24 March 2016

Financial Times: Fund houses favour the challenger banks

Challenger banks are becoming increasingly popular with fund houses, who are increasing their exposure to listed upstarts including Metro, Shawbrook, Aldermore and Virgin Money as the traditional banking model comes under pressure.

Investor bullishness about challenger banks is set against a backdrop of problems for the incumbents as negative interest rates and regulatory complexities have seen the FTSE banks sector drop 20 per cent over the past year.

Asset managers argue that there is now divergence in the sector, and that nimble new challengers will be able to profit from traditional banks shying away from lending.

Fidelity Investments, Pictet, BlackRock, and Kames Capital confirm they have increased their positions in so-called challenger bank stocks in recent months. Other fund houses, such as JPMorgan Asset Management and Liontrust, have held large positions in challenger banks since 2014.

“The challenger banks are interested in bespoke lending where the bigger banks have pulled out,” said Alice Cooper, UK equities investment manager at Kames Capital.

Retail point-of-finance loans, bridging loans, asset financing for small UK businesses and invoice financing are all areas that challenger banks have made their own, said Ms Cooper.

Georgina Brittain, UK equity fund manager at JPMorgan Asset Management said the challengers have “competitive advantages” over traditional banks in lending to buy-to-let landlords and small to medium-sized businesses.

“Investors should be looking at challenger banks differently to traditional banks,” said Jamie Clark, a fund manager at Liontrust. “Legacy impediments from the credit crunch like the regulatory imperative to rebuild capital buffers are impacting traditional banks, and they also have creaking IT systems and costly branch networks,” he said. “But the challenger banks have been able to pick and choose the most profitable niches to target, they are also focused on digital rather than physical branches and they can get things done very quickly.”

Mr Clark also said that public attitudes were in the challenger banks’ favour. “You’ve got regulatory and political animus which inform attitudes across the whole of society and they have to make amends for their perceived role.”

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