February 27, 2018 / 7:36 AM / in 4 months

UK's Virgin Money bets on open banking after robust annual profits

(Reuters) - Virgin Money (VM.L) reported a 28 percent rise in full-year pretax profit on the back of “market-beating” growth across its core products, as it looks to cash in on market reforms and prise customers away from Britain’s “Big Five” lenders.

FILE PHOTO: Signage is see outside a branch of Virgin Money in Manchester, Britain September 21, 2017. REUTERS/Phil Noble /File Photo

The British challenger bank said on Tuesday that underlying pretax profit rose to 273.3 million pounds for the year ended Dec. 31, beating analysts’ expectations of 259.02 million pounds.

Virgin Money's shares were up 5.6 percent at 279 pence at 1124 GMT, making it one of the biggest gainers on the FTSE Midcap Index .FTMC.

Virgin’s share of the British mortgage market, now at around 3.3 percent, is still very small and highlights the difficulties faced by the country’s banking newcomers in challenging the established heavyweights - Barclays (BARC.L), HSBC (HSBA.L), Lloyds Banking Group (LLOY.L), Santander UK (SAN.MC) and Royal Bank of Scotland (RBS.L).

However, its gross mortgage lending rose to 8.4 billion pounds in the year and the bank expects to grow mortgage balances at a single digit percentage rate during 2018, helped in part by Britain’s new ‘open banking’ reforms.

Britain’s nine biggest banks will soon be required to share data on customers, making it easier for those clients to compare services and products offered across the whole market, and even switch to other banks.

COMPETITION

“Mortgage competition is definitely hotting up. The big banks are seeing the UK mortgage market as being an attractive investment place and that’s good for customers and good for competition,” Virgin Money’s CEO Jayne-Anne Gadhia told Reuters.

“We’d expect certainly to be a be a net beneficiary from open banking and probably to take significant market share over the years from the big banks,” she added, referring to Virgin Money’s increased investment in digital banking.

The lender, however, said its banking net interest margin (NIM) - a key measure of a bank’s profitability - would fall to between 165-170 basis points this year, as a result of lower mortgage spreads stemming from the increased competition. It reported a banking NIM of 172 basis points for 2017.

The lender, founded by entrepreneur Richard Branson, expects to beta test its digital bank in the second half of this year, with a roll-out in 2019.

It said credit card balances hit its target of 3 billion pounds in 2017, up from 2.4 billion pounds a year earlier.

Britain’s banks are booking future credit card income long before it materialises and how banks account for interest earned on zero percent balance cards is worrying some.

“We’ve been through that with everyone from auditors to regulators and we are happy ... our customers are behaving in the way that supports the way we in which we recognise the income,” Gadhia said.

Reporting by Noor Zainab Hussain in Bengaluru; Editing by Sinead Cruise and Susan Fenton

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