“There is room for everybody at the moment,” she said. “We are seeing a change of momentum in the sector, but it is very clear that where the customer is being underserved is in SMEs in particular, which is where most of the challengers are focused.
“Also, in the financial crisis, the old established banks needed to be quite aggressive in their approach to lending to companies. Those companies have not forgotten that, and a lot of them feel more comfortable dealing with the new challengers.”
Brittain’s conviction is illustrated in her weighting to the sector, which included buying positions in Shawbrook and Aldermore when the firms floated in April and May respectively.
Another potential drivers for the challengers is increased mortgage lending, forecasted by EY to grow from £1.1tn to £1.3tn by 2019.
However, it is the mortgage side where Mark Boucher, manager of the Smith & Williamson Enterprise Fund, believes problems could arise.
Ironic twist
“There is some potential in SME loans and that is what all the challenger banks have said, but a lot of their growth has come from buy-to-let mortgages and I do not think that the challengers have been quite as active in the SME market as they like to tell people,” he explained.
“The challenger banks tend to be more active in the buy-to-let market, as it was an area that is quite profitable and easy for them to expand into, but the government are looking to make doing buy-to-let mortgages more difficult.”
Furthermore, while the financial crisis effectively afforded the challengers their way in, with the ‘legacy’ firms now running improved businesses there could be an ironic twist.
Brian Cullen, manager of S.W. Mitchell Capital’s UK Fund, said: “Challengers can be quite small, and if we see issues in the financial sector again then those banks with smaller balance sheets are much more at risk than the big banks that have come through all that before.”
So with all that in mind, how do managers view the sector based on current valuations?
