Shares in challenger bank Virgin Money UK (VMUK) surged 25% despite making a loss for the full year and suspending its dividend amid higher-than-expected PPI and restructuring costs.

In its first annual results as Virgin Money, the bank made a pre-tax loss of £265 million after absorbing £804 million of exceptional costs in the year including £433 million of “legacy conduct” costs and PPI payments. The company put aside £385 million in the last quarter to cover PPI claims but received 340,000 “information requests” (the first stage in making a PPI claim) in August alone ahead of the final deadline. Virgin Money said around 9% of PPI claims led to a payout.

The bank also took a hit from restructuring costs after it merged with Clydesdale and Yorkshire Bank (CYBG) this year, with all of the group’s branches now rebranded as Virgin Money. Last year, the bank paid a 3.1p per share dividend for the full year when it was known as CYBG.

But investors were clearly focusing on the firm's growth in business and personal banking rather than its PPI claims and dividend announcement. Shares climbed 25% or 36p to 176p after the announcement. Morningstar analysts have raised their fair value estimate for the stock from 190p to 210p.

The bank’s dividend yield, at around 2%, is not one of the largest among listed UK banks, but income has been an important part of luring wary investors back into the sector. PPI claims remain a threat to the profitability of UK banks, and Lloyds has suspended its share buyback programme because of the last-minute rush of claims. But Morningstar analysts Niklas Kammer and Johann Scholtz, in their review of the European banking sector, believe that the dividend is safe at Lloyds, which is their pick of the UK banks.

Virgin Money is rated as a 4-star stock by Morningstar, which means that analysts think that it is undervalued. Analyst Nathan Zaia says that Virgin Money is the largest mid-size bank in the UK with an established presence in retail and SME banking, particularly in the north of England, but the big five UK banks – Lloyds, RBS, Barclays, HSBC and Santander – “are in far stronger market positions”.

“Virgin Money UK is a leading ‘challenger’ bank in niche segments and regions, but it is in an awkward position –it does not have the cost advantages of an online-only … and does not have the scale of a major bank to absorb post-crisis regulatory costs,” he adds.

But Joe Healey, investment research analyst at The Share Centre, also expects PPI and restructuring costs to settle down in this financial year.

Virgin Money was set up by entrepreneur Sir Richard Branson in 1995 and was run from 2007 to 2018 by Jayne-Anne Gadhia, one of UK plc’s most high-profile female business leaders.