Challenger banks in numbers

From the flood of market entrants to the amount of money they’re lending, we look at the UK’s challenger banks and some of the key numbers behind their rise

The number of new banks that have started up in the UK in the past three years. Some are foreign banks entering the UK, but others include local start-ups like Atom, Paragon and OakNorth banks. These new entrants are generally known as ‘challenger banks’, a term which also covers far older institutions, such as Yorkshire Bank and TSB. In fact, the only characteristic they all share is that they aren’t one of the big four of Barclays, Lloyds Banking Group, HSBC and RBS.

This trend began when Metro Bank received its banking licence in March 2010 and became the UK’s first new high street bank in more than 100 years. A raft of others have launched since then, helped by a revised licensing process that carries less risk for would-be bankers. 

The diluted earnings per share (EPS) reported by Secure Trust Bank last year. Four other challenger banks – Aldermore, Virgin Money, Shawbrook and OneSavings Bank – reported a diluted EPS of between 22.6 and 34p.

All these banks have outperformed the banking sector as a whole over the past year. One of their larger rivals, Lloyds Banking Group, reported a diluted EPS of just 0.8p last year, while RBS and Barclays both saw negative results.

The percentage of all new UK bank account openings that TSB says it attracted in the first quarter of this year. “We’ve now seen nine consecutive quarters in which we’ve beaten our 6% target,” says Ian Firth, the bank’s treasurer.

How much market share challenger banks can capture remains open to question, but TSB is one of a number of challengers that are making reasonable headway. Gervais Williams, Managing Director of investment firm Miton Group, said: “Many of the challenger banks are smaller and more agile because they don’t have the legacy issues, so they’re able to take market share.”

The amount that Shawbrook has lent since it was founded in 2011. The bank, which focuses on property lending and loans for small and medium-sized enterprises (SMEs), has also raised more than £3.2bn in deposits.

Although Shawbrook is one of a band of fast-emerging challenger banks, these banks vary enormously in almost every aspect. TSB and CYBG (the parent company of Clydesdale and Yorkshire banks) are unusual in running large branch networks. Most challenger banks opt for lower-cost platforms, like websites and mobile phone apps.

The increase in loans, to £4.1bn, that Metro Bank reported for the first quarter of 2016. The bank also reported a 75% year-on-year growth in deposits to £5.9bn – indicating that its strategy of targeting the mass consumer market is paying off.

Another challenger that’s very customer-focused is Atom Bank, although it provides its services through a mobile phone app rather than high-street branches.

Even banks focused on SME lending still often rely on consumer deposits to support their lending activity.

The year of the financial crash that dented consumer confidence in big banks, while making it harder for customers to trust banks they haven’t heard of.

Something that’s helping challenger banks to overcome that mistrust is the UK’s deposit guarantee scheme, which insures deposits up to £75,000. Online comparison sites have also helped. “The evidence we see is if you can remain in the top quartile of the various price comparison websites then you will attract deposits,” says Chris Jolly, Chairman of Civilised Bank, which is hoping to launch its services aimed at SMEs later this year.

If challengers continue to enjoy success, the clearing banks may alter their own methods to mimic them, or they may choose to acquire some of them. The current crop of challengers may also find themselves under pressure from fresh waves of new banks. 

Whatever the future holds, the UK banking industry looks set to present investors with some interesting opportunities in the months and years ahead.

The original version of this article was published in the July 2016 print edition of The Review.
Published: 22 Jul 2016
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