Shawbrook's solid start hit by unwanted costs from Pollen bid

Shawbrook has reported a solid first quarter, while the challenger bank's board announced more details about why it continues to recommend shareholders reject a buyout offer from Pollen Street and BC Partners.

Independent directors on the board sent out a circular, which was not available at the time of publication, formally setting out why they unanimously recommended that "shareholders should take no action in relation to the offer and should not sign any document sent by Marlin Bidco or its advisers", referring to the £842m offer from the pair of private equity firms, which via Pollen hold a 38% stake.

Shawbrook will suffer £4m of one-off costs associated with the Pollen Street bid if it is aborted or unsuccessful, whereas this will rise to £9-12.5m excluding any applicable VAT if the bid is successful.

Marlin Bidco has claimed to have secured the support of at least 46% of shareholders, with 50% support required to get the deal over the line.

During the three months ended 31 March, Shawbrook saw loan originations of £495m, which was up 4% against the strong start last year.

In the buy-to-let market, originations reduced by 12%, which was significantly greater than the contraction in the market following last year's first quarter rush ahead of the government's new stamp duty rules.

As the loan book increased by 3% in the quarter to £4.2bn, the challenger bank maintained net interest margins, the measure of the difference between lending and saving rates, at 5.5% despite reporting "significant pricing pressures" on new customers flows and a higher level of redemptions from 'back book', medium-long term mortgage customers reflecting the high levels of market liquidity.

With the economic backdrop remaining benign, return on tangible equity was said to be in the upper quartile of management’s 22-25% target range.

Chief executive Steve Pateman highlighted the continued addition of new products to the portfolio, including the launch of an 'over 55 mortgage' and extension of the business finance presence both in the UK and in Jersey, with further additions on track for later in the year including complex mortgages and motor finance.

He said the bank maintained excellent credit quality with cost of risk remaining lower than anticipated, reflecting benign market conditions "albeit these conditions undoubtedly contribute to the continued softness we are seeing in risk and return disciplines across the market and we are very conscious of the need to maintain our focus on RoTE which continues to trade in line with management's expectations".

He concluded: "Our Q1 2017 performance reflects the resilience inherent in our diverse business-we can continue to grow within our risk and return disciplines notwithstanding a significant contraction in flows in the BTL market, and whilst market risk and return dynamics are competitive, we believe that we can continue to grow prudently and in line with our upper quartile RoTE ambitions generating significant value for our shareholders over and above that implied in the current offer from Marlin Bidco."

Broker Shore Capital said its fair value for Shawbrook is 450p and hence it agrees with the rejection of the Marlin Bidco’s offer of circa 333p, including the final dividend.

Overall, analysts felt the group was tracking towards slightly lower full year loan growth than it anticipate but at better than expected returns.