In Virgin Money UK PLC (LSE: VMUK) earnings on Monday, the net interest margin outlook is very important, UBS said, along with how management views the outlook.
A one basis point change in the interest margin, all else being equal, changes analysts’ pre-tax earnings forecast by 1.6%.
“The rise in UK interest rates – which we expect to rise to 4.5% by mid-2023 from a low of 0.1% in November 2021 – is positive for margins,” analysts said, as income from non-interest-bearing equity and deposit-backed assets rises. and floating rate loan yields are rising faster than floating deposit costs.
The challenge for Virgin Money in the current economic environment is that its funding base is “more skewed towards higher cost deposits”, the analysts added, noting that these are repricing at higher rates faster than for large Virgin banking peers which are up to 40% funded by non-interest bearing deposits.
“Over time, therefore, we could see VM margins come under pressure again if the big banks subsidize resi spreads with their lower-cost deposit base.”
The outlook for operating costs should also be of interest to investors, with higher inflation and VM’s track record of “uneven” cost cutting, as well as the outlook for loan loss charges.
In general, investors are “cautious about UK domestic banks in general, in our view”, analysts said, with shares in one sector trading on average at 5.4 times 2023 earnings forecasts.