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Challenger banks less vulnerable than main banks

Challenger banks less vulnerable than main banks

UK challenger banks are more versatile and may be less vulnerable to a downturn in the mortgage market caused by higher interest rates than larger banks, Colin McLean, UK equity fund manager at SVM, has said.

Mr McLean works on the £216m SVM UK Growth fund, which has significant exposure to UK challenger banks.

He said: "From an investment point of view they don’t have the legacy issues of the larger, more established banks. And that applies to mortgage lending.

"They are able to use IT systems and big data to understand the credit profile of customers in a way that wasn’t possible years ago.

"And the larger lenders are often stuck with legacy IT systems that mean they cannot necessarily do things differently to how they did it in the past."

Mr McLean said the only major UK bank his fund is invested in is Barclays, though he has holdings in several of the challenger banks.

He also said there could be more merger and acquisition activity in the sector, in light of recent transactions involving Virgin Money and Shawbrook Bank.

Shawbrook was circled by a consortium of private equity firms and was eventually forced to accept a £850m takeover deal last June.

Rupert Silver, manager of the Credo Dynamic fund, said he has invested in the debt of UK challenger banks due to the potential of those banks to establish strong market positions, but he said he is keen to avoid taking substantial risks in the portfolio and so does not invest in the equity.

david.thorpe@ft.com