Challenger banks are often not household names, but they have some major benefits over the mainstream lending giants. They are without the millstones of legacy charges for past mis-selling and the hefty UK banking levy. Operating through intermediaries also means specialist challenger banks can avoid the costs of running a branch network that high-street names, such as Barclays (BARC) and Lloyds (LLOY), must shoulder. Shawbrook (SHAW) is reaping the rewards of such a business model and is delivering impressive growth while reducing its cost-to-income ratio far below that of mainstream banks. What's more, the group is expected to pay its maiden dividend next year. And recent market ructions mean we think the shares now offer value.
- High return on equity
- Growing loan book
- Reduced cost-to-income ratio
- Well capitalised
- Buy-to-let exposure
- No dividend currently paid
Shawbrook outperformed the IPO guidance given in April last year for £1.6bn in new loans during 2015, achieving £1.68bn in new business. And as long as small businesses continue to struggle to obtain loans from mainstream lenders, Shawbrook should be able to continue growing its loan book. Increasing the size of its loan book and bumping up its net interest margin by 10 basis points to 6.2 per cent meant last year the group was able to reduce its cost-to-income ratio to 48.3 per cent from 50.5 per cent. Its net interest margin has also benefited from a reduction in the cost of funds.