Virgin Money UK announces £50 million share buyback amid strong financial performance

British bank Virgin Money UK (ASX: VUK) has announced a scheme to buyback up to £50 million in shares in an effort to reduce its issued capital and return the surplus to shareholders.

The move falls under the company’s commitment last year to distribute a 30% full year dividend payout supplemented with buybacks and subject to an ongoing assessment of surplus capital, market conditions and regulatory approval.

Chief executive officer David Duffy announced the buyback during a third quarter trading update.

“We have delivered another quarter of good progress against our strategy, with growth in both deposits and our target lending segments… given our strong capital position, we anticipate a total of £175 million in buybacks for the 2023 financial year with more to follow as we normalise our surplus capital position by the end of next year,” he said.

“Our overall credit quality remains stable and we are fully committed to doing the right thing by our customers, through competitive rates, innovative products and proactive communication, as well as supporting government initiatives to help people through the current challenging environment.”

Solid performance

Virgin Money delivered a solid financial performance for the period, with growth in net lending and deposits, robust margins and a broadly stable credit quality.

The group continued to make good progress on its digital transformation, with renewed momentum on restructuring activities, while lifting its total active relationship customer accounts to 3.7 million.

Mortgage balances

Mortgage balances of £57.5 billion were broadly stable in the quarter, against a subdued market backdrop as the group traded to preserve its profitability in a competitive environment.

Front-book application spreads remained tight and below back-book levels, as mortgage pricing continued to lag the sharp rise in swaps.

Mr Duffy said he expected housing activity to remain muted in the near term, given the implications of higher rates.

“We will continue to focus on supporting existing customers and managing mortgage profitability considering the current challenging trading conditions,” he said.

Business lending

Business lending increased by 1.6% during the quarter to £8.7 billion as a reduction in government-scheme balances was offset by a 2.6% growth in business as usual balances to £8 billion, reflecting a good performance in a subdued market.

“Our performance was supported by the strength of our franchise and sector specialisms in our target market segments,” Mr Duffy said.

“Government-scheme balances declined 9.4% to £0.7 billion as expected, as borrowers made contractual repayments… we expect a modest level of growth in business lending during the remainder of this financial year.”

Unsecured lending

Unsecured lending increased 2.4%, driven mainly by credit card growth as the group benefited from resilient demand from existing customers.

A total of 136,000 new accounts were opened during the quarter, while customer spending remained strong across all categories and repayment rates remained broadly consistent.

The group’s Virgin Atlantic card portfolio performed strongly, while personal Loans and overdraft balances reduced modestly in line with expectations.

The Group expects its unsecured lending business to grow at a moderate pace during the rest of the financial year.

Savings deposits

Deposit performance continued to be strong as overall deposits increased 0.4% to £67.3 billion on the back of competitive rates on term deposits.

Non-linked savings balances reduced during the period, while relationship deposits reduced modestly due to lower current account balances but were considered stable as a percentage of total deposits at 53%.

Net interest margins

Net interest margins (considered to be a key measure of profitability) reduced to 193 basis points (bps) as a result of higher rates, balanced spread pressure in mortgages and ongoing deposit migration.

“Looking ahead, we expect similar trends to continue, with an ongoing benefit from higher rates and reinvestment of the structural hedge, offset by persistent mortgage spread pressure given lower activity levels, as well as further deposit migration and competition,” Mr Duffy said.

“As a result of these factors, we expect a stable net interest margin across the second half of the year and a full year result of around 190bps.”

Non-interest income

Non-interest income was modestly lower compared to the previous quarter, as the group made changes to packaged account benefits and reduced associated fees.

It continues to face short-term headwinds from lower merchant services income following a strategic change to its payments partner arrangements.

Excluding these impacts, non-interest income was reported to be stable, as a result of continued good card spending and robust business activity levels.