One Savings Bank PLC, Paragon Banking Group PLC and Virgin Money UK PLC are buys as majors struggle, broker says
Specialty lenders are very profitable despite having to hold punitive levels of capital
Specialized challenger banks offer an increasingly attractive alternative to high-profile lenders for investors, with the potential for healthy payments over the next 24 months, according to broker Liberum.
The broker claims that even in a stress test that assumes a 14% drop in GDP and a UK unemployment rate hitting 8% in 2020, all of the challenger banks remain well capitalized.
Key markets for specialty lenders are showing a strong recovery amid pent-up demand for credit, Liberum adds.
The housing market is further helped by the stamp duty holiday until March 2021; COVID-19 is expected to see the SME cash deficit increase to £ 40-70 billion as bank volumes are boosted by government guarantee programs.
Specialty lenders remain highly profitable despite having to hold punitive levels of capital, he said, especially for mortgages versus big UK banks.
Liberum also believes that long-term trends in buy-to-let (BTL) and Asset Finance are not fully understood by the market.
“As the big UK banks focus on cost cutting and traditional price sensitive lending, specialist lenders are filling the void in lending markets that require greater sophistication and tailor-made service.
“In addition, with regulations increasingly requiring a more ‘high touch’ underwriting approach, specialist banks have benefited, as are now leaders in areas such as professional BTL and asset finance. .
In particular, Liberum has buy odds on One Savings Bank PLC (LON: OSB) with a target price of 535p, Paragon Banking Group PLC (LON: PAG) with a target of 535p and Virgin Money UK PLC (LON: VMUK ) with a target 165p.
Close Brothers (LON: CBG) is a holding company and Metro Bank PLC (LON: MTRO), where the target price is 94p, one sale.