Virgin Money UK warns of weaker mortgage volumes in the near term

Virgin Money UK has revealed that lending levels remained resilient towards the end of 2022, although it warned that mortgage borrowing would be impacted in the near term.

The financial services company said the value of customer loans increased by 0.7 per cent to £72.6billion in the first quarter following rises in mortgage and business borrowing.

Lending in the latter category was supported by an expansion in ‘business as usual’ balances offsetting a drop in Government-scheme balances from borrowers carrying out contractual repayments.

Mortgage lending grew at a much more modest pace due to a weaker property market, as mortgage rates soared following the controversial ‘mini-Budget’ in late September.

However, the Newcastle-based group told investors that ‘more muted’ mortgage volumes are anticipated going forward because of weaker economic conditions.

Inflation currently stands at 10.5 per cent following a surge in energy and food prices resulting from Russia’s full-scale invasion of Ukraine and the resurgence in travel as Covid-19 restrictions were loosened.

To try and dampen elevated prices, the Bank of England has raised the base rate on nine successive occasions since December 2021 and is set to lift it by another 0.5 per cent on Thursday.

This contributed to mortgage demand for new home purchases in the UK plunging by three-quarters in the final three months of last year, according to the BoE. 

But Virgin Money also noted that the rate hikes helped its net interest margin expand to 189 basis points in the first quarter.

For the full financial year, the Clydesdale Bank owner forecasts its net interest margin to stay in the 185 to 190 basis points range.

On top of that, it anticipates a cost/income ratio around the 50 per cent mark due to the completion of cost-saving actions, including investment in mortgage end-to-end digitisation.

The FTSE 250 firm began an amended restructuring programme two years ago to speed up its switch to digital banking services, partly by cutting numerous branches and offices. 

Full implementation of the plan has been delayed by heightened customer demand for help following the recent base rate increases and volatility in the aftermath of the mini-Budget, which has required employing more call centre staff. 

David Duffy, Virgin Money’s chief executive, said: ‘Arrears remain broadly stable, but we’ve increased the support available to those who need it and remain prudently provisioned for an uncertain economic outlook.

‘Looking ahead, we have good financial momentum and a number of exciting digital product launches to come, which will support our continued growth.’

Virgin Money UK shares were 1.3 per cent down at 190.45p when trading closed on Wednesday, albeit they have still grown by approximately 40 per cent in the past three months.