Challenger banks are bouncing back after months of share price weakness, with the markets rewarding smaller listed lenders for posting double-digit increases in profits, lending and customer numbers.
The regulators have handed out licences to 15 new banks since 2013, and City A.M. understands around 10 more are seeking a licence this year. Recent years have seen a flurry of initial public offerings (IPOs), with Metro Bank being the latest lender to float.
And City analysts say the latest round of annual results – which saw Aldermore and Shawbrook report 88 and 63 per cent jumps in pretax profits, respectively – prove Britain’s newest banks are here to stay.
“The results have universally confirmed that challenger banks can continue to grow extremely rapidly almost regardless of what is going on in the wider market simply because individually they represent such small proportions of the market,” Investec’s Ian Gordon told City A.M. “They have so much room to grow.”
Investors agree. Shares in OneSavings Bank, which focuses on residential and buy-to-let mortgages and SME lending, surged by nearly 20 per cent yesterday after the bank posted a 52 per cent increase in annual pretax profits.
The listed challengers have struggled to regain the significant losses they suffered last summer when chancellor George Osborne revealed they would be ensnared by a new eight per cent surcharge on banks’ corporation tax. Share prices took more hits when Osborne unveiled plans for tightening of the buy-to-let market. But City experts now say the uptick in share prices is likely to continue thanks to low interest rates and favourable regulatory changes.
“As we look forward, with a benign interest rate environment, we see scope for the challengers to continue to bounce back,” Kames Capital’s Alice Cooper said, adding, “We see potential for a more level playing field on capital requirements.”
“There are a variety of dynamics happening in the marketplace today that will benefit new entrants,” Jefferies’s Joseph Dickerson told City A.M. “The policymakers want this group of banks to succeed and give consumers more choice.”
“The point is not to have any one of these banks to command 25 per cent market share in any given product,” Dickerson added. “The point is that consumers are going to have more choice.”
Yet more choice may not lead to more lenders. OneSavings chief exec Andy Golding told City A.M. consolidation could come as soon as this year: “Whenever you get a mushroom – and I think we have had that in new banks, new lenders, new people applying for banking licences – you have definitely had an expansion, and at some point you will have a contraction. We could see some strategic mergers in the banking sector, creating scale and genuinely taking the fight to the bigger guys.”