Aldermore's maiden full year profits soar past forecasts

Maiden final results as a listed company showed underlying profit before tax rose 75% to £99m, versus a company-compiled consensus forecast of £95.5m. Reported PBT rising 88% to £95m and earnings per share also up 75% to 22.7p.

This outperformance was thanks to lower than expected impairments as a result of the relatively benign credit environment, partly offset by lower than expected non-interest income from invoice finance.

Net interest margin (NIM) increased to 3.6% from 3.4% a year before, as expected.

There was a nine percentage point improvement in the underlying cost/income ratio to 51% and, despite the benign credit environment, a creditable credit performance led to a cost of risk of 19bps, from 23bps a year before. At the year-end the loans to deposits ratio (LDR) was in line with management expectations at 107%, with the core tier 1 ratio at 11.8% and with guidance for "around 11%".

With Aldermore the third largest net lender to SMEs under the Bank of England's Funding for Lending Scheme in 2015, net lending was up 27% to £6.1bn, driven by 29% growth in asset finance and 10% in loan originations. Delving into the loan growth, SME commercial mortgages surged 50%, buy-to-let 18% and residential mortgages by 42%.

Management guidance implied the loan book will increase by a similar amount to around £7.4bn by the end of 2016.

It has been an excellent year, both operationally and financially, for the group," said chief executive Phillip Monks.

Addressing possible investor concerns about buy-to-let lending, Monks said it was a key element of UK housing stock and pointed to underlying demand continuing to grow, with an additional 1.1m UK households expected to be living in privately rented accommodation by 2021.

"We represent a small part of the overall market and, as such, believe that this lending segment remains attractive from both a growth and return perspective."

However, in light of December's proposals by the Basel Committee on Banking Standards to materially increase standardised risk weightings for buy-to-let, the group plans to pursue an application for an internal ratings-based approach (IRB).

On the broader outlook, while acknowledging short-term Brexit referendum "risk and uncertainty", Aldermore is confident about the resilience of the UK economy, SME growth optimism and continued government support for the residential mortgages market.

Analyst opinions

Investec hailed the "excellent results", with second half EPS of 13.9p 15% ahead of consensus.

With NIM guided flat in 2016 Investec thinks this will be "the key source of consensus upgrades for 2016 and beyond".

Numis is also optimistic about the future, mainly based on its belief that Aldermore will "cope comparatively well" with the expected increase in impairment and falling margins through improvements to operating efficiency.

"Overall, the ROE that Aldermore is forecast to achieve is as a consequence of its high margin, which we like. High-margin businesses are better able to self-fund their growth and return more profit to shareholders for any given volume of new business. Furthermore, we believe higher-margin businesses are also lower risk."

Analysts at Shore Capital were largely impressed, though voiced some reservations, including that management's guidance for the CET1 ratio was felt to be "a little on the low side for our liking", while on buy-to-let, they suggested the IRB application might be held back by "a lack of a lengthy trading history" compared to some more established peers.

Moreover, they added "the LDR of 107% highlights the deposit funded nature of the bank, albeit we note that it does make greater use of shorter-term funding than some of its rivals to achieve this, which potentially leaves its net interest margin more exposed when interest rates eventually rise because liabilities may reprice faster than assets."