By Iain Withers

LONDON (Reuters) -Shares in British lender Virgin Money leapt 16% on Monday after it reported a jump in full-year profit and investor payouts, as Bank of England rate rises lifted its finances despite a looming economic downturn.

Virgin Money reported pre-tax profit of 595 million pounds ($703 million) for the year to September, up 43% from 417 million the prior year.

The bank – which resumed investor payouts over the past year – said it would pay out a final dividend of 7.5 pence per share and buy back an additional 50 million pounds worth of shares.

Bank analysts at JPMorgan said the lender’s results were strong, adding shareholder returns were more generous than expected.

Virgin Money shares were last up 15% at 0827 GMT.

The country’s sixth-largest lender was created through the merger of Virgin Money and rival CYBG in 2018, in a bid to challenge the market dominance of banks including Lloyds and Barclays.

Investors are wary that an economic crunch in Britain could lead to higher loan defaults and dent bank finances, with official budget forecasters predicting households face a record hit to living standards over the next two years.

However, lenders have also benefitted from higher rates designed to curb rampant inflation, as they profit on the gap between what they charge on lending and pay out on deposits.

Virgin Money said it expected its net interest margin – a key measure of profitability – would increase from 185 basis points to between 185-190 basis points next year.

The bank set aside 52 million pounds to cover potential bad loans to reflect the deteriorating economic outlook, but said there were limited signs of credit concerns so far.

CEO David Duffy told reporters there were, nonetheless, signs customers were coming under strain.

Customer spending on energy bills was up 57% and outlay on groceries increased 16%, Duffy said, while the lender had seen a small increase in credit card spending on essentials.

“We are aware that some customers will have to make difficult decisions in this environment, and we are proactively offering them help and support,” Duffy said.

Virgin Money had raised staff pay to help them cope with cost of living pressures, Duffy said.

The bank has agreed a salary increase of 9-11% for its staff, split across increases in January and July, a bank spokesperson said.

($1 = 0.8467 pounds)

(Reporting by Iain Withers; editing by Emma-Victoria Farr and Jason Neely)