OREANDA-NEWS. Fitch Ratings has revised Virgin Money plc's (VM) Outlook to Positive from Stable. Its Long-term Issuer Default Rating (IDR) has been affirmed at 'BBB+' and its Viability Rating (VR) at 'bbb+'. Fitch has also affirmed VM's Support Rating at '5' and Support Rating Floor at 'No Floor'. A full list of rating actions is available at the end of this rating action commentary.

The revision of the Outlook to Positive reflects our view that as VM further grows and diversifies its business, and as its profitability continues to improve, its Long-term IDR could be upgraded to 'A-', over the next 12-18 months. This assumes that the bank continues to maintain its growth well within its conservative risk appetite and planned capital trajectory.

KEY RATING DRIVERS
IDRS, VRS AND SENIOR DEBT
The IDRs are driven by VM's standalone strength, as expressed in its VR. Their affirmation reflects the bank's well-managed low risk profile, which has resulted in healthy asset quality, improving profitability, as well as adequate liquidity and capitalisation for its risk profile.

Its loan portfolio, which largely consists of high-quality, low-risk, prime residential mortgage loans, has been growing faster than the market average and the bank has been gaining market share. However, growth has been reasonably controlled, as reflected by low loan-to-value (LTV) ratios and prudent underwriting standards. The bank now offers credit card loans and also plans to evaluate SME banking.

Asset quality remains healthy, with low levels of arrears, low average indexed LTVs and strong diversification by individual borrower. The overall assessment of asset quality takes into consideration the high indebtedness of UK households, but, in Fitch's opinion, this risk is somewhat mitigated by the sound performance of the UK's mortgage market. The bank's credit card portfolio, although higher-risk in nature, is also performing well. Asset quality may deteriorate over the medium- to long-term from its current healthy levels, particularly once base rates rise, but this should be compensated by improved pre-impairment profitability.

Profitability has improved as a result of volume growth and widening margins. Funding costs have decreased due to sector-wide deposit re-pricing in the first half of the year, which have more than compensated for falling yields on new mortgage lending. Margins also benefited from a changing loan mix, higher-margin credit card exposures and also from lower, but still adequate, on-balance sheet liquidity buffer.

VM continues to manage its costs, as its business is currently highly scaleable and its cost-to-income ratio has gradually improved in the first half of the year as a result of efficiencies and growth in its net interest income. As the bank expands into buy-to-let, credit cards and evaluates SME banking, Fitch expects profitability to rise further as a result of income growth and improved cost control.

VM raised further equity through its IPO in 2014, which boosted its capitalisation. Reported regulatory capital ratios are strong, given its exposure to low-risk mortgages, and are predominantly composed of Common Equity Tier 1 capital. Leverage is adequate; however, we expect regulatory capital ratios to be managed down albeit remaining well within the regulatory minimum.

VM is predominantly funded by retail deposits with continued growth in its savings franchise. Further diversification of its funding base has occurred through accessing wholesale markets, through both unsecured senior debt and RMBS offerings. However, management has stated it will manage its wholesale funding appetite conservatively. Balance sheet encumbrance has risen to levels that are higher than generally seen at UK banks, because most wholesale funds have been accessed on a secured basis. Liquidity is managed conservatively and well above European and UK regulatory minima, with high-quality assets primarily consisting of UK sovereign and supranational exposures.

SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating of '5' and Support Rating Floor of 'No Floor' have been affirmed as Fitch does not factor into VM's ratings potential extraordinary support from either the UK government or its ultimate shareholders. While such support is possible, it cannot be relied upon in assessing the bank's ratings.

RATING SENSITIVITIES
IDRS, VRS AND SENIOR DEBT
The Positive Outlook on VM's IDR reflects Fitch's view that as the bank further develops its franchise, profitability will improve. The rating upgrade would be dependent on the bank maintaining its currently moderate risk appetite and a sound funding and liquidity profile. VM's IDRs and VR may be downgraded should the bank's risk appetite increase as it seeks to grow its balance sheet and improve profitability.

SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch does not expect any change in the bank's Support Rating and Support Rating Floor.

The rating actions are as follows:

Virgin Money plc
Long-term IDR affirmed at 'BBB+', Outlook revised to Positive from Stable
Short-term IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb+'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'.
GBP3bn senior unsecured GMTN programme: affirmed at 'BBB+'
GBP300m senior unsecured debt, XS1222597731, affirmed at 'BBB+'