Aldermore was set up following the financial crisis to service SMEs in the UK. CEO Phillip Monks tells Stefanie Linhardt why this ‘challenger’ bank is so positive about life post-Brexit.

Phillip Monks embedded

As they are to the UK economy, small and medium-sized enterprises (SMEs) are the backbone to Aldermore. The UK ‘challenger’ bank focuses on serving the country’s growth engine with targeted products supporting SME finance and banking for their owners.

This focus means Aldermore’s fortunes could be seen as a barometer of trends for the UK economy – and despite the UK’s vote to leave the EU, the bank’s recent results have been strong.

In the first six months of 2016, arguably only including seven days during which the Brexit result was known after the June 23 vote, Aldermore reported a 50% increase in year-on-year pre-tax profits to £59m ($72.2m). Loan origination was up by 26% to £1.5bn, year on year, and net loans grew by 11% since year-end 2015 to £6.8bn.

Future looks good

But Aldermore chief executive Phillip Monks is also confident going forward. “It is still quite early, but we haven’t seen any drop-off in applications or proposals from our intermediary partners in either our business finance or any of our mortgage businesses [since the referendum],” he says. “It is still very much business as usual as far as we are concerned. I sit here feeling quite optimistic.”

The UK economy has so far performed better than most economists expected in a ‘Brexit scenario’, as the 0.4% month-on-month growth in the index of services in July reported by the UK’s Office for National Statistics (ONS) showed.

Post-Brexit gross domestic product (GDP) growth figures were still awaited when The Banker went to press but ONS chief economist Joe Grice expects the preliminary estimate of third-quarter GDP, published at the end of October to “add significantly to the evidence” that the referendum result “appears, so far, not to have had a major effect on the UK economy”.

Clearly, sterling has dropped – to levels not seen since 2011 – and moved closer to parity with the euro. While economists are widely not expecting a recession in the UK, an HM Treasury comparison of independent forecasts anticipates growth to slow to 0.7% in 2017.

Brexit buffer

Still, Mr Monks believes the UK-only nature of the bank’s operations will ensure it is less affected by the upcoming Brexit negotiations. He also expects SME clients to be able to capitalise from the weak pound, which should make them confident in their ability to grow.

“While a large number of SMEs are domestically oriented, the fact that the pound is a lot weaker than it was pre-Brexit means export markets are profiting and, through the value chain, so are a lot of our SMEs,” he says.

Mr Monks adds that while large banks might seek to constrain their lending to conserve margins, specialist lenders are deploying expertise and, in the case of Aldermore, in a legacy-free, modern environment. He says after the financial crisis it became apparent that there was a need for a more diversified banking sector in the UK to serve the country’s SME community, which is why he founded the bank in 2009.

“What the government and the regulators now realise is that we need to have a greater competitive environment, and this means that there needs to be a greater balance in the capital treatments of the smaller banks and the bigger banks,” he says. “This will be the key issue in creating this diversified banking sector.”

Strong start

Although Aldermore was one of the first challenger banks in the UK, it has since grown its specialised operations in SME financing as well as residential, commercial and buy-to-let mortgages. It listed on the London Stock Exchange in March 2015.

The bank has a low underlying cost-to-income ratio of 45%, relying on brokers to sell their products rather than paying for a branch network. But Mr Monks plans to cut the cost-to-income ratio even further, to below 40%. He also aims to maintain shareholder returns in the high teens – reported return on equity in the first half of 2016 was 16.3%.

To reduce costs further, he is expanding the bank by broadening its offering within its existing business lines, and is considering diversifying the sales process to include direct distribution through its online portals in the medium to long term.

The bank has not ruled out inorganic growth. “We definitely don’t need [to grow through acquisitions] to achieve our plans but if the opportunity arises, we wouldn't be dogmatic about it – so long it is accretive to shareholder returns, that is a good reason,” says Mr Monks. “In a post-Brexit environment, there will be opportunities.”


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