Virgin Money's mortgage lending jumps, warns of Brexit impact

By Noor Zainab Hussain

LONDON (Reuters) - British challenger bank Virgin Money (VM.L) reported record mortgage lending in the first quarter but warned that consumers would face rising borrowing costs if Britain votes to leave the European Union.

Jayne-Anne Gadhia, the first female CEO of a listed British bank, said that a so-called Brexit would deliver an "economic jolt" to consumers, hitting them with higher interest rates on the likes of mortgages and credit cards while dampening investor sentiment.

"The period of uncertainty will be a long one that almost certainly will affect foreign investors looking to invest in the UK and I think that's probably not great for banks either," Gadhia said.

"My personal view is that the best solution for the UK economy and the banks is that Britain stays in Europe."

She added, however, that the company had not yet seen evidence of a slowdown.

The bank, which listed on London's main market in 2014, reported gross mortgage lending up 30 percent to 2.1 billion pounds in the first quarter.

That gives the company a 3.4 percent share of the UK mortgage market, Bank of England data shows, highlighting the difficulties faced by British newcomers such as Virgin Money and Aldermore (ALD.L) in challenging the established might of Barclays (BARC.L), HSBC (HSBA.L), Lloyds Banking Group (LLOY.L), Nationwide (POB_p.L), Santander UK (SAN.MC) and Royal Bank of Scotland (RBS.L).

Virgin Money said that growth was driven by an increase in demand for residential and buy-to-let mortgages, adding that it expects lending to increase over the full year despite forecasts for a slowdown in Britain's buy-to-let market.

"We had a record start to the year for mortgages and our savings franchise continues to flourish," Gadhia said in a statement.

Deposits increased by 18 percent year on year to 26.3 billion, while the group's market share of balances on cash ISAs -- tax-efficient individual savings accounts -- increased to 4.2 percent from 3.1 percent a year earlier.

Credit card balances topped 1.8 billion pounds at the end of the quarter, compared with 1.6 billion pounds at Dec. 31, and remain on track to meet an accelerated growth target of 3 billion pounds by the end of 2017, the bank said.

Virgin Money continues to earn returns in excess of its cost of capital, it said, adding that it is making strong progress towards the target of a mid-teens return on tangible equity by the end of 2017. It also expects a net interest margin (NIM) of about 160 basis points for 2016.

KBW analysts said the NIM guidance suggests a weaker outlook for 2016.

"Arithmetically, this would imply an about 4-5 percent earnings cut before factoring in stronger volumes and stronger asset quality," the analysts wrote in a note.

Shares in Virgin Money, backed by founder Richard Branson and U.S. financier Wilbur Ross, were down 2.3 percent at 346.5 pence at 0921 GMT.

(Editing by Sinead Cruise and David Goodman)