virgin by CYBG, then owner of Clydesdale Bank and Yorkshire Bank, in 2019. The historic Clydesdale name was phased out after the deal.

Analysts are Shore Capital said: “While today’s numbers are mixed, we do not think the very low valuation can be overlooked and think VMUK could be a bid target if its share price doesn’t recover soon.”

Shares in Virgin Money closed down 3.9% at 147.2p, having been down nearly 6% earlier in the day.

The stock is down 17% in the year to date.

In recent days, major high street banks including NatWest Group, owner of Royal Bank of Scotland, and Lloyds Banking Group, which owns Bank of Scotland, have reported profits for the first quarter ahead of expectations, with income boosted by higher interest rates. However, NatWest reported a fall in customer deposits as people shopped around for deals on interest rates in competitive market conditions.