Aldermore, Shawbrook boosted by BofA ML upgrade

Challenger banks Aldermore and Shawbrook got a boost on Thursday as Bank of America Merrill Lynch lifted its recommendations on the stocks to ‘buy’ from ‘neutral’.

BofA said the introduction of the Bank of England’s term funding scheme (TFS) along with a reduction in the UK macroeconomic downside risk has significantly reduced the tail-risk in the specialist lenders.

“Some fiscal stimulus has been promised by the new UK government. We think some changes to stamp duty could be one logical shift in policy, which would help the property market and increase mortgage lending. The challengers would benefit most, we think.”

BofA Merrill Lynch said the UK’s vote to leave the European Union has caused a big drop in Aldermore’s share price, along with expectations of a recession and lower interest rates.

However, it pointed out that Aldermore has reacted by reducing underwriting risk.

“Its liability mix means it is a beneficiary of lower rates. While risks remain, we think the BoE's TFS reduces tail-risk giving us more confidence in Aldermore's business model.”

As far as Shawbrook is concerned, it said a combination of origination growth, cost control and quality underwriting has allowed management to target a return on equity of more than 22%.

“While Brexit looks to have hurt, the immediate outlook the BoE TFS reduces tail risk and Shawbrook’s liability structure means that it is able better protect net interest margin than most.”

At 0950 BST, Shawbrook shares were up 8.5% to 221.58p and Aldermore shares were up 4.9% to 154.18p.