UK challenger banks in demand

Challenger banks such as Shawbrook were in demand on Thursday after Panmure Gordon argued that the sector’s sharp discount versus established peers was unmerited.

Worries of an economic slowdown have led the specialist lenders to underperform the large UK banks by between 20 and 35 per cent since the Brexit vote, yet medium-term gross domestic product forecasts are unchanged, Panmure told clients. The challengers trade at just 7.5 times 2017 earnings on average compared with 18.4 times for their larger competitors, in spite of their higher growth and returns, it said.

“As large UK banks focus on cost reduction and commoditised price-sensitive mainstream lending, the specialist lenders are filling the gap in those lending markets which require greater sophistication and bespoke service,” Panmure said. “With a £2tn UK market in lending, the challengers only need tiny share gains to significantly grow their assets of circa £80bn.”

Panmure had “buy” advice on OneSavings, up 3 per cent to 378.5p, Shawbrook, ahead 2.3 per cent to 266p, and Aldermore, up 232.4p. Its “sell” recommendations were CYBG, down 2.9 per cent to 278.1p, and Metro Bank, off 1.7 per cent to £36.05.

In a wider market that struggled for direction, the FTSE 100 closed lower by 0.3 per cent or 24.49 points to 7,277.92 as heavyweight stocks including AstraZeneca, BP and Royal Dutch Shell began trading ex dividend.

Coca-Cola HBC led the blue-chip risers, up 4.9 per cent to a record high of £19.12, after its annual earnings beat forecasts on better than expected margins.

Speculative demand continued to squeeze Unilever, which added 1.1 per cent to £33.48. Interest in Unilever has picked up in recent days following the news that Nelson Peltz, the activist investor, had taken a $3.5bn stake in Procter & Gamble.

Dealers highlighted an overnight surge in demand for short-dated options on Unilever’s US-listed stock, which rarely trade more than a double-digit volume in the average session. A trader or traders bought more than 10,000 call options expiring next month to gain the right to purchase Unilever’s US depositary receipts at $40 and $45 apiece, versus a market price of $42.

Pets At Home rallied from a one-year low, up 2 per cent to 185.1p, after the retailer’s deputy chairman Dennis Millard spent more than £10,000 buying the shares at 188.6p each. Pets has fallen 25 per cent from its 2014 flotation price of 245p on disappointing sales growth.

A fifth profit warning in just over a year sent Cobham sliding 15.3 per cent to 114.7p, with the aerospace engineer also flagging up that its balance sheet needed to be strengthened.