Virgin Money UK leaps on hopes worst of insurance scandal over

(Reuters) - Shares in Virgin Money UK VMUK.L leapt as much as 24% on Thursday after the British bank said it believed the worst of an industry-wide insurance scandal was behind it.

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That helped to overshadow a drop in annual profit and the company’s decision to suspend its dividend payout.

The owner of Clydesdale and Yorkshire Bank said it had set aside 385 million pounds ($494 million) in the last quarter to cover costs related the mis-selling of payment protection insurance (PPI) - a scandal that has cost the industry billions and continues to unsettle investors worried about more charges.

That was within the 300-450 million pound range Virgin Money UK forecast in September, when it reported an “unprecedented volume” of claims for compensation ahead of an August deadline.

“We are going to be processing claims from now through to the end of next summer, but we think we have got a pretty good handle on the costs,” Chief Financial Officer Ian Smith said on a call with journalists.

“I can’t say that there’s not going to be any more provisions, but I am very confident the risk of a scale charge in relation to PPI is completely behind us.”

Virgin Money UK, formerly known as CYBG, became Britain's sixth-biggest lender after it bought Virgin Money last year. It is betting on the high profile brand of Richard Branson's Virgin empire and growth in business banking to challenge bigger rivals such as Lloyds LLOY.L, RBS RBS.L and Barclays BARC.L.

In its first full results as the merged entity, the bank said underlying pretax profit dropped 7% to 539 million pounds in the year ended Sept. 30, below analysts’ average forecast of 544 million.

At 0920 GMT, Virgin Money UK shares were up 19.8% at 171.25 pence, topping the UK midcap index .FTMC and on course to add about 500 million pounds to the company's market value.

That was despite the lender cancelling its dividend.

“The board, incorporating feedback from our major shareholders, believes this is the right short-term action to enable us to deliver on our longer-term strategy and targets,” the company said.

JP Morgan called the move “sensible”, adding it helped the bank to report a common equity tier one capital ratio - a key measure of financial strength - of 13.3%, higher than analysts’ forecast of 13%.

(GRAPHIC: Virgin Money - )

Reporting by Pushkala Aripaka and Muvija M in Bengaluru; Editing by Shounak Dasgupta and Mark Potter