The third quarter trading update from Virgin Money (LSE: VM) shows that the challenger bank is moving from strength to strength. Certainly, its future may be less certain following the EU referendum, but its performance proves that, so far at least, there’s no crisis in the banking sector.
Virgin Money’s gross mortgage lending increased by 19% in the first nine months of the current year. This resulted in a 3.6% market share of gross mortgage lending to the end of the third quarter of 2016. Net mortgage lending was up 33% versus the first nine months of 2015, with £1.3bn of net mortgage lending in Q3.
In terms of credit card balances, they increased to £2.2bn at the end of September. That’s 41% higher than they were in 2015 and shows that consumer confidence among Virgin customers hasn’t taken a major hit following the EU referendum. And with Virgin commencing a partnership with 10x Future Technologies to build its digital bank, its long-term growth outlook is very positive.
In fact, Virgin Money is expected to grow its bottom line by 34% in the current year, followed by growth of 12% next year. This shows that there’s still considerable scope for challenger banks to muscle in on the under-pressure traditional banking companies. And with this particular challenger trading on a price-to-earnings growth (PEG) ratio of 0.8, it offers excellent value for money as well as a wide margin of safety.
Uncertainty ahead?
Looking ahead, Virgin Money and other challenger banks such as Aldermore (LSE: ALD) could endure an uncertain period. Although Virgin Money’s performance in the third quarter was strong, Article 50 of the Lisbon Treaty to start the Brexit process hasn’t yet been invoked. As a result, there’s still scope for Brexit to have a negative impact on the UK economy and on the banking sector, with negotiations in 2017 likely to provide an uncertain backdrop for the banking sector.
However as mentioned, Virgin Money offers a wide margin of safety so that even if its growth rate does disappoint, its shares may provide capital growth. Similarly, Aldermore is forecast to deliver a rise in earnings of 10% in the current year and 5% next year. While this rate of growth is slower than that of Virgin Money, it’s nevertheless ahead of the wider market’s anticipated growth rate. And with Aldermore having a PEG ratio of 1.3, it offers growth at a very reasonable price.
However, Virgin Money has the greater appeal of the two stocks right now. It’s on track to meet full-year guidance and trades on an ultra-low valuation. Furthermore, it’s focused on building a digital bank that’s likely to broaden the company’s appeal. Alongside a loose monetary policy environment and a UK economy that’s holding up well despite higher uncertainty, Virgin Money has the potential to be a star long-term buy.