Shawbrook Set to Take $12 Million Charge on Improper Lending

Updated on
  • Shares drop as much 28% on forecast of $12 million charge
  • Chief Financial Officer Tom Wood resigns, replaced by Minto

Shawbrook Group Plc uncovered improper lending to new small businesses at its offices in Scotland that didn’t meet its risk criteria, which will probably force the lender to take a 9 million-pound ($12 million) charge. 

The shares plunged as much as 28 percent to a record low after the bank disclosed the lending “irregularities” at its business finance division in an unscheduled statement on Tuesday, before recovering to a 8 percent decline at 10:06 a.m. in London. The stock dropped 45 percent over Friday and Monday, following the Brexit referendum.

“We’re getting to the bottom of what happened,” Chief Executive Officer Steve Pateman said by phone. “We spotted the problem and feel confident that the risk assurances and controls we have in place will serve the organization well in future.”

The issues led to the departure of some individuals in the bank’s Scotland office who had lent money to companies they shouldn’t have approved because the firms failed to meet risk criteria set by the bank, the CEO said. The police are not involved at this stage and the Bank of England’s Prudential Regulation Authority and the Financial Conduct Authority have been kept informed throughout the process, he added.

Shawbrook said in its statement the second-quarter charge relates to 14.7 million pounds of “impacted facilities” that will hurt pretax profit for the year. The improper lending was caught by an upgrade to the bank’s risk management systems earlier this year which the bank said it was confident would prevent the recurrence of any irregularities in future. Shawbrook will report first-half results on July 27. 

The charge would be larger than the 6.5 million pounds in bad-loan provisions the bank took for all of last year. Shawbrook reported net income of 58.5 million pounds for 2015.

“Our confidence has been severely damaged by this news,” said Gary Greenwood, an analyst at Shore Capital, who downgraded the stock from buy to hold in a note to clients Tuesday. “A combination of Brexit uncertainty and our disappointment around today’s announcements leaves us with no option but to downgrade our recommendation.”

Other challenger banks Virgin Money Holdings UK Plc, Metro Bank Plc and Aldermore Group Plc rose more than 2 percent.

Tom Wood resigned as chief financial officer and will be replaced on an interim basis by Dylan Minto, director of strategy, the company said Tuesday in a separate statement. His departure is unconnected to the lending irregularities, according to Pateman.

Shawbrook, which went public last year, is one of a number of small challenger banks that have ridden the recovering economy of recent years to help them win market share from the nation’s entrenched players. Shares of those banks have plunged after the U.K. voted to leave the EU on concerns that a drop in housing prices and a slowdown in the economy will put them through their first economic downturn as public companies.

The bank had 3.2 billion pounds of deposits and 74 million pounds of subordinated debt as of the end of 2015. Pollen Street Capital, a private-equity firm that was spun out of Royal Bank of Scotland Plc, owns 44 percent of Shawbrook’s shares, according to data compiled by Bloomberg.