Shawbrook tapping into SME credit gap

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.

Shawbrook has a diversified income stream, lending to small- and medium-sized enterprises (SMEs), buy-to-let landlords and consumers via its five divisions. The group grew across all these divisions in 2015, increasing its loan book by 44 per cent to £3.36bn. The group's commercial mortgages and asset finance businesses were the standout performers. Increased cyclical demand for finance from SMEs led to an increase in net operating income for asset finance of almost 30 per cent to £50m.

The group has also made big inroads into the commercial mortgage market. The loan book for its commercial mortgages business grew an impressive 65 per cent to £1.6bn last year. The business caters primarily to buy-to-let landlords, as well as SME owner-occupiers. Around 66 per cent of the business's £627m in new loans last year were to buy-to-let landlords. And while the group's share price weakened after the government's budgetary announcement of a 3 per cent increase in stamp duty attached to buy-to-let purchases Shawbrook has less to be worried about than many of its rivals. Not only do buy-to-let loans make up only a quarter of the group's loan book - compared with higher proportions of 43 per cent and 47 per cent at Aldermore (ALD) and One Savings Bank (OSB) respectively - but many of Shawbrook's buy-to-let clients operate via limited companies, which are exempt from the tax rise.

Importantly, Shawbrook has a strong capital base from which to grow. After raising £82m in net capital via its IPO, the group's common equity tier-one ratio improved to 14.4 per cent at the end of 2015 from 11.6 per cent a year earlier. This makes the group better capitalised than Aldermore and One Savings Bank. In addition, the group's 2015 return on tangible equity was 27.9 per cent. With these factors in mind, management expects to start paying a dividend on the back of 2016's financial results, as capital generation continues to grow.