Virgin Money UK warns of falling mortgage volumes as interest rates rise and mini-budget causes property market turmoil
- Virgin Money said the value of customer loans was £72.6bn in the first quarter
- Rate hikes helped push the group’s net interest margin up to 189 basis points
- The company has warned that “more moderate” mortgage levels are expected in the short term
Virgin Money UK revealed lending levels remained resilient towards the end of 2022, although it warned mortgage borrowing would be hit in the near term.
The financial services company said the value of customer loans rose 0.7% to £72.6bn in the first quarter on higher mortgage and commercial borrowing.
Lending in the latter category was supported by an expansion in business as usual balances offsetting a decline in public plan balances of borrowers making contractual repayments.
Warning: Virgin Money UK revealed that lending levels remained resilient towards the end of 2022, although it warned that mortgage borrowing would be impacted in the short term
Mortgage lending rose at a much more modest pace due to a weaker housing market, as mortgage rates soared after the controversial “mini budget” at the end of September.
However, the Newcastle-based group has told investors that “lower” mortgage volumes are expected in the future due to weaker economic conditions.
Inflation currently stands at 10.5% following a spike in energy and food prices stemming from Russia’s large-scale invasion of Ukraine and a resurgence in travel as Covid-19 restrictions were eased.
In an attempt to mitigate high prices, the Bank of England has raised the base rate nine successive times since December 2021 and is expected to raise it by a further 0.5% tomorrow.
This contributed to mortgage demand for new home purchases in the UK falling by three quarters in the last three months of last year, according to the BoE.
But Virgin Money also noted that rate hikes helped its net interest margin to 189 basis points in the first quarter.
For the full year, the owner of Clydesdale Bank expects its net interest margin to remain in the 185 to 190 basis point range.
On top of that, he forecasts a cost-income ratio around the 50% mark due to the completion of cost-cutting measures, including investment in mortgage digitalization.
The FTSE 250 company began a modified restructuring program two years ago to accelerate its shift to digital banking by cutting many branches and offices.
Full implementation of the plan has been delayed by increased customer demand for assistance following recent base rate increases and volatility following the mini-budget, which has necessitated the hiring of more call center staff.
David Duffy, chief executive of Virgin Money, said: “Arrears remain broadly stable, but we have increased the support available for those who need it and remain cautiously 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 down 1.5% at 190.1p just before the close of trading on Wednesday, although they are still up around 40% in the past three months.