Small U.K. Banks See Brexit Growth Potential as Rivals Retrench

London to Remain Financial Heart of Europe, Says Boleat
  • Metro Bank and Shawbrook expect little stress after Brexit
  • Stocks of all Britain-focused banks have suffered since vote

The U.K. challenger banks trying to chip away at the nation’s biggest lenders say last month’s vote to leave the European Union has a silver lining.

Major banks already grappling with how to boost profitability may be forced to make deeper cuts and pull back from some lending as Brexit introduces new costs and the potential for a U.K. recession. The upstart rivals expressed optimism that loan demand will remain strong, giving them a chance to step into the gap and gain new customers.

“That’s where our opportunities come from,” Steve Pateman, chief executive officer of Shawbrook Group Plc, said in an interview, adding that big banks retrenching in the wake of Brexit was “great news for us.”

Lloyds Banking Group Plc said Thursday it will cut a further 3,000 jobs and 200 more branches -- on top of earlier plans to slash 9,000 positions and 200 branches -- as it seeks to head off a Brexit-driven earnings slump. Executives at Shawbrook, Secure Trust Bank Plc, Virgin Money Holdings Group Plc, and Metro Bank Plc all said in the past week that they see growth opportunities as big banks retrench.

Investors haven’t been as bullish, with the stocks of all U.K.-focused lenders down since the vote, led by Shawbrook’s 39 percent decline. Economists forecast a mild recession for Britain starting this quarter.

Business ‘Battleground’

Bank of England Governor Mark Carney is expected to move to prop up Britain’s economy by reducing interest rates after the U.K. narrowly voted to leave the European Union in a referendum a month ago. A deeper cut would further crimp margins for the nation’s lenders, already squeezed by base loan rates that have been on hold for almost a decade.

Without the burden of legal costs from the last crisis, most of the challenger banks enter this period with higher returns on equity. That may allow them to stomach more risk and pursue growth in areas the larger firms vacate.

Secure Trust CEO Paul Lynam said big banks would pull back from riskier small business lending in particular, with his firm able to “cherry pick” the lending assets it wants. The banks said they hadn’t seen any changes in customer behavior or impact on lending appetite since the June 23 vote.

“One of the battlegrounds has been small business lending,” said Joseph Dickerson, an analyst at Jefferies International Ltd. in London. “It’s an area that has been underserved by the large incumbents, and there are attractive margins. There’s a lot of scope for the challenger banks to take market share.”

Untested Books

Still, those small business loans may be among the first to turn if the uncertainty over trade and asset values pushes the U.K. economy into a recession. Investors expressed concern about challenger banks before the vote as many have yet to go through an economic downturn as public companies.

“The problem is these banks are untested, and I think that is generally what the market is concerned about," said Jonathan Goslin, an analyst at Numis Securities in London. “At some point the big banks will come back into the market and become more competitive. Maybe Brexit means a delay to that but I wouldn’t take it a step further and say it creates more opportunities. I would be cautious about that."

For more on investors’ concerns about the challenger banks, click here.

The challengers are showing some caution. Shawbrook said it’s “too soon to fully assess the medium-term impacts,” with CYBG Plc, the lender taken public by National Australia Bank earlier this year, echoing that sentiment. Virgin Money CEO Jayne-Anne Gadhia said her bank postponed plans to start lending to small-and medium-sized businesses in the wake of the vote, resulting in the departure of a key executive she hired in October to lead the push.

‘No Effect’

Still, the lenders are striking a more optimistic tone than some larger rivals. Royal Bank of Scotland Group Plc Chairman Howard Davies said in advance of the vote his firm had already seen weakening demand for loans. Lloyds CEO Antonio Horta-Osorio said his bank had seen a ”deceleration” of mortgage applications in recent weeks.

The challengers unanimously said they’d seen minimal impact.

“We’re seeing no effect on our credit book, or our flow of new business or our growth numbers,” Metro Bank Chairman Vernon Hill said in an interview with Caroline Hyde and Anna Edwards on Bloomberg Television on Tuesday. While reporting a 4.1 million-pound ($5.4 million) loss for the first half of the year, the bank more than doubled lending to 4.6 billion pounds from 2.2 billion pounds a year earlier.

“I don’t see any change in the core growth numbers in Britain,” he said. Unlike the U.S., there are “not very many banks in Britain. There is lots of room for lots of change and lots of growth.”

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