UPDATE 2-Virgin Money sees weaker UK housing market and margins

* H1 underlying pretax profit jumps 26 pct to 128.6 mln stg

* "Areas of weakness to be navigated" in UK housing market

* Shares fall as much as 10 pct (Adds CEO comments, details, share movement)

July 25 (Reuters) - British bank Virgin Money Holdings Plc flagged a weaker housing market and pressure on margins on Tuesday, hitting its shares and adding to signs of tougher trading for UK lenders.

Virgin Money is the first British bank to report mid-year results with Lloyds, the country's biggest mortgage lender, announcing its numbers on Thursday.

At 1105 GMT, Virgin Money shares were down 5 percent at 291 pence, having fallen as much as 10 percent earlier in the day.

The company's cautious guidance overshadowed a 26 percent rise in first-half underlying pretax profit to 128.6 million pounds ($167.4 million), helped by growth in its core mortgages, savings and credit card businesses.

Analysts are concerned slowing economic growth, a faltering housing market, high levels of consumer debt and rising inflation could start to make life harder for UK banks.

Virgin Money, one of several small banks trying to make inroads in an industry dominated by the likes of HSBC, Lloyds and Barclays, said Britain's housing market was expected to remain resilient, but there could be "areas of weakness" in the near term as the country prepares to leave the European Union.

"Mortgage spreads are expected to continue to face some pressure," it added. The housing market has slowed in recent months as wages growth has fallen behind inflation.

"Looking at the mortgage market, the balanced view is that with the uncertainties of Brexit ahead, you can see a slowdown in house prices in the big cities and particularly in London..." Chief Executive Jayne-Anne Gadhia told Reuters.

Virgin's net interest margin, a measurement of lending profitability, was 1.59 percent in the first half, down 1 basis point from the end of 2016. For 2017 as a whole, it forecast a margin towards the bottom of its 1.57-1.60 percent guidance.

The bank's core capital ratio was 13.8 percent, 140 basis points below end-2016 levels.

"We have an internal minimum of 12 percent that we've always said and that's our planned position," Gadhia said.


Virgin said balances at its credit card business, which contributed 27.9 percent of total first-half income, rose to 2.8 billion pounds and were on track to hit 3 billion by the end of 2017.

It said it could achieve that without any deterioration in asset quality.

Britain's financial regulators have warned lenders are being too complacent about the risks from rapid growth in consumer credit at a time when household incomes are barely rising.

Virgin said it was not in the unsecured personal loan or motor finance markets, and so credit cards were its only exposure to consumer credit.

Gadhia said it aimed to keep the proportion of unsecured lending on its balance sheet at 10 percent of total assets.

"I think when we get to 3 billion pounds in cards, that will be about 7 or 8 percent. That feels about right to us."

($1 = 0.7681 pounds) (Reporting by Noor Zainab Hussain in Bengaluru; Editing by Rachel Armstrong and Mark Potter)