RBC ups targets on specialty lenders due to UK economic resilience

Analysts at RBC revised their price targets for UK challenger banks higher as a result of the resilience shown thus far by the economy and the support provided by the Bank of England.

The broker also revised its forecasts higher for Aldermore,Close Brothers and Shawbrook.

"While we note that significant uncertainty remains regarding the outlook for the UK economy, we believe that these early indicators are significant enough to be reflected in updated cost of equity assumptions for the Specialty Lenders subsector, and consequently our price targets," analyst Peter Lenardos said in a research note sent to clients.

Cost of equity assumptions for Close Brothers, Paragon and OSB were all cut by half a percentage point to 10.5%, 11.0% and 13.0%, respectively.

Those for Aldermore and Shawbrook were cut by a full percentage point to 13.0% and 15.0%, respectively.

RBC's recommendation on Aldermore and Close Brothers was kept at 'sector perform', while its target price on the former was hiked from 175p to 190p while that on the latter went up from 1118p to 1254p.

OSB and Paragon were both kept at 'outperform', with the target on the former revised from 290p to 305p and that on Paragon from 350p to 370p.

Shawbrook was kept at 'underperform' and the target boosted from 185p to 210p.

For OneSavings Bank, Lenardos based his recommendation on the lender's "strong growth profile" and exceptional cost control, while the main considerations for Paragon were its valuation below book value and ongoing diversification efforts.