By Scott Kanowsky
Investing.com -- Virgin Money UK PLC (LON:VMUK) posted a rise in full-year income, as the bank was given a boost from elevated interest rates and credit card spending that helped offset provisions against bad loans that remained above pre-pandemic levels.
Statutory profit on ordinary activities before tax grew by 43% in the twelve-month period to September 30 to £595 million (£1 = $1.1826), which the Newcastle-based lender said was based on the higher rate backdrop. The Bank of England has hiked borrowing costs aggressively in a bid to curb soaring inflation, including a sharp 75 basis point increase earlier this month - the BoE's biggest rate rise in three decades.
Unsecured balances jumped by 13.8% to £6.2B thanks to strong performance in Virgin Money UK's credit cards business, where balances expanded by more than a fifth annually. Analysts have previously suggested that this trend could be a sign that more consumers in Britain are taking out bridge loans to pay for essential items that have recently become far more expensive.
Meanwhile, mortgage lending returned to growth in the second half of the year despite a slide in demand for new homes in the U.K.
Net interest margin - a gauge of the difference between what a bank receives from loans and securities investments and the amount it pays for deposits - moved up to 1.85%, at the higher end of the company's full-year guidance.
However, Britain's cost of living crisis and the impact it could have on consumer activity led Virgin Money UK to book an impairment charge of £52M. Despite provisions for COVID-19 impacts being unwound, the level of coverage also remained above pandemic levels, which the firm said reflected "worsening macroeconomic forecasts."
"While not directly exposed to Ukraine, we have seen second-order impacts on the broader UK economy from higher costs, higher interest rates and potential pressure on our customers and asset quality," said Chief Executive Officer David Duffy in a statement.
"As we enter a more volatile environment, with higher inflation and rates, we are carefully monitoring for any impacts. We enter this phase with a prudently underwritten loan book, robust coverage, and a defensive asset mix."
Underlying operating costs also ticked up to £914M due to surging inflation and increased investment.
But the cautious outlook for the broader economy did not stop Virgin Money UK from delivering a 30% annual dividend payout, while predicting a further increase in net interest margin in its 2023 fiscal year.
London-listed shares in the company rallied in early trading on Monday.