I’m always keen to add a good FTSE 250 growth stock to my portfolio. As FTSE 250 companies have a smaller market capitalisation than their FTSE 100 peers, they can offer greater scope for growth in the future. One example I’m looking at is Virgin Money (LSE:VM). The share price is up by an impressive 112% over the past year, so clearly things are going well.
The story until now
Virgin Money was founded in 1995 by Richard Branson, the founder of the whole Virgin group. Over the past few decades, it has bought and merged with other financial services companies. For example, it bought Northern Rock back in 2012. The merger with Clydesdale Bank in 2019 also provided inorganic growth for the FTSE 250 stock.
At present, it offers retail and business banking. As well as traditional banking services, it also sells some investment products and insurance. Like a normal bank, the main way it makes money is from the net interest income. This is the difference between the rate it lends out mone’ versus the rate it pays on money held.
Reasons for outperformance
The growth stock has outperformed over the past year, largely due to the pandemic. This negatively hit the bank, due to provisions that had to be set aside for impairments. Yet this wasn’t as big as other banks that have large corporate and investment banking operations. This meant that pre-provisions, a profit of £625m would have been made in 2020. With the provisions, a reported loss of £141m was registered for 2020.
The strength of the business was shown as it weathered the storm well. For example, mortgages were an area where heavy losses with defaults might have been seen. Yet the average LTV of the mortgage book was 57%, which makes it quite low risk. This shows me that the bank is sensible and conscious of risk limits.
Further, 78% of the businesses banked are categorised as operating in areas that are considered lower-impacted sectors. These include agriculture and utilities. Due to this make up of clients, Virgin Money was able to not be overly hampered by companies that really struggled last year.
A FTSE 250 growth stock with potential
It hasn’t been all plain sailing for the FTSE 250 growth stock. It had to offer 67k mortgage payment holidays and 58k personal payment holidays. Given the large credit card arm it has, this could be a risk going forward. In some cases it can be easy to roll over debt, and this might only default or be flagged up later this year.
Another risk is the competitive industry Virgin Money operates in. At a time when interest rates are so low, there are many larger banks competing for the same customers. This could hamper further growth for the company.
On balance, I’m keen to buy the FTSE 250 growth stock. I think the client base it has will enable it to come out of the pandemic in better financial shape than competitors. I also think there is more room to grow in comparison to other banks such as Lloyds Banking Group. Therefore, I’m considering buying shares in Virgin Money.
