UPDATE 2-Virgin Money owner CYBG warns on margins as Brexit, competition take toll

* Mortgage lending falls after bright previous quarter

* Warns on margins in tough mortgage market

* No new PPI provision

* Shares fall 8% (Adds analyst comment, details on PPI, share movement)

By Pushkala Aripaka and Noor Zainab Hussain

July 30 (Reuters) - Shares in Virgin Money owner CYBG tumbled on Tuesday after the British lender reported a dip in mortgage loans and shrinking net interest margins that would likely fall to the lower end of earlier full-year forecasts.

The owner of the Clydesdale and Yorkshire banks became the UK's sixth-biggest lender after buying Virgin Money in 2018, posing a more serious challenge to bigger rivals Lloyds , RBS and Barclays, who will all report results later this week.

CYBG had managed to grow its mortgage book earlier this year despite facing sustained competition and economic uncertainty.

But it blamed lower lending volumes and a large volume of redemptions in its fiscal third quarter for a 0.2% slide in the value of its mortgage book to 60.4 billion pounds ($73.4 billion), sending shares down 8% to 182.85 pence by 0850 GMT.

CYBG said its net interest margin (NIM) - the difference between what banks earn from loans and pay for deposits - stood at 168 basis points for three-month period ended June 30, down 3 basis points from the first half.

The company said it expected its full-year NIM to be at the lower end of its 165-170 basis-point range. JP Morgan analysts said they continue to see NIM pressures across UK banks.

SILVER LINING

CYBG has laid out plans to tackle the dominance of Britain's big lenders, betting that a full re-brand as Virgin Money and growth in business banking will help it shake up the market.

It was the latest to report a dip in mortgage loans as the United Kingdom's impending exit from the European Union saps confidence among house buyers but it said that had been offset by rises in both personal and business loans.

"Even with the twin pressures of Brexit and the highly competitive mortgage market, we remain on track to deliver full year performance in line with our guidance," Chief Executive David Duffy said.

The lender said business lending had inched higher over the period, while personal lending rose 5.7% on the back of a bounce in demand for credit cards.

"It is a broadly positive upbeat for the third quarter but the market will likely be disappointed to read that the company is now guiding FY19 NIM at the lower end of the previously guided range," Goodbody analyst John Cronin said.

Common equity tier one capital ratio - a key measure of financial strength - increased slightly to 14.6%.

CYBG made no new provisions for compensation related mis-selling payment protection insurance or PPI, the UK's costliest consumer mis-selling scandal, but added there had been a pick-up in "information requests" in recent weeks. ($1 = 0.8229 pounds) (Reporting by Pushkala Aripaka and Noor Zainab Hussain in Bengaluru Editing by Saumyadeb Chakrabarty, Sinead Cruise and Georgina Prodhan)