January 29, 2013 / 6:00 PM / 5 years ago

TEXT-Fitch affirms Virgin Money plc at 'BBB', outlook is stable

Jan 29 - Fitch Ratings has affirmed Virgin Money plc's (VM) Long-term Issuer
Default Rating (IDR), Short-term IDR and Viability Rating (VR) at 'BBB', 'F3'
and 'bbb', respectively. The Outlook is Stable. A full list of rating actions is
at the end of this rating action commentary.


The rating affirmations reflect the bank's strong liquidity profile, healthy
asset quality, sound capital and solid customer funding franchise. The ratings,
however, also take into account the bank's fast growth ambitions, which will put
pressure on its currently sound balance sheet as well as its weak underlying
profitability. The growth via potential acquisitions, which could be
opportunistic in nature, renders its current business projections difficult to


VM's IDR is driven by its standalone strength. The bank's operations have a very
short track record in their current form and during the one year of the bank's
operations under Virgin Money ownership (January 2012 to January 2013), its
balance sheet profile has changed significantly, with a reduction in
capitalisation, lower liquidity and a change in funding structure, all in line
with plans. Nonetheless, asset quality remains healthy, albeit concentrated in
UK mortgages, with a small amount of product diversification introduced through
the newly acquired credit card book. Fitch expects that the book will suffer
some deterioration in quality, given the current macroeconomic climate.
Nonetheless, it believes the book should continue to perform well, reflecting
its sound origins and management's risk averse culture.

Capitalisation is currently deemed to be sound and in line with the better
capitalised building societies'. Regulatory capital ratios are high but benefit
from the low risk weightings applied to mortgages under the IRB approach.
Nonetheless, Fitch sees some pressure arising from the projected loan growth.
Management's stated minimum targeted Tier 1 ratio of 15% would render its
leverage quite high.

Underlying profitability is still weak: VM has suffered from the effect of a
high liquidity buffer, low risk but low-yielding loan book, both of which are
combined with the very low base rates prevalent in the UK. Fitch understands
that underlying profitability is improving, partly as a result of a cost cutting
exercise and partly as a result of increased risk-return in its loans. However,
it expects earnings in the UK financial sector to remain under pressure as long
as rates remain low.

Fitch views the transparency of the bank's public disclosure to be weak and
certain aspects of its corporate governance could be improved. Both reflect the
private nature of the bank and of its parent holding company.

Overall, Fitch believes that over the medium-term VM's ratings could improve in
line with the better performing UK mortgage lenders, as long as management is
able to implement its plan as expected and to meet its targets in line with
projections. However, negative rating pressure would apply if capital and
liquidity deteriorate more quickly than currently planned, or if a large
acquisition takes place which could compromise the current capital and funding
position of the bank or if underlying profitability remains weak.


VM's SR of '5' and SRF of 'No Floor' reflect Fitch's view that while the
probability of support from the authorities is possible, it cannot be relied
upon, especially following the introduction of the UK Banking Act in 2009.
Furthermore, despite the fact that support provided by its shareholders is
possible, the ability and willingness of this support being provided in a timely
manner cannot be relied upon by Fitch in its ratings. The SR is potentially
sensitive to any change in assumptions around the propensity or ability of the
authorities or of the shareholders to provide timely support to the bank.

The rating actions are as follows:

Long-term IDR affirmed at 'BBB'; Outlook Stable
Short-term IDR affirmed at 'F3'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'

Additional information is available on www.fitchratings.com.

The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.

Applicable criteria, 'Global Financial Institutions Rating Criteria', dated
August 2012 and 'Evaluating Corporate Governance' dated December 2012, are
available at www.fitchratings.com.

Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Evaluating Corporate Governance
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