Credit Suisse picks favourites from UK challenger banks

Credit Suisse initiated coverage of Shawbrook at ‘outperform’ with a 410p price target, saying the model is attractive, given that it avoids commoditised lending and is diversified across both SME and consumer lending.

The Swiss bank prefers Shawbrook to Aldermore, as its stronger capital position is a larger buffer against asset quality/regulatory risks and offers upside to returns if the company were managed to a lower minimum tier 1 common capital ratio.

CS started OneSavings Bank at ‘underperform’ with a 315p price target, saying it is too dependent on buy-to-let to achieve medium-term customer loan growth targets of around 20%.

“Implied 34% over 2014-18E annual BTL growth looks very ambitious versus growth achieved by other BTL lenders in the pre-financial crisis boom, when the overall market was growing more than twice as fast,” it said.

Credit Suisse initiated coverage of Virgin Money at ‘neutral’ with a target price of 385p. It said the bank benefits from operational leverage, but could see more upside from stronger competition measures to help challenger banks, which CS reckons is unlikely for now.

Finally, it upgraded Aldermore to ‘outperform’ from ‘neutral’, with a 265p price target.

CS said current levels appear to be pricing in pessimism, for instance on buy-to-let mortgages. Although Credit Suisse acknowledges the risks here, it noted mortgage loan book growth is now less exposed to BTL, while loan-to-value ratios are low enough to soften the impact of any potential regulatory restrictions on lending.