Shares of Virgin Money UK PLC (LON: VMUK) today fell 13.6% after Bell Potter, an Australian stockbroker and financial advisory firm, downgraded the bank’s rating to ‘hold’ from ‘buy’.
Bell Potter sited the fact that the Bank of England was considering implementing negative rates in order to support the ailing British economy, which would have a significant impact on the bank’s profitability going forward.
Given that Virgin Money is a smaller financial institution as compared to other high street banks, it is likely to struggle if mortgages become unprofitable due to negative interest rates given its huge dependence on interest income.
The bank also relies heavily on customer deposits to meet its funding needs and negative interest rates may lead to a major decline in customer deposits given that the bank will now be charging customers interest on their savings and deposits.
Virgin Money has maintained a stable earnings outlook for the 2020 financial year, but analysts are worried about what might happen in the 2021 fiscal year if negative rates materialise.
Virgin Money share price
Virgin Money shares today fell 13.6% to trade at 73.06p having closed Friday’s session trading at 85.22p.