Virgin Money takes Lloyds Bank and others down with it

After posting stunning gains in the past two months, Virgin issues a warning for the banking sector.

Vaccine-driven optimism behind November's 36% surge for Lloyds Banking Group (LSE:LLOY) shares was subject to a reality check today, when Virgin Money (LSE:VMUK) disclosed a £501 million bad debt charge.

The challenger bank's “conservative” provision in annual results sent its profits 77% lower, which helped dampen enthusiasm towards the sector after a spectacular run in recent days.

Lloyds Banking Group shares were 4% lower at 37.93p, NatWest (LSE:NWG) dipped 3% to 161.3p and Barclays (LSE:BARC) fell 4% to 144.2p in a session when the FTSE 100 index gave up half a percent to 6,396.

London's top flight had started the session at a five-month high after surging more than 1.5% yesterday on hopes for a global economic recovery in 2021, and amid relief that Joe Biden is finally starting his transition to the White House.

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Virgin Money is less sure about the outlook, with the lender still unable to give medium-term guidance due to the unprecedented nature of Covid-19 and unclear prospects in the UK.

Its £501 million impairment charge was built around a more conservative set of economic scenarios and weightings, leading to an assumption that UK GDP will decline 15% in 2020 and average unemployment will rise to 8.6% next year and peak at 10%.

CEO David Duffy pointed out:

“Although the vaccine news is a strong cause of hope for the future, the economic benefits are still some way off when considering the immediate reality of current restrictions and so have not yet been factored into our near-term forecasts.”

The group, which was formed out of the merger with the Clydesdale and Yorkshire banks, now has considerable balance sheet provisions of £735 million but for the time being Government support and forbearance means arrears are lower across most portfolios.

About 67,000 mortgage payment holidays have been granted to date, representing about 20% of balances, but with the vast majority of these customers now back making payments. There were also 58,000 personal payment holidays, equivalent to 6% of balances.

Its shares have doubled in value since the end of September, with some analysts backing the stock due to its smaller current account base making the company among the least interest rate sensitive of the UK banks. 

The net interest margin finished the year at 1.52%, albeit up from 1.47% the previous quarter, and is expected to be broadly flat this year. In a fierce home loans market, Virgin's mortgage lending declined 3% to £58.3 billion after it adopted a disciplined approach to pricing.

Analysts at Barclays welcomed the company's 2021 guidance and said they continue to see long-term value in the shares at about six times 2022 forecast earnings per share.

A glimpse of the Future

Virgin's shares were down 6.5p to 139.95p in the FTSE 250 index, with fast-growing publishing group Future (LSE:FUTR) the biggest faller overall in the second tier after its surprise £600 million deal to buy the owner of the Go Compare price comparison site, GoCo Group (LSE:GOCO).

Future said the combination would tap into growing consumer demand for help making informed and value driven purchasing decisions.

The company behind magazines including Total Guitar and Home & Garden also published better-than-expected results, with strong online audience growth and the impact of acquisitions driving it to a 53% jump in revenues to £339.6 million and profits of £52 million.

Future is now valued at around £2 billion after its shares surged from 780p at the end of March to more than 2,000p earlier this month. The stock fell 12% to 1,720p after today's deal included the promise of issuing new Future shares to GoCo shareholders, including eSure founder Peter Wood. They will also get 33p in cash after the company was valued at 136p a share.

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Another company whose performance has impressed this year has been passport and banknote printer De La Rue (LSE:DLAR), with shares surging from 37p at the end of May to 180p earlier this month.

It was previously laid low by overcapacity in the currency printing industry and conclusion of its UK passport contract, although with turnaround specialist Clive Vacher at the helm the company today reported a significant rise in half-year operating profits to £15.3 million.

The Authentication division remains on track for £100 million in revenues in 2021/12, while the Currency business is operating at full capacity amid strong demand for polymer banknotes. It recently extended its relationship with the Bank of England until 2028. Shares today fell back 12.4p to 168.4p despite the company remaining on track to meet full-year forecasts.