Panmure Gordon initiated coverage of UK Challenger banks in its Morning Note on Thursday, beginning with Buy recommendations on banks including Aldermore (LON:ALD), OneSavings Bank (LON:OSB), and Shawbrook (LON:SHAW).
A growing number of Challenger banks have sprung up in the years since the financial crisis, catering to savers need for reliable financial institutions that aim to make banking simple. Several Challenger banks are based wholly online.
In their note to investors, Panmure Gordon favoured Virgin Money as a ‘true challenger’ for its for its 2017E Tangible Return on Equity of 14 percent for Price/Book Value of 1.1. Alongside the Buy ratings on Aldermore, OneSavings and Shawbrook, Panmure gave Sell ratings on CYBG and Metro Bank.
“We particularly like the specialist lenders as they have avoided direct competition with large UK banks and offer high growth and returns at attractive valuations (helped by the fallout from the Brexit vote) of 2017E Price to Earnings and Price to Book Value of 7.5 and 1.6 for Tangible Return on Equity of 23 percent compared to large UK banks on 18.4 and 0.9 for RoTE of 8 percent,” Panmure Gordon analyst Shailesh Raikundlia said.
Raikundlia added that the ‘top pick’ was Shawbrook, being “the most specialised of the lenders”.
The group cited the high growth potential of the Challengers as a key reason for initiating coverage, adding that “the financial crisis left a dearth of growth in the domestic banking sector until the arrival of challenger banks for whom we forecast revenues to grow by 12 percent CAGR first half 2016 to – financial year 2020”.
The added that challenger banks fill a real gap in the market, the specialist lenders are filling the gap in those lending markets which require greater sophistication and bespoke service, and reiterated that they feel Brexit concerns in the area are “overdone”.
Shares in OneSavings Bank rose 2.99 percent in early trading after the Buy rating to 378.30, with Shawbrook up 1.42 percent to 263.70 and Aldermore up 0.34 percent (0932GMT).