Shore Capital says get Shawbrook while it's hot

Shore Capital has reiterated its 'buy' rating on challenger Shawbrook Bank on its belief the valuation of the specialist lenders sub-sector is wrong, with Shawbrook being valued at 10 times earnings despite 20% EPS growth forecast.

Maiden final results from the bank since its 2015 initial public offer were better than expected, with an increase in adjusted pre-tax profit of 62% to £80.1m that beat consensus of £78.0m.

This drove a 77% increase in adjusted EPS to 26.9p, or 26.3p if one excludes a one-off benefit to tax of £1.3m in respect of revaluation of deferred tax assets ahead of the implementation of the UK bank corporation tax surcharge in 2016.

As Shawbrook pointed out, it does feel it will be badly affected by the incoming changes to stamp duty for buy-to-let budget property.

But ShoreCap analyst Gary Greenwood stressed his concern than the challenger bank cannot continue to generate current return on equity (ROE) levels in the long term.

"We remain concerned that current banking returns are exceptional with substantially less impairment than at the peak of the economic cycle," he said

"Competition remains muted but is picking up and margins are exceptionally high. Consequently, the current ROE being achieved by the new and specialist lenders is not sustainable in the long term."

"While we are cautious about long term returns, we believe that this year and next year's volume growth will remain very strong at margins that are expected to deliver a very substantial economic profit for shareholders."

With it being too early to call the top of the cycle, in his opinion, Greenwood said the market was wrong to price in a substantial recession.