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Virgin Money’s pre-tax profit fell by three-quarters in the year to October after it set aside £501m to cover bad loans in case the pandemic causes longer-term financial problems for its customers.

The UK’s sixth-largest bank reported a pre-tax profit of £124m in its full-year results on Wednesday, down from £539m a year earlier. It also warned that, as a retail-focused bank, it was more vulnerable to the economic effects of multiple lockdowns.

David Duffy, chief executive of Virgin Money, said that although the recent news on vaccine development was encouraging, he was wary of predicting a quick recovery.

“It’s going to take time to see vaccine benefits distributed across the economy,” he added. “There will be a sentiment benefit in 2021, but it may not play through very quickly. We feel there is a period where consequences of Covid will play out before the benefits.”

The FTSE 250 group’s share price fell 6 per cent in early trading and is down more than 23 per cent this year.

Virgin’s conservative approach on loan provisions contrasts with most large European and US banks, which reported third-quarter results last month. HSBC reduced its provisions by 80 per cent in the third quarter, while Barclays cut them by 63 per cent.

Unlike its larger competitors, Virgin does not have a trading or investment bank business to buttress its domestic retail operations, making it more vulnerable to a UK downturn.

The bank’s pre-provision operating profit of £625m was down 10 per cent on a year earlier because interest rate cuts reduced its margins.

It reported a 13.6 per cent increase in business lending to £8.9bn, thanks to £1.2bn of government-backed lending. Personal lending was up 3.9 per cent, while mortgage lending declined 3 per cent.

The bank’s common equity tier one ratio, an important measure of financial strength, rose from 13.3 to 13.4 per cent over the three months to October, giving the bank a £950m capital buffer in addition to £753m of credit provisions.

“[The] impairment charge for [the year is] higher than expected, though Virgin Money had looked less conservative than peers,” said Joseph Dickerson, an analyst at Jefferies. “We suspect provisioning will remain a key part of the debate.”

Virgin received £35m in September from the government-backed Capability and Innovation Fund, which was set up to promote competition among UK banks. The fund is part of a £775m scheme being paid for by NatWest, formerly Royal Bank of Scotland, as a condition of its government bailout more than a decade ago.

Virgin said the award would help it reach a market share of more than 6 per cent.

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