Investment Thesis

• Trades on undemanding valuations (i.e. depressed price to book and price to earnings) and below the valuation (which also includes a Brexit / Covid discount). 
• Potentially further provisioning required as a result of Covid-19. 
• Improving shareholder returns (including potential for buybacks).
• Delivering on medium term targets.
• Solid franchise and branch network. 
• Synergies from Virgin Money acquisition to support earnings growth.
• Expected low levels of impairment charges (especially as a low interest rate environment helps customers and arrears). 
• Funding position remains sound, however excess funding for potential capital management is unlikely now. 
• Increasing penetration in the SME and retail banking space in the UK.

Key Risks

• The UK economy recovers quicker than expected post-Covid-19. 
•  VUK resumes dividend payments earlier than expected. 
• More intense competition for deposit and loan growth. 
• Increase in bad and doubtful debts or increase in provisioning. 
• Funding pressure for deposits. 
• Medium term guidance targets, especially cost reduction targets, fall short. 
• Regulatory changes especially around any capital requirements and hence lower ROEs achieved.
• Brexit uncertainty (potentially leading the UK economy into recession).
• Clarity provided over Virgin Money disappoints.

Key Highlights: Relative to the pcp and on a constant currency basis: 

• Underlying operating income +2% to £1572m, with net interest income increasing +5% to £1412m as lower deposit costs, structural hedge benefit and growth in higher yielding assets more than offset mortgage spread pressures, partially offset by -16% decline in non-interest income to £160m, reflecting weaker market conditions.
• Underlying operating expenses reduced -2% to £902m with the underlying cost-to-income ratio reducing -200bps to 57% as efficiencies from cost savings programme were partly offset by higher variable remuneration. 
• Impairment release of £131m (vs £501m charge in pcp) amid robust asset quality & improving outlook, however, maintained coverage levels of 70bps (down -33bps), well above pre-pandemic levels. 
• Underlying PBT improved +546% to £801m driven by a recovery in income, lower costs and improved impairment performance leading to underlying RoTE improving +17.2% to 17.8%. VUK returned to statutory profit before tax of £417m from £168m loss, equating to statutory RoTE of 10.2%. 
• Capital strengthened with CET1 increasing +150 bps to 14.9% (14.4% excluding software benefit) equating to buffer of £1.4bn over MDA threshold of 8.7%, and strong liquidity & funding position maintained with LCR of 151% (up +11%) and 108% (up +100 bps) loan-to-deposit ratio.
• Capital returns resumed with the Board declaring a 1p dividend (updated capital framework and dividend policy post-SST at 1H22).

Company Description

Virgin Money UK Plc is a holding company that owns Clydesdale Bank and Yorkshire Bank in the United Kingdom. It was formed by National Australia Bank (NAB) in February 2016, in advance of the divestment of its UK segment via IPO. VUK is a full-service challenger bank of scale servicing both retail and SME in the UK market. VUK services ~160k small business customers with a turnover of less than £2m, and ~23k medium businesses with a turnover of >£2m.

(Source: Banyantree)

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