Aldermore buy-to-let fears overdone

Last year, while Aldermore's net buy-to-let loans rose 18 per cent to £2.4bn, new buy-to-let loans were actually down 7 per cent to £673m. Fast loan growth in other parts of the business meant overall net loan growth was a more impressive 28 per cent, taking the loan book to £6.1bn. Net commercial mortgage loans grew by 50 per cent to £829m and the residential mortgage loan book increased by 42 per cent to £1.4bn. Meanwhile, asset finance, where the bank lends to businesses to finance critical assets such as machinery and vehicles, grew by 29 per cent to £1.3bn. All this helped to push the group's net interest income up 42 per cent to just under £200m and, even more impressively, drive pre-tax profits up 88 per cent.

There's little reason to suspect a substantial slowdown in growth either, despite recent buy-to-let changes. For one thing, Aldermore's loan book is becoming more diversified. Buy-to-let mortgages made up 39 per cent of loans at the end of 2015, down from 43 per cent a year earlier as other lending activity grew at a much faster rate. Of the £2.6bn of new loans made last year, buy-to-let accounted for around a quarter. The asset finance division made new loans of £893m or 34 per cent of the group total, with residential mortgages and commercial mortgages to small and medium-sized enterprises (SMEs) accounting for the remaining 22 per cent and 16 per cent, respectively.

It's important to note that around 70 per cent of Aldermore's buy-to-let loans are remortgages, which are not affected by the stamp duty change. Part of Aldermore's diversification away from buy-to-let has been increasing its lending in the help-to-buy area, which is higher-margin work. As a result, the net interest margin in residential mortgages increased by one percentage point to 3.7 per cent.

Like many of the challenger banks, Aldermore is free of the legacy issues that are still plaguing mainstream lenders, such as huge provisions for mis-selling of payment protection insurance. The cost-to-income ratio was 51 per cent last year, having steadily reduced from 90 per cent in 2012. The group is well on its way to achieving its target of a ratio of less than 40 per cent by the end of 2017.

Return on equity (RoE) also rose to 19.7 per cent last year, from 13.5 per cent in the previous year. However, as a result of the introduction of the UK bank tax surcharge, management expects the group's return on equity to be in the high teens in future. This is less than what analysts are forecasting for some rivals. Investec, for example, thinks Shawbrook (SHAW) and OneSavings Bank (OSB) can achieve RoE of 20.1 per cent and 29 per cent, respectively, this year compared with 18.5 per cent for Aldermore. Nevertheless, Aldermore's forecast RoE looks very impressive and well ahead of the forecasts for other banks, including fellow challenger Virgin Money (VM.), which Investec predicts will return 11.1 per cent this year.