Panmure initiates coverage of challenger banks

Panmure Gordon initiated coverage on several challenger banks on Thursday, highlighting a preference for specialist lenders as they have avoided direct competition with large UK banks and offer high growth and returns at attractive valuations.

The brokerage started Aldermore, OneSavings, Shawbrook and Virgin Money at ‘buy’ with price targets of 285p, 390p, 355p and 400p, respectively.

It initiated coverage of CYBG and Metro Bank at ‘sell’ with 245p and 2,700p price targets, respectively

Shawbrook is the brokerage’s top pick as it is the most specialised of the lenders and already operates as a major player in more niche markets, including structured & asset finance and consumer lending focused on home improvement loans.

“The bank focuses on lending to SMEs through a bespoke offering and has bucked the trend towards using intermediaries. Instead, around 75% of lending in Asset Finance is originated directly, enabling it to leverage on early investment and monitor underwriting closely.”

It likes Aldermore for its relatively low risk diverse mix of mortgage and SME lending which serves a significant, structural market need and is supported by a scalable operating platform driven by a strong intermediary distribution channels.

The brokerage said the stock offers good value relative to the sector and its peers.

As far as OneSavings is concerned, Panmure said it reckons that despite buy-to-let market concerns, changing demographics and a focus on professional landlords will lead to continued strong loan growth. It added that the stock is undervalued.

Panmure argued that Virgin Money is more of a true challenger bank given its Northern Rock origin with its business model mirroring the high street banks.

“However, already generating double digit returns and a focus on higher margin credit cards, we believe that the market undervalues its return potential due to concerns about higher RWAs but we mitigate this by assuming low dividends and high capital buffers.”

Panmure said it is not keen on CYBG as it reminds it of the low growth and returns and continual restructuring costs recently seen at large UK banks, or Metro Bank for its exorbitant 2017E P/TBV of 3.9 for no profits.

At 1022 GMT, Shawbrook shares were up 2.3% to 265.97p, Aldermore was up 0.9% to 230.20p, OneSavings was up 2.6% at 377p, Virgin Money was off 1.5% to 342.90p, CYBG was off 1.6% to 281.70p and Metro Bank was 0.6% lower at 3,646.70p.