Shawbrook hikes profits and sets out confident loan targets

Shawbrook Group grew profits 29% in the first quarter and, despite a small squeeze on net interest margins (NIM) from higher property lending in the period, stated its confidence in hitting full year targets.

The challenger bank said its business pipelines remained healthy, even allowing for the current political and economic uncertainty, and management said they were confident of maintaining the return on tangible equity (ROTE) at around 23% for the full year and, as part of new guidance provided on longer-term strategic plans through to 2020, added that they expect this metric will remain in the 22-25% range over the medium term.

Chief executive Steve Pateman also announced the bank's new target is to grow the loan book to around £8.5bn by 2020, compared to £3.6bn at the end of last year, implying a compound annual growth rate of 19% over the next five years.

As for the first quarter, Shawbrook started the year strongly, producing underlying profit before tax of £22.3m in the three months to 31 March, up 29% compared to the same quarter last year.

This was driven by increased loan origination volumes of £475m and continued operational leverage, though the benefit from increased buy-to-let lending ahead of the April's stamp duty increase is expected to moderate over the remainder of the year.

These stronger mortgage flows and the impact of the property acquisition completed in December combined to create a negative mix impact on NIM, which is the measure of a bank's profit margin being the difference between amounts paid on deposits and charged on loans.

The balance sheet was largely stable, with the core tier 1 (CET1) ratio reduced by 1.0 percentage points to 13.4%.

Analyst Gary Greenwood at Shore Capital assumed the CET1 was down primarily due to risk-weighted asset inflation associated with growth in the business.

"Operational risk weightings in particular needs to reflect forward looking growth plans," he added. "Nevertheless, this remains above the group's minimum target requirement of 12% and, combined with the strong return in equity, means that Shawbrook is well positioned to fund its loan growth ambitions, in our view. The leverage ratio of 8.1% remains very strong, in our view."

Greenwood said that while he may need to tweak his income statement model to reflect the lower margin guidance, he expects this to be offset by the benefit of operating leverage, meaning bottom line profit forecasts should be largely unchanged.

Likely due to the lower NIM guidance, shares in Shawbrook were down 2.7% to 284p just before 0930 BST on Thursday.