The Virgin Money (ASX: VUK) share price is up after the company delivered its update for the third quarter to 30 June 2020.
Virgin Money is the new major bank competitor in the UK. It was formed after a merger of two challenger banks – Virgin Money and CYBG (which was spun out of NAB).
June 2020 quarter update
The UK bank said that customer deposits increased by 4.8% to £67.7 billion due to lower consumer spending and businesses maintaining higher levels of liquidity.
Virgin Money’s mortgage portfolio reduced in size by 1% to £58.9 billion with new home purchases dramatically reduced due to the lockdowns. However, the retention rate improved.
Third quarter business lending grew by 5.7% to £8.8 billion, driven by significant demand for government-backed lending schemes of BBLS (Bounce Back Loan Scheme) and CBILS (Coronavirus Business Interruption Loan Scheme).
Personal lending reduced by 2.7% in the third quarter to £5.2 billion because of lower credit card balances.
The net interest margin (NIM) decreased to 1.57% on a 9-month annualised basis. The NIM is important because it reflects how much profit a bank makes on lending out money that it itself has borrowed from another source. The NIM in Q3 was 1.47%, down from 1.63% in Q2. In FY20 Virgin Money expects a NIM of between 1.55% to 1.60%.
Is COVID-19 causing problems?
Virgin Money said that it hasn’t seen any significant specific provisions or credit losses yet due to the government support and forbearance measures. It has increased its provisions by £42 million primarily for mortgages and personal lending. Total credit provisions are now £584 million.
However, it remains strongly capitalised with a CET1 ratio of 13.3%.
Summary
Virgin Money seems to be doing well enough during this period, but COVID-19 is far from over so I’m cautious about looking at banks at this stage. But the Virgin Money share price is still down 50%, so there could be a value opportunity there. I’d rather go for more reliable dividend shares though.
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