The Banker’s Top 1000 ranking shows how UK challenger banks are making better returns than the established players, writes Brian Caplen.

After the financial crisis, the UK government was very keen to have new banks provide competition to the big established banks. But most analysts were sceptical as to how this would work out. The barriers to entry were huge, and with greater regulation and slim margins, banking did not seem an attractive sector for start-ups. 

All the same, from 2010 onwards a fair number of challenger banks have arrived on the scene with the aim of defying those gloomy predictions. The Banker’s Top 1000 World Banks ranking for 2017 shows they are making progress. 

Metro Bank, for example, has risen 187 places to 782 in the Top 1000 ranked according to Tier 1 capital. This is one of the largest rises globally and would have been even larger had sterling had not fallen 20% against the ranking’s base currency, the US dollar. 

Virgin Money, which was established in 1995 and so predates the crisis, is larger still, standing in 462nd place. Meanwhile, there are three other UK challengers making their debut in the ranking: Aldermore at 805, Shawbrook at 988 and OneSavings Bank at 993. This means they have capital in excess of the $442m threshold required for Top 1000 entry. 

But, more importantly, they are starting to demonstrate viable business models. Metro – famous for its bright brand colours, prominent branches and child- and dog-friendly policies – is on course to finally turn a full-year profit in 2017. 

OneSavings Bank began in 2011 following a capital injection into building society Kent Reliance by JC Flowers, the US private equity firm specialising in financial services. It currently has the highest return on capital of any UK bank (44.61%) and the lowest cost to income at 25.37%. Aldermore and Shawbrook both have returns on capital in the low 20s and cost to incomes in the low 40s. Shaw brook, founded in 2011 and focused on the SME market, was previously ranked in the Top 1000 under the name Whiteaway Laidlaw Bank, from which it obtained its banking licence. The lender has been the subject of recent takeover bids from a private equity consortium. 

Of course, the challengers are operating in specialised areas of the market that the majors have sometimes left untouched, so the potential for high returns is there. All the same, their results are impressive. They currently account for slightly more than 1% of UK bank capital and yet contribute nearly 4% of profits. Now that’s punching above your weight. 

Brian Caplen is the editor of The BankerFollow him on Twitter @BrianCaplen

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