In Virgin Money UK PLC (LSE:VMUK) results on Monday, the outlook for net interest margin is all-important, said UBS, as well as how management view the outlook.
A basis-point shift in interest margin, all else being equal, shifts analysts' forecast profit before tax by 1.6%.
"Higher UK interest rates – which we expect to increase to 4.5% by mid 2023 from a November 2021 trough of 0.1% - are positive for margins," the analysts said, as income from assets funded by non-interest bearing deposits and equity rises and floating rate loan yields rise faster than floating deposit costs.
The challenge to Virgin Money in the current economic environment is that its funding base is "more skewed to higher cost deposits", the analysts added, noting that these are repricing to higher rates faster than for Virgin's larger banking peers which are up to 40% funded by non-interest bearing deposits.
"In time therefore we could see VM’s margins come under pressure again if larger banks subsidise resi spreads with their lower cost deposit base."
The outlook for operating costs is also expected to be of interest to investors, with inflation higher and VM’s track record in cost reduction "patchy", as well as the outlook for loan loss charges.
Generally, investors are "cautious on UK domestic banks in general, we think," the analysts said, with a sector shares on average trading on 5.4 times 2023 forecast earnings.