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Are Virgin Money shares a potential buy?

In the world of corporate branding, Virgin has to be hailed as a perfect example, encompassing everything from trains to space flight, and almost entirely inseparable from its founder Richard Branson. When Clydesdale and Yorkshire bank bought the original Virgin Money Group last year then, it came as no surprise it would take on the name.

New though the name may be, the latest trading update shows Virgin Money UK (LSE: VMUK) is suffering from an old problem in the banking world – Payment Protection Insurance (PPI). Today the bank confirmed that due to the rush of claims before the August deadline this year, it was now setting aside £385m in PPI provisions.

Bad but not too bad

Though the figure is certainly a hit for Virgin Money, it actually comes in the middle of the range the bank said when it gave a warning in September. Notably for investors the costs also caused Virgin Money to abandon plans to introduce a dividend; the company suffering a pre-tax loss of £232m for the year (compared with a £164m loss the previous year).

Forgoing a dividend however, is often a sign of good leadership for me. Sometimes money should be reinvested in a firm rather than distributed to shareholders. Too many companies have maintained a dividend they cannot really afford in order to bolster their share prices.

Likewise I don’t consider the PPI problem to be a fundamental hit long-term. Once the full costs are taken account of, we can all hope there is an end finally to the scandal that has been plaguing the banking industry (not to mention scam callers on our phones).

Virgin Money also said its latest figures take account of costs associated with the merger, and include impairment costs partly caused by accounting changes. Again these issues are generally short term in nature.

Competition pressures

That said, the banking industry as a whole has been suffering pressures from other sources than just PPI. A low interest rate environment, increased competition, and Brexit have all been taking their toll, and Virgin Money is no different.

Virgin admitted that competition in the mortgage market would likely be putting further pressure on its profit margins next year, though it does expect the rate of decline to slow.

In addition to these industry-wide issues, as somewhat of a newly formed entity, Virgin Money is likely to see greater uncertainty in the near future. It intends to launch its first Virgin Money current account this year, which combined with a business banking section could bring about more scrutiny from regulators than it has perhaps been used to.

Similarly, restructuring of staff and facilities from the old Clydesdale and Yorkshire banks following the merger could cause teething problems for some time to come – some Virgin Money staff were disgruntled last month, for example, after shares they were given in Clydesdale as part of the merger were hit hard on the back of a profit warning.

I think it is still early days yet to see how it will play out for Virgin Money, and these latest figures don’t exactly have me running to invest. But longer term, the Virgin brand is certainly one worth considering when the time is right.

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Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.