Virgin Money looks gorgeous but can't find love on the markets

The shares took a bath, despite analysts and customers singing the bank's praises. They are likely to be cheap for some time to come

Virgin Money has been running an impressive race, but the stock market is unconvinced (PA Wire/PA Images)

Virgin Money is doing a better job then most of kicking Britain’s big four banks up their rotund backsides.

The last set of results provided plenty of evidence for that. First half profits leapt by a third to £124m. Mortgage lending, at £2.1bn net of repayments, was at a record, and far better than the City had expected. Impairments were very low. The bank’s low risk credit card business also grew nicely.

As for its profitability, put it this way: A return on equity like the 13 per cent produced by the business would be considered tantamount to witchcraft at HSBC towers.

Britain’s banking behemoth keeps making promises to do better when it comes to that most closely watched of measures. And it keeps breaking them.

You can only look gorgeous, like Virgin does right now, if your customers fancy you. That seems to be the case. This bank has always been a dab hand at marketing. But the much ballyhooed lending lounges and the schemes to help first time buyers get on the property ladder, they seem to be working too.

The City’s scribblers also think the business is cute.

Investec’s Ian Gordon described the numbers as “robust” and suggested that his colleagues would have to upgrade their forecasts. He was far from alone with that assessment.

And yet the shares found no love on the stock market. In fact they slumped, by well over 8 per cent by lunchtime.

This despite the fact that they're cheap as chips.

Even before that tumble, the bank was valued at just 0.8 times the combined estimated value of its various businesses. Such a number discounts any potential growth, despite the fact that Virgin Money is growing, and shows every sign of continuing to do so.

Partly that is a function of sentiment. The success of Virgin, like most of the challenger banks that emerged from the wreckage of the financial crisis, is closely linked to the success of the UK economy. There isn’t much faith in the prospects for the latter post Brexit, and there is still less in Britain’s low grade Government, despite all of its reassurances.

Virgin was also partly the author of the shares' problems. It started the alarm bells ringing by warning of “some areas of weakness to be navigated” in the UK housing market, without providing anything much in the way of context.

In the midst of uncertain times, that’s the sort of thing that scares the life out of investors when they see it. They duly ran for the hills.

In reality Virgin should manage just fine. It subsequently clarified that it was highlighting issues in London and the South East, where the problems caused by first time buyers being priced out of the market have been clear for some time.

It should also be remembered, at this point, that Virgin took over the good parts of the collapsed Northern Rock business, which was strongest in the north of England, where the housing market’s outlook is more stable (at least for now).

However, by the time that message was put out, the damage was done.

Another problem faced by challengers like Virgin is that they are ingenues. The market hasn’t yet seen how they cope with a downturn like the one that is coming.

Even though Virgin appears to have a low risk profile, and has passed the Bank of England’s stress tests, sentiment probably won’t change until after that. The proof of the pudding is in the eating, after all.

As a result, you’ll probably be able to pick up shares in this outfit cheaply for some time to come. There are many worse investment choices you could make.