Virgin Money’s mortgage portfolio shrinks despite hot UK property market

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Virgin Money has predicted a good year ahead as the UK economy recovers, despite the end of the stamp duty exemption and competition, which led to a reduction in the bank’s mortgage portfolio in the last quarter of 2021 .

The FTSE 250 group reported a 0.7% year-on-year decline in its mortgage balance to £57.8bn (€69bn) in the three months to December 31, compared with an increase of 1 % estimated by analysts.

UK housing demand remained strong despite house prices posting the best start to the year since 2005, supported by a buoyant labor market. However, this is expected to slow in 2022 as inflation-driven rising interest rates drive up borrowing costs, with several lenders raising mortgage rates late last year.

Virgin Money predicts its net interest margin – the difference between the interest a bank earns on loans and investments in securities and the rate it pays for deposits – would rise from 1.7% to 1.75 % in 2022.

He said this reflected the Bank of England’s rate hike expectations, as well as falling costs and a strong capital position.

Smaller loan book

As well as the end of stamp duty tax relief in September and pressure from rivals, chief executive David Duffy said the smaller mortgage portfolio reflected the lender’s own efforts to reduce its exposure to this part of the Marlet.

“We did this smartly to protect margins while maintaining our market share overall – we are now striking a good balance.”

Benjamin Toms, head of RBC Capital Markets, said the lower mortgage balance reflected a deliberate strategy.

“I don’t think mortgage weakness is a function of brand weakness. Rather, they are the ones who choose to turn off the taps because they want to keep their net interest margin stable.

Unsecured retail lending saw the biggest growth in the quarter, rising 9% year-on-year to £5.6bn. Virgin Money said this was mainly driven by credit card spending, with customer confidence returning to pre-pandemic levels even in the hardest hit sectors such as travel.

The bank said it had been boosted by new digital offerings through its credit card app, including an installment loan service that would compete with “buy now, pay later” providers.

However, loans to small and medium-sized businesses fell 7% year-on-year to £8.3bn. Virgin Money said it reflected concerns about potential lockdowns in December due to the Omicron variant of the coronavirus, but confidence had improved in the past month.

The group’s tier one common equity ratio, a measure of balance sheet strength, was 15.2% compared to 13.9% a year earlier and consensus estimates of 14.7%. Its net interest margin for the quarter increased 25% year-on-year.

Shares of the British bank were flat in afternoon trading, having risen nearly 45% over the past year. – Copyright The Financial Times Limited 2022

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