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Virgin Money has missed profit expectations as it made a bigger than expected provision for bad loans to account for rising credit card arrears owing to the cost of living crisis.
The challenger bank reported statutory profit before tax of £345mn in the year to September 30, down from £595mn in 2022 and below analyst forecasts of £430mn.
The hit to profits was largely because of a jump in the amount the lender set aside for bad loans to account for rising arrears in its credit card business amid a gloomy economic outlook.
Virgin Money reported a credit impairment charge of £309mn, higher than market expectations of £282mn. The jump, which is an almost sixfold increase on last year’s charge of £52mn, comes after the lender updated its model for credit losses to reflect a deterioration in the economy and higher levels of customer indebtedness.
Virgin Money said it expected a “continued increase in arrears” in the next financial year, largely focused on its credit cards portfolio, which grew by 10 per cent this year as consumers turned to credit in the face of rising prices.
Chief financial officer Clifford Abrahams said consumers who had been hit by higher mortgage rates were increasingly using credit cards to smooth their consumption on discretionary spending.
“We see a lot of transactions on our travel credit cards and there is still a post-Covid effect of people spending more going out and travelling to go on holiday,” he said.
The FTSE 250 lender said the relief it had offered customers struggling to pay their credit card bills, such as an extension in repayment terms, had also increased in line with arrears.
The proportion of credit card balances reaching more than 90 days past due increased to 1.7 per cent, from 1.2 per cent the previous year, while the value of credit card balances having to be written off jumped to £116mn from £79mn over the same period.
Virgin Money also took a £45mn impairment hit after it delayed the launch of a digital mortgage brokerage platform.
“We are not quite sure if this bank is branch or digital led,” said Benjamin Toms, an analyst at RBC. “It feels like a lot of investment is still required to compete with large UK peers.”
Virgin Money chief executive David Duffy said: “We spent a bunch of time working on [the platform] and at the end of the day when we were doing the testing for deployment we were not confident in the robustness of the data we were seeing.”
The bank, which was created following a 2018 takeover by rival CYBG, said it would buy back up to £150mn of its own shares before May 2024 in Thursday’s update. It is planning to reward shareholders with a final ordinary dividend of 2p per ordinary share for the financial year.
Shares fell by almost 4 per cent in morning trading on Thursday, and are down almost 20 per cent in the year to date, after the sector was hit by fear of contagion following the collapse of Silicon Valley Bank and trouble at other lenders including rival Metro Bank.
Gary Greenwood, an analyst at Shore Capital, said the bank’s poor record of meeting expectations meant it might struggle in the near term without a change of leadership.
“I don’t really care what other people think,” said Duffy. “I don’t have any conversations about that with anybody other than the board.”