Challenger banks snapped up

The UK’s challenger banks curry more favour with politicians than patrons. Dishing out new licences to opponents of incumbents deemed “too big to fail” is one thing. Convincing savers and borrowers to sign up with unfamiliar names is another.

An approach for niche lender Aldermore suggests greater scale is needed.

South African group FirstRand is mulling a 313pper-share cash offer for the Reading-based bank that no one seems minded to oppose. Aldermore’s shares jumped 19% on the news and the bank’s board sounds keen on the £1.1bn valuation. FirstRand’s addendum that the offer will not rest on unanimous boardroom support looks superfluous.

The financial services group has made an astute choice for its first foray into UK banking. Aldermore may be small but its growth has been sure-footed. As the number of buy-to-let landlords has fallen, the lender has skimmed market share from larger rivals. Total lending in the first half of 2017 rose 9%to £6.2bn. Cheap financing under the Bank of England’s term funding scheme, which ends in 2018, has helped cut the cost of funds. If the Bank of England rethinks heavy capital requirements for small lenders, it has more to gain.

There is an obvious link between FirstRand’s second-hand UK car financier, MotoNovo, with its £3bn loan book, and Aldermore’s £7bn of deposits.

And the bid price looks fair at a 63% premium to the bank’s float price in early 2015. At 1.7 times book, Aldermore is being bought on similar terms as Shawbrook, another challenger bank that agreed to a takeover in July.

With two challenger banks taken private so far in 2017, speculation is hot over who will be next. The government had hoped challenger banks would spark competition for customers, rather than a bidding scramble. But there is a chance the former will be assisted by the latter. London, October 16.