Credit Suisse sees rising risks for challengers banks Aldermore, Shawbrook

Following solid share price recoveries in recent months, the risk-reward for some names "is less clear" for some, prompting the Swiss bank to turn more defensive and downgrade Aldermore and Shawbrook to 'neutral' from 'outperform'.

With Theresa May declaring a March deadline to start the Brexit separation process, Credit Suisse said it expects related risks and uncertainties to materialise.

"Conceptually, we believe business lending will be affected earlier in a weakening economy," CS said in the note on Tuesday.

Aldermore and Showbrook are exposed to non-property SME lending - around 24% and 28% of first-half group loans respectively - "which we expect to be more sensitive to a deterioration in the macro economic environment".

OneSavings bank was upgraded to 'outperform' or 'neutral' as it is felt to have stronger buffers from existing strong capital accretion and ROTEs, with analysts' dividend expectations increased well above the consensus.

"We are less concerned about asset quality in BTL (which is ultimately secured on property) than SME lending. This also gives OSB the most near to medium-term flexibility on capital amongst our coverage, we think."

Elsewhere among the challenger banks the CS analysts continue to prefer Clydesdale, on an 'outperform' rating for its inexpensive self-help story from cost restructuring, compared to Virgin Money, at 'neutral' due to its greater use of operational/financial leverage posing a challenge in a weaker revenue environment.

Analysts also noted Reuters reports that suggest the BBA is encouraging the government to reduce the current 8% corporate tax surcharge on banks - "this would benefit the sector if implemented, but wouldn't affect our relative preferences".