Challenger banks drive for growth leaves them ‘vulnerable’ to no-deal Brexit, says report

UK challenger banks “may be more vulnerable” than high street lenders to an economic downturn and Brexit-related risks, said ratings agency Fitch.

Mobile and other new banks - such as Revolut,  former Credit Suisse trader Nik Storonsky (pictured), or Monzo - have added millions of customers since the 2008 financial crisis as consumers and small firms look for higher service levels and access to funding traditional lenders cut back on in the aftermath of the global downturn.

However, the agency said: “We view sustained above-market-average growth as a potential risk to a bank's credit profile because it may indicate under-pricing of risk or a loosening of underwriting standards to generate volume.”

The move comes after new lender Metro Bank was forced to turn to investors for £375m in extra funding after underestimating how much shock absorbing capital it held, earlier in the year.

Challenger banks exposed to consumer mortgages or property lending would be particularly vulnerable in a downturn, said the credit agency.

‘Expose weaknesses’

It added: “A cyclical downturn or a disruptive no-deal Brexit leading to higher unemployment or falling property prices could expose weaknesses in their risk management and financial position.”

Earlier this month, the Bank of England wrote to challenger bank chief executives this week, ordering them to correct “overly optimistic” risk modelling, following a stress test of 20 unnamed new lenders.

The Bank added that many of these banks were unable to demonstrate an "understanding of the stress drivers for their business" or to explain the assumptions made in their stress testing models, while management plans related to stress testing were "poorly defined and lacked any clear trigger points" for action.

The Bank used the same test on challenger banks as it used for high street banks — a 4.7 per cent drop in UK gross domestic product, with a 40 per cent drop in commercial property prices and a 33 per cent fall in residential property.

Dominant players

Although the bank did not name the 20 challengers it reviewed, it revealed that all had a balance sheet of at least £750m, a growth rate of at least 10 per cent since 2010, or since they were created, or a focus on commercial lending.

Fitch said: “We believe that less diversified banks or those focused on niche or highly cyclical sectors are more vulnerable. Many challenger banks fall into this category.”

In May, Metro raised cash from investors from an emergency share issue after admitting it had misclassified commercial and buy-to-let property loans and did not hold sufficient capital.

Scores of banking licences have been issued by UK regulators over the last decade in a bid to break the stranglehold of Briain’s big five high street lenders — HSBC, Lloyds, Royal Bank of Scotland,Barclays and Santander. However, they remain dominant across a range of lending categories and banking services.