The Sunday Times Aimee Donnellan Published: 6 September 2015
As the new players start to eat into big lenders’ markets, a wave of mergers could create a threat to the status quo
Virgin Money chief Jayne-Anne Gadhia (Ian Rutherford)
CHRIS DAVIES had just finished his morn- ing coffee when two men knocked on his office door. The 67-year-old finance director of the Great British Card Company, a greetings card retailer with sales of £15m, sighed as he ushered them in. It was the sixth time in 12 months bankers had visited his office on a quiet industrial estate in Gloucester.
The duo from Secure Trust — a so-called challenger bank — were there for one reason only: to poach Davies’s business from Lloyds.
Usually he politely dismissed such pitches, but within the first few minutes of what became an all-day meeting he began to listen. “They knew the right questions to ask,” said Davies, who began his career as a banker.
After the financial crisis, Lloyds had cut the card company’s overdraft facility and replaced it with an invoice financing system. “That change was very restrictive and caused problems when we expanded. We were looking for an alternative,” said Davies.
The Secure Trust bankers knew exactly what to offer. To get Davies to sever a funding relationship with Lloyds that began in the 1990s, they had to make it worthwhile. Just before they left, they promised to increase the company’s lending limit by £500,000.
“That made all the difference,” said Davies. “Lloyds wasn’t as flexible when it came to funding, though we did keep them on for clearing.”
Davies is one of many customers turning from the established banks to a gaggle of upstart lenders. Little-known banks such as Aldermore, Shawbrook and Secure Trust are quietly building their empires, lending more to small companies and boosting profits. They have rewarded their investors well: Aldermore’s share price has risen nearly 14% in the past month.
So far, they are niche players. But analysts predict that a wave of mergers will create a sizeable challenger to the established order of HSBC, Barclays, Royal Bank of Scotland and Lloyds. The big four cater for 75% of current accounts and 85% of small business accounts.
The challengers were born from the ashes of the financial crisis. George Osborne pushed for alternatives to the scandal-hit banks that brought the economy to its knees.
At the top of the challenger food chain are banks that have ties to bigger lenders. TSB Bank — a Lloyds Banking Group spin-off, created at the behest of the European Commission — and Santander UK, Britain’s fifth-largest bank, fall into this camp, along with Clydesdale and Virgin Money. Bosses of these businesses say their size and market reach make them the most credible threats to the bigger players.
“Real competition is the only thing that is going to change the culture of the larger banks,” said Paul Pester, chief executive of TSB. “When bank bosses start to see customers leaving, which eats into their profits and bonuses, only then will you see change.”
Jayne-Anne Gadhia, chief executive of Virgin Money, objects to the term “niche” player. “We are challenging on mortgages, re–tail and credit card accounts. Last year we made up 3.8% of the mortgage market,” she said.
Aldermore is now one of the top two lenders to small businesses via the Bank of England’s Funding for Lending Scheme — a sobering fact for larger banks that pride themselves on servicing the backbone of the economy. British banks have drawn a total of £61.4bn through the scheme since it began in 2012.
“It’s not really about how big these banks are, it’s about how profitable they are,” said Dan Thomas, head of UK banking at KPMG. “The larger banks are still a target for the regulator and struggle with old, complex IT systems. The new and smaller niche challengers don’t have these kinds of problems.”
Vernon Hill, the founder of Metro Bank
Aldermore’s simple business model helped its profits more than double to £44m in the first half of the year. Shawbrook’s profits reached £34.8m.
There is little doubt that with so many banks already operating and more to come, the big four will be forced to react.
“The bigger banks have scale but there is a lot of inertia,” said David Duffy, chief executive of Clydesdale.
“Those lenders don’t have to do a lot to stay at the top. Challengers, on the other hand, have to be almost obsessional about focusing their business towards the customer so they can keep growing.”
The second tier includes OneSavings Bank, Aldermore, Shawbrook, Secure Trust and Handelsbanken.
Metro Bank, brainchild of American tycoon Vernon Hill, is also in this group. It provides dog-friendly branches open seven days a week in southeast England.
Then there are the retail challengers such as Asda Money, Tesco Bank, M&S Bank and Sainsbury’s Bank.
“We all tend to be lumped into the challenger category but in reality we are all very different,” said Stephen Johnson, deputy chief executive of Shawbrook, founded in 2011.
Johnson said customers are ditching bigger lenders in favour of a “human touch” that Shawbrook readily provides.
The numbers suggest challengers are strengthening their balance sheets and embarking on a lending spree, while traditional banks are shrinking their operations. According to research last year by KPMG, lending assets from challengers grew 16%, compared with a fall of 2.1% for the top five (including Santander).
But the small banks face challenges too. With limited deposits, they suffer bigger funding costs and have to swallow high set-up fees for current accounts. “The challengers have to find a way of competing in the retail space. Very few of us can compete in this way,” said TSB’s Pester.
Some say the only way the challengers will truly break the stranglehold of the bigger banks is to join together.
There are rumours that Banco Sabadell, which recently bought TSB, is also looking at Clydesdale, the Co-operative Bank and Williams & Glyn (being carved out of RBS).
“Consolidation is one way to create stronger challengers. With Sabadell behind us we have a lot more firepower,” said Pester. “Having a smaller num- ber of more powerful challengers will make a difference.”
But there are fears their wings are being clipped. In July, challengers were hit with an 8% tax on bank profits.
They are not taking this lying down. On Friday, 10 chief executives will have a showdown with a senior Treasury official. Their message? Curb us at your peril.