Virgin Money worth 88% more

Virgin Money did better than expected during its first half and there's been no evidence of any change in the behaviour of its customers after the shock EU referendum result. That's a massive relief, and investors who'd dumped the shares post-Brexit are piling back in. With profit predicted to keep growing fast for at least the next few years, tipsters think the challenger bank is seriously undervalued.

After crashing 46% after the 'Leave' vote to below 200p for the first time since IPO, Virgin Money shares are up 6% Tuesday at a four-week high. Underlying profit before tax surged by 53% to £102 million in the six months ended 30 June, with underlying net interest margin (NIM) - the difference between interest earned and interest paid - meeting 1.6% guidance.

"Since the vote to leave the EU we have experienced continued strong customer demand and no evidence of changes in customer behaviour," chief executive Jayne-Anne Gadhia told us today.

"Virgin Money is in a strong position to deal with a period of post-referendum uncertainty as a low risk retail bank with a high-quality asset base and unburdened by legacy conduct issues."

Keep this up and credit card balances - 31% higher this time at £2.1 billion - will have hit £3 billion by the end of 2017. Mortgage balances swelled by 9% to £27.7 billion, but, crucially, the average loan-to-value (LTV) of Virgin's retail mortgage portfolio was just 55.4%. What's more, only 1.5% of the mortgage stock has a LTV above 90%.

A scramble to secure buy-to-let (BTL) mortgages ahead of stamp duty changes on 1 April saw Virgin's BTL portfolio increase by 11% during the half. It's now 17.7% of the total mortgage portfolio.

Of course, Gadhia knows interest rates are probably heading lower in August, and understands that this may not necessarily offset a slowdown in mortgage demand rise in unemployment.

It's why NIM is now tipped to be up to 160 basis points in 2016, depending on the timing of any cut in the Bank rate from 0.5%. It was low-160s before. Also expect "solid double digit" return on tangible equity (RoTE) for 2017 compared with a "mid-teens" forecast previously.

Jonathan Goslin at Numis Securities is more cautious on loan growth and impairments, which is why he expects to cut earnings per share estimates by 10-15%. However, he still thinks Virgin is "very good value" as improvements in operating efficiency should underpin "significant balance sheet growth for very little incremental cost".

"We believe there is a near-term opportunity for investors to benefit from a significant improvement in Virgin Money’s underlying fundamentals," he writes, predicting "strong EPS growth over the next three years". That explains the 'buy' rating and 490p price target.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.