One of our favourite banks Virgin Money (VM.) is pleasing the market again with a solid set of third quarter numbers.

The shares are up 3.4% to 298.60p as it reveals its gross lending for mortgages reached £2.2bn, or £1.1bn on a net basis by the end of the quarter.

Year-to-date Virgin has achieved a 3.5% market share of the UK mortgage market with gross lending of £6.5bn. This puts its market share above the 3% estimated figure we gave when we last wrote on the stock  here.


Another strong part of Virgin’s offering is its ‘super prime’ credit card book. The Bank of England’s Financial Monetary Committee is warning on the dangers of consumer debt growth but Virgin's stringent lending criteria mitigates this risk.

Its CEO Jayne-Anne Gadhia, says ‘our prime credit card business is developing as planned and, as a responsible lender, the strict and consistent application of underwriting standards supports a low and stable cost of risk as well as resilience in the future.’

Virgin Money fan Ian Gordon, analyst at Investec, says that while credit performance is stable ‘within its “super-prime” cards book the cost of risk has improved even further versus the first half 2017. Consensus impairment forecasts have declined sharply, but we think they have further to go’.

There were some more negative points in today's update. While gross mortgage lending was £2.2bn in the third quarter, this was actually a 4% decline on the previous quarter.

And the banks common equity tier one (CET1) fell by 1.3% in the first half of 2017 and is guided to decline by 0.3% in the second half. However, Gordon notes this still leaves a robust CET1 ratio of 13.5% by year end, comfortably ahead of Virgin’s 12% target.

The tier one ratio is essentially a measure of the ability of a balance sheet to withstand economic shocks.


In terms of valuation, Gordon describes the company trading on 5.9 times 2019 earnings per share estimate of 50.2p as ‘absurd’. He has increased his earnings forecast for 2019 by 20% ahead of Bloomberg consensus, adding ‘consensus needs to move up!’

Gordon’s target price of 395p implies a 32% upside while the price target published by investment bank Jefferies is even more bullish at 430p.

Issue Date: 17 Oct 2017