The Virgin Money UK (ASX: VUK) share price is on watch today after it released its third quarter update.
Virgin Money’s third quarter
The company said there is an improving economic outlook and it has robust asset quality, with no significant provisions in the third quarter. It has balance sheet credit provisions of £678 million, down from £721 million in the first half. That represents coverage of 0.94% (down from 1.00%).
There was actually a third quarter impairment release of £19 million, driven by lower modelled ECL (expected credit loss) from update economy assumptions.
If the current strengthening in the economic backdrop persists, the group believes there may be an opportunity for a further reduction in credit provision levels in the FY21 result.
Deposits and lending
Virgin Money said that its ‘relationship deposits’ increased by 3.7% to £29.8 billion, whilst overall deposits decreased by 0.8% to £68 billion as it continued to manage the deposit mix and reduce funding costs.
Mortgages increased 0.7% to £58.7 billion. Personal lending grew 2.5% to £5.2 billion. Business lending fell 2.4% to £8.7 billion.
Net interest margin (NIM)
The NIM is important because it tells investors how much profit/margin the bank is making in percentage terms from it’s lending compared to the cost of funding for those loans (such as the interest rate paid on savings accounts).
Virgin Money’s NIM improved in the third quarter to 1.68%, up from 1.60%. It benefited from a lower cost of funds driven by improvements in deposit mix and repricing as well as higher hedge contributions, partially offset by a more competitive lending backdrop.
CET1 ratio
The CET1 ratio tells investors how much capital the bank is holding. In the quarter, its CET1 ratio increased by around 40 basis points (0.40%) to 14.8%.
Virgin Money benefited from continued “strong profitability” and a benign backdrop.
Outlook for the Virgin Money share price
The bank said that its solvency stress test outcome and impairment outlook remain key inputs for Virgin Money’s approach to considering shareholder returns. It will give another update about its capital framework after the stress test.
It seems like the bank’s share price has already gone through quite a bit of recovery already, so the easy gains are probably over. There’s probably still a bit of upside of more recovery, as well as the ongoing synergies from CYBG and Virgin Money.
But I’m not a banking expert, so there are other ASX dividend shares I’d rather be looking at.