CHALLENGER BANKS: As the name implies, they are joining the contest in the banking market.

Investments made through challenger banks can offer a source of get-rich-quick schemes for adventurous investors.

There is no shortage of shareholders of the high-street lender Trustee Savings Bank who will verify it.

Their listing investment of 260 pence per share received a premium increase of 30% when TSB got snapped up by the Spanish bank Sabadell a year later.

That could be as close to a get-rich-quick scheme you might find in any of the UK private and institutional banking sectors.

Specialist lenders are now making a serious challenge to the dominance of the big banking institutions. Take note HSBC, Lloyds Banking Group, Barclays, Royal Bank of Scotland, and Santander UK.

The financial challengers have generated huge returns on equity. Most of the early results show figures in excess of the big banks. To prove a point, Shawbrook achieved a return on equity of 19.5 per cent last year. The OneSavings Bank saw a 25.5 per cent return.

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Challenger Bank’s Niche Focus

There is one main attraction for investors in the subsector of challenger banks. They often benefit most from this niche focus and the bank’s entrepreneurial management.

The key attractions of challenger banks’ niche focus includes:

• Mainstream bank-beating growth prospects.
• Robust capital positions.
• Decent loan quality.
• Lack of legacy bad loan issues.

Many outperformed the FTSE All Share Banks index over the past six months. They did so by focusing on small business and retail customers.

Several quotes from fund managers and an executive director sum it up rather well. They highlighted the way that challenger banks profit from UK banking rules.

“Their returns are cyclical and not exceptional. But, they make low to mid-teen returns on capital. That comes without the conduct risks their [bigger] peers would carry. They are also good for competition in the market. Competition is key.

The best way to promote it is by creating a more level playing field for participants of all shapes and sizes. We must avoid one-size-fits-all banking rules and regulations. The costs that smother the changes are already driving competition”.

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The Rise of the Challenger Bank

The ‘challenger bank‘ signature gained currency in 2011. It followed calls for greater competition in the banking sector by the UK chancellor.

The Independent Commission on Banking instigated the initial moves on the recommendations. Even so, challenger banks still have some reasons to feel aggrieved. They are irate about the government’s 8% tax surcharge on bank profits above £25m. That is what the Chancellor ‘George Osborne’ then introduced in his Budget.

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