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Charter Court offers high growth potential

The alternative lender trades at a discount to its closest peer, while offering an impressive return on equity
June 14, 2018

Alternative lender Charter Court Financial Services (CCFS) has only been listed as a public company for eight months, but it has already suitably impressed investors. It bears all the impressive hallmarks of a UK challenger bank – a return on equity in the high-20s in percentage terms, a fast-falling cost:income ratio nearing 30 per cent and solid growth of the loan book, which was up two-fifths last year to £5.4bn. Unlike some of its peers, its net interest margin also widened last year and is forecast to continue to do so over 2018 and 2019. However, despite the shares rising almost 40 per cent on their admission price, they still trade at a discount to those of the group’s closest peer.

IC TIP: Buy at 317.5p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

Rapid loan book growth

High return on equity

Diversifying funding

Declining cost:income ratio

Bear points

Slim dividend yield

Second-charge loan competition

Charter Court has been benefiting from rising demand for buy-to-let and specialist residential mortgages, which make up the largest proportion of its loan book. Concentrating on professional landlords – exempt from the 2016 abolition of stamp duty relief on buy-to-let mortgages – means it has maintained impressive growth in new lending. Last year the value of its buy-to-let loan book rose by almost half to £3.2bn despite a 10.4 per cent decline in the number of buy-to-let mortgages for the industry as a whole.

The specialist residential mortgage book has also been growing at a fast pace too. Last year it wrote £0.8bn in new loans, boosting the specialist residential loan book by more than a third to £1.7bn. Management has been capitalising on its expertise of underwriting loans to non-prime customers. Last year, the lender launched specialist right-to-buy, help-to-buy and new-build products aimed at customers with minor credit issues who fail current mainstream lenders' criteria.

The group also has small exposures to second-charge loans – provided to prime residential and buy-to-let customers against a property that is already charged to another lender – and bridging finance, which are provided on a six- to 12-month basis and are secured against residential or buy-to-let property on a first or second-charge basis. The latter segment grew its loan book 6 per cent last year to £219m, representing 4 per cent of group loans. The second-charge loan book increased 13 per cent to £171m during the same period. However, in an increasingly competitive second-charge market, management has prioritised credit quality over volume growth. That meant new second-charge loans slowed to £60m in 2017, from £95m.

While Charter Court has been expanding its lending at an impressive pace, it has not done so at the expense of its net interest margin or its risk profile. All lending is secured, while just £7.5m of its £5.4bn total lending has a loan-to-value (LTV) ratio above 90 per cent. Just over half of its loan book has an LTV ratio of between 70 and 80 per cent. Provisions for loan impairments were also just £0.5m last year.

Diversifying funding sources has also benefited the lender’s net interest margin, which expanded to 3.19 per cent in 2017, from 3.08 per cent in the prior year. Its retail deposits rose more than a quarter to £4.4bn, while it also launched a range of individual savings account (Isa) products. Two securitisation transactions – with a combined value of £597m – were completed, including its first prime residential mortgage-backed security (RMBS) transaction. It completed a further two securitisations, worth £621m, during the first quarter of this year. Broadening funding sources has become more important for alternative lenders following the closure of the Bank of England’s Term Funding Scheme, which gave access to cheaper borrowing. Its cost of funds fell to 1.3 per cent in 2017, from 1.7 per cent.    

CHARTER COURT FINANCIAL SERVICES (CCFS)  
ORD PRICE:317.5pMARKET VALUE:£759m
TOUCH:317.1-317.6p12-MONTH HIGH:337pLOW: 228p
FORWARD DIVIDEND YIELD:2.8%FORWARD PE RATIO:6
NET ASSET VALUE:140pLEVERAGE:19
Year to 31 DecTotal operating income (£m)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
2016934.916.8nil
201715311235.0nil
2018*18915848.76.5
2019*22615848.99.0
% change+20--+38
Normal market size:1,500   
     
Beta:0.48   

*Investec forecasts, adjusted PTP and EPS figures