By Muvija M
(Reuters) - Virgin Money spooked investors with surprise one-off costs on Wednesday, knocking its shares despite a return to half-year profit and a forecast for improved margins.
Shares in Britain's sixth-largest bank fell 5% to 1.86 pounds at 0740 GMT after it reported exceptional costs of 173 million pounds ($240 million) including some related to its 2018 merger with CYBG and for a historic mis-selling scandal.
"In overall terms, we see the negatives outweigh the positives," Goodbody analyst John Cronin said in a note.
Among the positive developments reported on Wednesday, Virgin Money set aside 38 million pounds to cover pandemic-driven bad loans, compared to 232 million pounds a year earlier.
That helped Virgin Money report a 72 million pound pre-tax profit, compared to a 7 million pound loss a year before.
"We are cautiously optimistic about the improving outlook as the impact of the vaccination programme in the UK delivers positive revisions to economic expectations," Virgin Money Chief Executive David Duffy said.
The bank stopped short of following bigger British rivals, including Lloyds and HSBC, who have released provisions due to a better-than-expected outlook.
Smaller rival OSB also acknowledged the ongoing uncertainty in a trading statement, while Metro Bank last week gave no update on provisions.
Virgin Money's net interest margin (NIM) - a key measure of profitability - dipped to 1.56% from 1.62%, as record low interest rates set by the Bank of England hurt so-called challenger banks, newer entrants who rely on lending the most.
Larger banks offer other financial services, such as wealth management or investment banking, which have cushioned the hit to margins from low interest rates.
Virgin Money, however, forecast that its NIM would be around 1.6% for the full year.
($1 = 0.7197 pounds)
(Reporting by Muvija M in Bengaluru and Iain Withers in London; Editing by Alexander Smith)