UK ‘challenger banks’ brace for recession
Print Edition
FACING the prospect of their first UK recession, Britain’s small specialist lenders could struggle to cope with a downturn, especially in the small and medium-sized business sector that is their lifeblood.
The promises of the so-called challenger banks, many just a few years old, to improve customer choice and challenge the dominance of big high street lenders are looking shaky after Britain voted to leave the European Union, some investors and analysts say.
Challenger banks’ ability to take business from lenders HSBC, Lloyds Banking Group, Barclays and Royal Bank of Scotland relies on healthy bank funding markets and a buoyant UK economy with rising demand for loans. But as economists slash UK growth forecasts and borrowers and home buyers run for cover, those three factors could be under threat.
The UK could go into recession in the coming year, according to experts polled by Reuters. Britain last had a recession in 2008-2009, following the financial crisis. “The outlook for the important small-to-medium enterprise sector looks likely to be hardest hit and a credit cycle inevitable. We think it’s logical that banks have sold off so dramatically,” said Matthew Beesley, head of global equities at Henderson Global Investors.
Marcus Stuttard, head of the London Stock Exchange's AIM board, which provides funding for small businesses, told a government committee it was likely “companies will delay making investing decisions and therefore requesting finance” until Britain’s economic future looked more secure.
Financial sector shares fell sharply after the referendum result last Friday. Among challenger banks, shares of Aldermore, OneSavings Bank, Shawbrook and Virgin Money have fallen an average 37 percent. Britain’s four largest banks fell an average of 21 percent in the same period.
The stock price falls of larger rivals, with millions of customers and more dependable revenues from Britain and elsewhere, also offer investors opportunities to buy blue chip stock at rock bottom valuations, detracting from the upstart banks.
“The scale of the share price movements in smaller banks looks alarming, they look like what you associate with liquidity crises or capital shortfalls yet those two concerns are not present,” said Ian Gordon, an analyst at Investec. Analysts say banks now are much better capitalized than they were before the 2008 financial crisis, meaning the focus is more on the implications of a Brexit for the UK economy.
Some smaller lenders acknowledge the challenges arising from Britain leaving the EU, but also put a brave face on their prospects, seeing opportunities at home.
“The challenger banks are almost exclusively UK only and are therefore insulated from the distractions that will inflict those operating cross border,” Secure Trust Bank chief executive Paul Lynam said.
“Some banks may temper their lending appetite whilst they wait for clarity to emerge, but in the long run Brexit presents more opportunity than threats to the smaller banks.”
Xavier VanHove, portfolio manager at THS Partners, said: “After Brexit, a UK recession is guaranteed but a bad loan won’t materialize for around 18 months. For me, challenger banks are no-go areas because I really don’t know how bad things could turn.”
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