UK ‘Big Five’ high street banks face ‘too big to compete’, as small challenger banks secure stellar returns says KPMG

UK 'Big Five' high street banks face too big to compete

According to a new KPMG report, the UK challenger banking sector is outperforming the ‘Big Five’ UK high street banks.

Also on

  • Challenger banks embark on lending spree as they increase lending assets by 16 per cent -  compared to a decline of 2.1 per cent for the ‘Big Five’ high street banks
  • The UK challenger banks are growing faster than the UK’s ‘Big Five’ banks in 2014 - but it is the Small Challengers who are securing returns greater than technology giants
  • Key financial indicators of Large Challengers are becoming similar to those of the ‘Big Five’ – raising the question of how long they’re able to continue challenging

The UK challenger banking sector is outperforming the ‘Big Five’ UK high street banks, however, the Large Challenger banks need to accelerate how they stand out in the market, according to a new KPMG report.

The new annual report, The Game Changers, analyses the full-year results of some of the largest UK challenger banks, grouped in three categories1 – the ‘Large Challengers’, ‘Small Challengers’ and ‘Retailer-owned’ banks.

The report reveals that while Small Challenger banks are securing stellar returns, key financial indicators of the Large Challengers such as the return on equity, are becoming very similar to the ‘Big Five’ – Barclays, HSBC, Lloyds, RBS and Santander.

  ‘Big Five’ UK banks Challenger Banking sector average

Large Challenger group average

Small Challenger group average



Return on equity in 2014 2.8% 3.8% 2.1% 18.2% 15% 11%


Challenger banks overall, are also becoming more cost efficient as they grow. In particular, as Small Challengers have grown, they have benefitted in a reduction in their cost to income ratio (CTI), from 65 to 53 per cent between 2012 and 2014. Larger challengers reported a higher CTI of 64 per cent in 2014 as many have inherited a higher cost base, which has yet to be optimised.

These figures are remarkably similar to the ‘Big Five’, who reported an increase in their CTI from 60 to 63 per cent in the same period.

Warren Mead, head of challenger banking and alternative finance at KPMG, said “Although the overall challenger banking sector is growing rapidly and securing greater returns, it is the Small Challengers who are driving its growth.

“Small Challengers are securing high returns and have better cost optimisation. If this trend were to continue, as the challengers grow and benefit from economies of scale, it poses an interesting question for the Big Five as to whether too big to fail, becomes too big to compete? “Financially, the Large Challengers are looking very similar to those of the traditional banks. To ensure they remain differentiated, they must review their brand, distribution, products, culture and customer service.

“Digital banking is a great example. Our report found that the mobile functionality of the challengers is at best equal to, but often worse than, the ‘Big Five’. For those challengers focusing on customer service or cost as a differentiator, this could be a major hurdle for the future.”

The report also revealed that the challenger banks are strengthening their balance sheets and embarking on a lending spree, while traditional banks reduce the size of their operations as a result of regulation. In 2014, lending assets grew 16%, compared with a decline of 2.1 per cent for the ‘Big Five’.

This translated into an average annual 8.2 per cent growth in loans and advances to customers between 2012 and 2014, compared with a decline of 2.9 per cent from the ‘Big Five’. For Large Challengers, this was 3.2 per cent growth, while Small Challengers significantly grew their loan books by 32.3 per cent. However it should be noted that the combined loans of the five largest challengers are still just five per cent of the Big Five’s loan books, and therefore it is easier achieving higher levels of growth.

These figures paint a picture of the challenger banks picking-up the whitespace left behind following the financial crisis. This includes areas such as small business lending, second charge mortgages, invoice financing and unsecured lending.

However challenger banks face key challenges. Although regulatory rules apply equally to all banks, in practice however, they do not. Challengers have to hold more capital in comparison to established banks.

Depending on the results of the Competition and Markets Authority’s current review into the banking sector, there may also be a significant impact on the fortunes of the challenger banks and their willingness to push further into the small business banking and current account markets.

Mead continued, “For the next few years at least, we expect the challengers to continue to outperform the market in terms of pure financial results.

“However Small Challengers may have to start making trade-offs as maintaining high rates of growth will be difficult to maintain. For Large Challengers and the Retail-owned banks, there is plenty to go for if they accelerate their differentiation journey.

“But for all challenger banks, the main point of difference is their culture. Being largely free of the legacy problems of the past contributes to a sense of social purpose that puts fire in the bellies of their executives and frontline staff alike. Only time will tell whether the big banks will combat that fire with fire of their own. Creating a ‘bank within a bank’ – a new challenger brand free from legacy conduct, technology and culture – might be the best start.”

Other key findings include:

  • Board diversity lags behind ‘Big Five’ banks – 19 per cent of challenger bank board members were female, compared with 26 per cent across the ‘Big Five’.
  • Absence of branch networks has not hindered Small Challengers – For secondary savings, the absence of a branch network has not hindered customers with the growing willingness and preference to use online and mobile for banking.
  • Challengers are falling behind on mobile – Current challengers do not offer a better mobile banking experience than the big high street banks. Functionality is generally the same, if not worse, than that offered by the bigger lenders.

The full report can be downloaded here.

- ENDS -


Notes to Editor:

1. Basis of preparation

The report makes reference to the 2014 results of the UK headquartered banks grouped as follows:

  • ‘Big 5’ banks: Barclays, HSBC, Lloyds, Royal Bank of Scotland (RBS) and Santander.
  • Large Challengers: Post Office (financial services are provided by Bank of Ireland UK), National Australia Bank (NAB), TSB and Virgin Money.
  • Small Challengers: Aldermore Group, Handelsbanken, Metro Bank, OneSavings Bank, Shawbrook Group and Secure Trust Bank.
  • Retailer-owned banks: Asda Money, M&S Bank, Tesco Bank and Sainsbury’s Bank.

Information has been obtained from published 2014 year end reports (including results presentations and accompanying analyst packs) and company websites. Where total numbers are presented, it is the total of the sub-division of banks as described above, excluding Metro Bank who had not released their full 2014 results at the date of drafting this report.

2. Key financial indicators

We have taken the following approach to calculate each of the measures used in this report:

  • Return on Equity – profit after tax attributable to the shareholders divided by the average of opening and closing equity (excluding non-controlling interests for the ‘big 5’ banks). RoE for the Small Challengers does not include Handelsbanken as this is a segment of the Group and therefore does not present capital.
  • Net interest margin – the net interest margin for each sub-division of challengers is calculated as total net interest income divided by the average of the total opening and closing interest bearing assets. [Big 5 banks average net interest margin is taken from paradox of forces – to included calculation].
  • Cost to income ratio – the cost to income ratio for each bank has been calculated as total operating expenses divided by total operating income.

HSBC presents its results in US dollars ($). This has been translated into sterling using the relevant period end or period average rate. Where percentage changes are presented for HSBC, the percentages are based on the dollar amounts disclosed by the banks, rather than on the sterling translation of those amounts.


For media enquiries, please contact:

Simon Chan, KPMG Corporate Communications

M: +44(0) 7747 564 737


KPMG Press office: +44 (0) 207 694 8773

Follow us on twitter: @kpmguk


About KPMG

KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 12,000 partners and staff.  The UK firm recorded a turnover of £1.9 billion in the year ended September 2014. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 162,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.  Each KPMG firm is a legally distinct and separate entity and describes itself as such.

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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