Brexit has pummelled the challenger banks. Across the board these stocks are down in excess of (and sometimes significantly in excess of) 20% since the vote. It was not long ago that these stocks were the darlings of the market, trading at a huge premium to book value and at PE ratios of well over 20. That bubble is well and truly burst and it is now time for value investors to pick over the carcass. Those investors looking for a tough project should certainly take a close look at the sector. There is a lot of doom and gloom in the share prices of these companies and if things turn out not to be as bad as expected there is huge upside available to those that are willing to put the work in. Buying shares in challenger banks is one of the most contrarian moves an investor can make in the market at the moment.
If things turn out to be anything less than a disaster, a strong recovery is very much on the cards for these stocks. KPMG is out with a forecast that house prices could fall 5% nationwide and slightly more in London post-brexit. If this is the case challenger banks will be able to handle this without difficulty. Especially in the case of those with disciplined underwriting. Typically loans are subject to a maximum of 80% loan to value and the loan book as a whole is lower than that (particularly in the slightly more mature players). Across the sector banks are also vastly better capitalised than they were before the crisis and you can see in the graphs later on that most have a comfortable surplus over their regulatory capital requirements.
That is not to say that no fall is warranted. A post Brexit recession would see an increase in non-performing loans and reduce profitability. However if you are trading at a PE of 6 or 7 then there is clearly an expectation that profits will go lower baked into the share price. The prize for investors here is figuring out the sweet spot between who is the cheapest and who is the best able to weather the storm. A substantial bonus price comes from predicting the magnitude of the unpredictable storm.
As these stocks have fallen a number have become high yielding shares. However, I certainly…
