The occasional stock market crash can be just what we need to weed out the weak and boost the overall strength of the market. Most of the bigger companies will probably survive. But often, smaller and more nimble firms can come out ahead of the competition. Like those little furry mammals that beat the dinosaurs after the big rock fell from the sky. The one I have in mind today is a challenger bank, Virgin Money (LSE: VMUK).
Virgin Money shares are down a whopping 48% so far in 2020, marginally better than Lloyds Banking Group on a 55% drop. But at the worst of the lockdown, Virgin plunged far lower than the big banks. Investors really did have a worse outlook on the challenger banks than on the big names.
Unlike Lloyds, Virgin has more than doubled since that low. Partly, I think, because a challenger bank doesn’t carry the traditional baggage that’s weighing down the sector. And Virgin shares gained another few percent Tuesday, on the back of a third-quarter update.
Customer deposits gained 4.8% during the period. That’s a happy result of people spending less while they were stuck at home. On the other hand, personal lending fell 2.7%, essentially for the same reason. To put the balance in perspective, customer deposits amount to £67.7bn, while personal lending stands at a much lower £5.2bn. The bank’s mortgage portfolio declined by 1% to £58.9bn, as new purchases ground to a halt.
Business boost
On the business lending front, Virgin enjoyed a 5.7% boost, to £8.8bn. It’s directly due to the Covid crisis, being “driven by significant demand for the government-backed lending schemes.”
Virgin has made further provisions against the ongoing pandemic uncertainty. But I see almost no chance of this challenger bank going bust. And I can see it coming out of this crunch in a fitter state to take on the sector establishment. Chief executive David Duffy said: “We have now re-commenced our transformation and rebrand activity, taking what we have learned through the pandemic to deliver on our mission to disrupt the status quo as a full-service digital bank.”
That emphasises that key thing that can come out of a stock market crash. When the status quo is being rocked, the fast-footed newcomers get an extra chance at disrupting it. It’s really what the ‘challenger’ in ‘challenger bank’ is all about.
The challenger bank challenge
But what about the next 12 months and the valuation of Virgin Money shares? I’ve already expressed my reservations over the stock market recovery we’ve seen since the early days of the crash. I really don’t think investors have taken full stock of the economic damage we’ve suffered. And I don’t think people appreciate how long it might take to get over it.
I see a very real chance of a second stock market dip as the medium-term reality hits home. If that happens, the banks could take another hit, including the challenger variety. So how do we deal with that uncertainty?
I reckon the only way to approach something like Virgin Money is to think about its long-term value. If it pulls through the crisis in good health, which I’m sure it will, I believe Virgin Money will provide top-class value.