Clydesdale owner prepares for increase in mortgage bad debts

CLYDESDALE Bank owner Virgin Money has increased its provisions for mortgage bad debts by around 60 per cent noting the economic outlook remains highly uncertain as the UK emerges from the coronavirus lockdown.

Virgin Money said it has made cautious assumptions and is preparing to manage higher levels of customers in financial difficulty in coming months.

“The UK economy is emerging from lockdown and we have seen increased consumer spending and economic activity in recent weeks,” said the group in a third quarter trading update.

“The economic outlook remains highly uncertain and it may be some months before the full extent of the impact of the lockdown on the Group’s customers is visible, once Government and other support measures are withdrawn.”

While trading in the year to date has been on line with expectations, the update from Virgin Money underlined the scale of the challenges posed by the fallout from the coronavirus for banks.

These have played a key part in the delivery of the support the Government has provided for businesses and consumers.

Chief executive David Duffy said Virgin Money, which also owns Yorkshire Bank, has granted around 67,000 mortgage and 53,000 personal payment holidays. It has supported around 25,000 business customers with lending arrangements.

The group recently reactivated rationalisation plans which had been put on hold because of the coronavirus. These will result in branch closures in Scotland and in the Clydesdale Bank name disappearing from the high street. All remaining outlets will operate under the Virgin Money brand.

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The group said it increased business lending by 5.7% in the third quarter, driven by support for customers through the Government-guaranteed Bounce Back Loan and Coronavirus Business Interruption Loan schemes.

Lending under these totalled £867 million at the end of the quarter, on June 30.

The group said it has lent a total of around £270m to more than 6,800 small and medium sized enterprises in Scotland under the schemes.

A one per cent reduction in its mortgage book, to £58.9bn, reflected the effective closure of the new purchase market under lockdown, partially offset by improved retention rates.

Virgin Money said it has not yet seen any significant specific provisions or credit losses in relation to the Covid-19 pandemic, citing a backdrop of Government support and its own forbearance measures.

However, the increase in the mortgage impairment provision, to £81 million from £50m at March 31, is based on models that incorporate “more cautious economic scenarios” and expectations in respect of the behaviour of customers on payment holidays.

Virgin Money increased its provision in respect of personal lending by 8%, to £249m, from £231m.

The group reduced its provision in respect of business lending to £254m from £261m after making a significant provision in the first half.

Virgin Money said it recorded a significant, 4.8%, increase in deposits reflecting lower consumer spending during the lockdown.

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Regarding the impact of the coronavirus on working arrangements, the group said: “We expect the current working model the pandemic has brought about, whereby the majority of colleagues are working from home, to remain in place for at least the remainder of 2020.”

The group expects to close seven Clydesdale Bank branches and five Virgin Money outlets in Scotland under its rationalisation programme. It will be left with 55 branches in Scotland.

The rationalisation programme is expected to result in around 100 jobs losses in Scotland.

The corporate headquarters of the group will remain in Glasgow.

Plans for the closures were originally announced in February in a move linked to the process of integrating Virgin Money with CYBG, the former owner of Clydesdale Bank and Yorkshire Bank.

Virgin and CYBG merged in a £1.9 billion deal announced in April 2018.

Fahed Kunwar, Banks analyst at equities research specialist Redburn, said Virgin Money’s update highlighted the state of limbo that banks are in.

“Despite the country being in the midst of a severe recession, the scale of government support has meant there is little sign of borrowers defaulting on their loans” he noted. “We will wait for the fourth quarter when the furlough schemes end to see just how serious the loan losses are, particularly on Virgin Money’s credit card portfolio.”


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