Virgin Money: universally challenged | Financial Times

Virgin Money, a UK challenger bank whose own challenges have spawned three years of losses, has finally turned a profit. The first quarter was “profitable and positive”, the bank said in a results statement otherwise larded with caution: forms of “uncertain” recur 10 times over five pages.

That is wise. The weighty legacy of payment protection insurance mis-selling — 740,000 complaints at a cost of £3.1bn — was put to bed only last week, revealing a further charge of £49m. Its business, and that of its customers, is full of unknowns: as to the duration of lockdowns, the impact when government support is withdrawn and the wider economic fallout.

The bank’s bread-and-butter lending, meantime, reflects the broader mood. People and businesses are saving rather than spending. Virgin’s loan book dipped 0.3 per cent to £72.2bn over the quarter. Roughly one-fifth of homeowners are on mortgage payment holidays. Deposits rose 0.9 per cent to £68.1bn.

That reduced the deposit-to-loan ratio by a percentage point but, at 106 per cent, it is far from problematic. Japanese banks’ ratio has been well below 100 per cent since the mid-1990s and on-the-floor rates have helped hold Virgin’s net interest margins at 152 basis points; the full-year spread is expected to be broadly stable on last year’s 156bp.

Virgin’s travails over the past few years, and those of rival Metro Bank, illustrate the difficulties faced by the banking newcomers. High capital requirements, low returns and some nasty governance issues meant that, rather than upending the staid world of high-street banking, they instead upended the fortunes of investors. Virgin Money’s share price is less than half the 2018 peak; Metro’s is just the tiniest fraction of its peak.

They are not alone. Supermarkets such as Tesco and J Sainsbury are retreating from financial services. The newest online breed has won fans but found profitability more elusive; Monzo went as far last summer as to say uncertainties borne by the pandemic “cast significant doubt” on its ability to continue as a going concern. Even with its newfound profitability, Virgin Money presents too many challenges for investors.

If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.