Virgin Money focusing on higher growth areas to increase profits

Lender Virgin Money has seen shares soar by more than a quarter despite scrapping its dividend payout after a £385 million hit for payment protection insurance (PPI) pushed it deeper into the red.

The group – formerly known as CYBG – revealed that statutory pre-tax losses widened to £232 million for the year to September 30 from £164 million the previous year after the hefty PPI charge.

It halted the final dividend payout in light of the PPI provision, which followed a last-minute surge in claims ahead of the August 31 deadline.

But shares leapt as much as 28% higher at one stage as the losses came in lower than some had feared and results showed otherwise solid growth.

The Clydesdale and Yorkshire Bank owner, which changed its name from CYBG in October following last year’s £1.7 billion takeover of Virgin Money, said its bottom line was also hit by restructuring costs after the deal.

On an underlying basis and with the PPI bill stripped out, pre-tax profits fell 7% to £539 million.

Virgin Money UK chief executive David Duffy said it was “frustrating” to book the extra PPI bill, which took its total for the year to £415 million and overall so far to £3.01 billion.

He said: “We, like the rest of the industry, were surprised by the scale of the PPI information requests and complaints during August.

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Virgin Money CEO David Duffy

“We have moved swiftly to address the issue and are leveraging innovative technology solutions to enable us to deal with genuine customer complaints as quickly, and as cost-effectively, as we can.”

Mr Duffy insisted the group has a “clear path” to return to statutory profit in 2019-20, with the PPI charges behind it and despite tough retail banking conditions.

Virgin Money grew mortgage lending by 1.7% to £60.1 billion, while customer deposits rose by 4.6% to £63.8 billion.

Its net interest margin – a key measure for retail lenders – fell over the year amid intense competition on mortgage market rates, though it said this would hold up over the year ahead, which is better than expected in the City.

The group is now focusing away from mortgages towards higher growth areas, such as business and personal lending – which rose 16.1% and 4.5% respectively in 2018-19.

It is also launching a raft of initiatives as it rolls out the Virgin Money rebrand across its Clydesdale and Yorkshire Bank brands, including a digital current account next month, three new concept stores and a loyalty programme offering incentives across the wider Virgin Group.

But its overhaul comes with a cost.

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Around 1,500 job losses were announced after the Virgin Money deal, when it warned that around 16% of the combined workforce will go.

Russ Mould, investment director at AJ Bell, said: “Expectations were pitched fairly low heading into today’s announcement so the company’s solid if unspectacular performance across several metrics has been treated with a sigh of relief.

“While the lack of a dividend is disappointing, given that many people invest in banks purely for income, it may also be prudent given that Virgin Money faced a big last-minute surge in PPI claims and it also incurred larger-than-expected restructuring costs during the period.”