- Shares tumble on higher than expected provisions
- Underlying performance in line with expectations
- US regional lenders fall sharply overnight
With the US banking sector still in turmoil as more medium-sized institutions saw their shares tumble overnight, today’s first-half update from challenger lender Virgin Money (VMUK) was bound to be closely scrutinised.
Judging by the 8% fall in the shares to 141p, which sent them to the bottom of the FTSE 250 mid-cap table, it seems investors didn’t like what they saw.
WHY ARE VIRGIN MONEY SHARES DOWN?
The market is particularly fickle at the moment where banking shares are concerned, and what passes muster at one firm doesn’t necessarily mean other firms will receive similar treatment.
High street lender NatWest Group (NWG) was punished by investors for reporting a slight drop in deposits, which is normal at this time of the year, while Lloyds’ (LLOY) failure to raise its full-year guidance was blamed for sending its shares lower.
Virgin Money, which owns the eponymous brand as well as Clydesdale Bank and Yorkshire Bank, posted a solid increase in net interest income and underlying operating profits, thanks to an expansion in its net interest margin and a tight rein on expenses, which brought its cost-to-income ration down from 54% to 51%.
Overall lending was stable, with a slight drop in mortgage demand which was offset by an increase in business lending, while overall deposits increased by 2.6% to £67 billion.
However, provisions for bad loans increased to £144 million against what was an unusually low figure of £21 million in the same period last year, and it seems this is what the market has taken exception to despite the bank’s assurances that underlying credit quality is still ‘resilient’.
Also, on a technical point, the bank’s tangible net asset value per share fell to 350.5p compared with 383p last September as a result of large adjustment in cash-flow hedges and a large pension charge, which unsettled some analysts.
US BANKING ‘CRISIS’ NOT OVER
Meanwhile, overnight in the US there was more concern as, just days after the rescue of First Republic by JPMorgan (JPM:NYSE), shares in Californian lender PacWest (PACW:NASDAQ) collapsed by 50% forcing it seek a strategic backer.
The collapse comes less than two months after PacWest said it had raised $1.4 billion in fresh funding from a group of investors including Apollo Global Management following a 20% fall in its deposits.
The selling in PacWest spilled over into other regional banks including Arizona-based Western Alliance (WAL:NYSE), the 40th biggest US bank, whose shares tumbled 25% after the market close yesterday, and Texas-based Comerica (CMA:NYSE), the 37th largest US lender by assets.
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