Virgin Money Pop

Shares jumped after the company unexpectedly announced a €50M share buyback and hasn't seen stress from the cost of living crisis.

The good news

Last Monday, Virgin Money reported an increase in its pre-tax profits and upgraded its outlook, pleasantly surprising investors. The company said its net interest margin is expected to expand in the medium term, which is logical considering the BOE and RBA are expected to keep rates elevated. On top of keeping its dividend, the lender offered its second buyback in history, though smaller than the prior one, planning to buy back shares until May.

The growth was based on the company's unsecured lending business and positive results from Slyce, its buy-now-pay-later product, which has a long waiting list. Benefitting from the cost of living crisis that has prompted more people to take out loans, the long-term prospects of its asset quality deserve some consideration.

The less-than-good news

The CEO was upbeat, saying there were few signs of credit concerns, but he didn't add "so far". The UK is officially in a recession when people are increasingly less able to pay back debts, which is mainly a concern for unsecured lenders. Virgin Money's impairments last quarter were better than last year, with just £52M compared to £131M last year. CET1 ratio ticked up to 15.0% from 14.9% prior, well above requirements and offering some cushion for a downturn in credit quality.

But at the same time, the company's earnings report disclosed that provisions dropped from £504M to £457M, which is almost the amount the company is spending on propping up its share price. A strong payout ratio of 57% helps support the stock in the short term, but how long the company can keep that up might depend on how hard the landing is for the UK economy next year.

Virgin Money in a rising flag

The stock price of Virgin Money UK has completed a falling wedge pattern as part of a rising flag. If the low is at 117 is in, there might be a meteoric jump to 312, as this is the height of the upward leg added to the breakout point. 219 is critical ceiling bulls must recapture for changes to increase even remotely, but before that, the focus is on 188.

A drop to 160 might raise eyebrows as it might lead to an extended slide towards the alleged low, but it would require the takeover of 140 in the shorter time frame. However, the retest of the upper descending wedge trendline is considered bias-positive since it offered rejection.

Key takeaways

Virgin Money's stock prices jumped after the company unexpectedly announced a €50M share buyback. The company is doing well despite the cost of living crisis, with solid results from its unsecured lending business and Slyce. The company has a substantial payout ratio, but it hangs on how long it can keep up the good results ahead of an impending recession and while provisions drop.