UK bank sector results: challengers rally

Still reeling from the crash, smaller lenders attracted investor buying after these results.

Virgin Money (LSE:VMUK) and Onesavings Bank (LSE:OSB) succeeded where their bigger rivals failed last week, as the sector's results season ended with big rises for shares in the challenger banks.

The half-year figures from Virgin were significant for being much closer to City expectations, with sharply lower profits of £120 million among the key metrics in line with forecasts.

The 58% year-on-year drop reflected a £232 million charge against future loan losses, with Covid-19-related bad debt provisions split between £110 million for business, £39 million for personal lending and £15 million in mortgages.

The company's guidance on its capital position also reassured analysts, with the all-important Common Equity Tier One (CET1) ratio - a key measure of financial strength - of 13% higher than the City's forecast of 12.8%. This resilience helped Virgin shares jump 13%, although at 80p they are still far from the 180p seen in mid-February.

Source: TradingView. Past performance is not a guide to future performance

Analysts at UBS are holding out for shares to recover to 170p, but admit much will depend on the potential downside for loan losses in 2020, plus the outlook for income next year as slower loan growth and persistently low interest rates make their presence felt.

With industry dividends having been suspended, last week's first-quarter results from the blue-chip banking sector was predictably grim as profits at the likes of Lloyds Banking Group (LSE:LLOY) and Royal Bank of Scotland were obliterated by rising bad debt provisions.

Lloyds shares were still trading at close to 30p today, having fallen from 35p in the wake of last week's results. Virgin, which used to be known as CYBG, moved in the opposite direction today. Investors liked a defensive loan book with 82% high-quality mortgages and no material exposure to the business sectors most directly impacted by the Covid-19 lockdown. 

There was a similar message at OneSavings Bank, whose shares climbed 5% today after it said it had entered 2020 with an “extremely strong” CET1 at 16%. While highlighting its operational resilience, the specialist mortgage lender warned that current economic forecasts could result in a doubling of its expected credit loss provision from £42.9 million at the end of December.

A much shorter quarterly update from Metro Bank (LSE:MTRO) focused on its key metrics of assets, loans and deposits, which were all broadly close to where they were at the end of 2019. The bank, which has recently embarked on a restructuring under new CEO Dan Frumkin, said its capital ratios were in excess of minimum regulatory requirements.

Shares still fell 3% following the update to near their low for the year at 84p, having been one of worst performing of all mid-cap stocks during 2019. Last year's 88% slump came after the revelation of a major accounting error where some commercial loans on its balance sheet were wrongly classified in risk terms.

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Frumkin set out plans in February to make Metro the UK's best community bank, an ambition he said today had never been more important. 

Metro's product offering will also be enhanced and broadened with the aim of driving revenues and improving a net interest margin (NIM) that fell to 1.51% in 2019 from 1.81% a year earlier.

Since then, the industry's NIM benchmark has come under further pressure following the latest cut in UK interest rates. Virgin said today that it expected NIM for this financial year to be between 1.55% and 1.6%, compared with 1.62% in the half-year and 1.71% a year ago.

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