Shawbrook & Aldermore - both are challenger banks worth a look

Shawbrook (SHAW.L)/Aldermore (ALD.L): Running an established High Street retail bank must be a nightmare at the moment. You are lumbered with an estate of properties that are often over-spaced. They are too grand, but of an age that requires plenty of maintenance expenditure. Your customers increasingly don’t want to drop in and say “Hello” – especially the younger customers would much rather be using a computer or mobile device for their banking. They of course are the future wealth holders that the bank wants to keep in their sights, whilst for now selling them secured and unsecured credit products. Yet, if you shut a branch you are pilloried by one and all. Your computer systems quite possibly resemble an inventive child’s Lego model. Rumours abound of mainframe’s still running pre-decimal code and shielding long lost corporate identities. The recent IT meltdown at RBS (the second belter in recent years) could have had many causes, but you have to wonder if in some bland datacentre there are still racks labelled National Provincial Bank and Westminster Bank. As if all this wasn’t enough, the Government and regulators have been on your parent company’s case ever since the banking crisis flared up.

So it does feel as if this is a great time to be a new challenger bank, unencumbered by an unwieldy branch network, powered by spanking new computer systems and with the prize of a low cost income ratio. I do not include in this converted Building Societies (e.g. Virgin Money) or re-discovered brands such as Williams & Glynn’s (whose divorce from RBS is underway) or TSB (soon to lose its independence again), who will have some of the issues described above. Likewise OneSavings Bank has at its heart the legacy of the Kent Reliance Building Society. Metro Bank is a real ‘newbie’, but is not yet quoted. That leaves us Shawbrook (to all intents and purposes new) and Aldermore, which both successfully floated this year. Shawbrook, trading at 375p is on 10.9x CY2016 consensus eps forecasts of 34.5p, with a maiden forecast dividend of 4.1p for a yield of 1.1%. Clearly this cover is very high and all being well there is scope for much more income in future years. At Aldermore the PE is 11.1x for CY2016, with the share price at 299p and consensus earnings at 26.9p and no dividend until, probably, CY2017. Clearly these are very early days and dividend hunters may want to wait, but these both look to be stocks worth keeping an eye on. As ever, keep mind out for the over-hang from ‘locked up’ holders, AnaCap at Aldermore and the Special Opportunities Fund at Shawbrook. Somehow lock ups just don’t seem to be what they used to be. (Neil Cumming^, 25^th June 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower