After the much-hyped IPOs of a few years past, the challenger banks are coming back to earth. Shares have been up, down, and all around but only OneSavingsBank has shown consistent share price growth since listing. Despite substantial earnings growth, Shawbrook’s share price is flat on the IPO price. Are investors overlooking Shawbrook?
Commentators have suggested that competition is on the rise: growth will slow and gross yields will fall, deposits will become more expensive and harder to retain. Profit will be squeezed at both ends. Today’s Q1 results show no sign of such pressure.
Underlying PBT grew 29% on the same quarter last year to £22m on a 8% rise in originations and 6% growth in net loans and advances. Management reports the continued substitution of higher cost deposits for newer lower cost funding.
Management seem cautious. Stamp Duty changes for BTL properties meant a sharp rise in Commercial Property lending in the period that won’t repeat going forward. A “range of political, economic and interest rate uncertainties” are also mentioned. Despite this, growth appears to be well balanced across the business.
If we compare Shawbrook with Aldermore or OneSavingsBank, this diversity is a major plus point. BTL lending will slowdown but Shawbrook has a great asset finance business (acquired out of Singers) and a growing consumer lending operation. Gross yields in both areas should hold up even if the mortgage business slows down.
With Shawbrook now trading around 10x PBT, there is a reasonable upside scenario here. Even if we assume an indefinitely slowed commercial mortgage business, there are other areas for growth. With the cost of funding continuing to fall, profit growth seems unlikely to slow as significantly as the current valuation seems to imply.
Perhaps the main risk comes from expected funding changes. Compared to peers, Shawbrook has had a longer tail of higher-cost funds. Ironically, this has been a positive for the share price. Shawbrook’s cost of funds has taken longer to fall whilst peers have benefited from a windfall gain that is harder to comp. Either way, the question is how much further can the cost of funds fall? Probably not very much.
If we consider the position of challenger banks more broadly, funding has been the engine driving their growth. The big banks have branch networks, they can pay almost nothing on instant access deposits and retain that money. Competition at this rarefied level is almost non-existent. This created an…
