Dark clouds continue to hover over the UK’s banks despite Virgin Money (VM.) extinguishing fears of consumer inertia since the Brexit vote.
News that demand for credit cards and mortgages has remained strong with ‘no evidence of changes in customer behaviour’ since the referendum helped push shares 7% higher to 261.8p.
Pre-tax profits improving by 53% in the six months to 30 June also saw investors warm to the stock following the post-Brexit vote sell off.
Virgin Money lost a third of its value from the markets opening on 24 June to the day before its half-year results. Investors had dumped banking stocks on fears that demand would fall and bad debts would rise.
There was no sign of this so far at Virgin Money. Net mortgage lending increased by 29%, or £2.2 billion, in the six months to 30 June, while credit card balances swelled by £500 million to £2.1 billion.
Despite this macro-economic factors are expected to play a role in limiting banks’ growth.
Ian Gordon at Investec expects an interest rate cut to 0.25% by the Bank of England in August, which would hit margins.
‘For us, the key headwind was, and remains, UK monetary policy,’ he says.
Virgin Money’s net interest margin – the difference between the rate it borrowings at and the rate it lends at – is currently 1.6%, down from 1.65% 12 months ago.
If Gordon is proved right on interest rates halving next month then he expects a ‘deterioration’ in Virgin Money’s net interest margin to follow.