Can Virgin Money’s share price recover after profits crash?

Virgin Money’s [VMUK.L] interim results for the six months to 31 March were decidedly mixed. While total income was up on the same period the previous year, profits took a thumping, as the challenger bank earmarked cash to protect it from defaults on its substantial loan book.

Virgin Money’s share price experienced a selloff last week, as shareholders digested an underwhelming set of results from the challenger bank. But it hasn’t just been a substantial slump in profits that has given investors the jitters. The stock has also been under pressure following the collapse of Silicon Valley Bank in the US and turmoil in the European banking sector. This has led to a rather muted sentiment on the banking sector, especially when combined with the gloomy macroeconomic conditions. 

The question is whether the downturn in Virgin Money’s share price represents a buying opportunity. 

How did Virgin Money perform in H1?

Statutory pre-tax profits were down a huge 25% year-on-year to £236m as the Virgin Money banked a £144m impairment charge to cover potential loan defaults. That’s up from a £22m charge the previous year and was enough to trigger a selloff in the bank’s shares. 

CEO David Duffy said that interest rate rises and inflationary pressures had hit affordability for UK businesses and individuals. Duffy added that the number of customers in financial distress is low.

It wasn’t all bad news for Virgin Money Total income rose 10% to £933m, although operating and administrative costs also rose 5% to £477m. Net interest margin increased 1.91% in the first half of the year supported by higher prices. Deposits were up 2.6% to £67bn, with the bank pointing out that 72% of these were FCSC-insured.

Virgin Money upped its full-year (FY) guidance for net interest margin to 190bps, partly based on higher interest rates. The bank said that the first half of the year had been “subdued, with several economic indicators forecast to remain weak in the near term before improving into FY24”.
 
“We have a strong capital position and we’ve significantly grown pre-provision profit, while continuing our prudent approach. As the UK economy stabilises in the months ahead, we have a high degree of confidence in our long-term plans,” said Duffy.

How did Virgin Money’s share price react?

Having opened Thursday at 150p a share, Virgin Money’s share price fell over 13% during the morning session, as the reduced profits sapped market confidence. At one point Virgin Money’s share price touched 136.1p, before clawing back some of the losses to close the day at 147.2p. However, the stock dropped once again on Friday to finally close at 144.45p, an 8.2% decline on the week. 

The interim results may have triggered a selloff in Virgin Money shares last week, but the stock has been on the ropes for a few months. Over the three-month timeframe, Virgin Money’s share price has fallen 24% as investors have become jittery on banking stocks after the fiascos at Silicon Valley Bank and Credit Suisse. 

What are analysts saying about Virgin Money?

Shorewood Capital suggested that the downward spiral could see the bank enter bid territory. The broker said that results were mixed, noting profits were ahead of forecasts and the positive net interest margin. However, muted guidance has weighed on sentiment, with Shorewood hinting that a bid for Virgin Money could be on the cards.

“Our last published fair value of 320p equates to a trailing P/TNAV of 0.9x and implies the shares are worth more than double the current price,” the broker said. “While today’s numbers are mixed, we do not think the very low valuation can be overlooked and think VMUK could be a bid target if its share price doesn’t recover soon.”

Virgin Money has a 220p 12-month median price target from analysts tracking the stock. Hitting this would see a 52.3% upside on Friday’s close. Analysts at Barclays [BCS] trimmed their price target on Virgin Money shares from 230p to 200p, pinning an ‘equal weight’ rating on the stock. Citigroup reaffirmed their ‘buy’ rating on Virgin Money in March.