Challenger Banks continue to outperform, but the landscape is getting tougher

Challenger Banks continue to outperform

This year’s report finds that UK challenger banks continue to win market share from the incumbents and this trend is expected to continue, though it will be an increasingly difficult and fragmented journey.

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As the challenger industry evolves sub-sectors are emerging and a key theme for 2016 is the rise of the digital-only banks such as Atom, Mondo and Starling.

Against several key measurements challengers continue to outpace the big five. Challenger banks have increased lending by 32 per cent compared to a 5 per cent decline for the big five. Whilst the big five face mounting cost pressures challenger banks are enjoying reduced or consistent cost-to-income ratios (CTI). Smaller challengers enjoyed a 3 per cent CTI reduction to 49 per cent in 2015 and they are well placed to continue their cost cutting drive. Larger challenger banks saw a small year-on-year increase reporting an average CTI ratio of 59 per cent in 2015 (58.0% in 2014). Ongoing conduct and litigation costs meant the big five UK banks had a CTI ratio of 81 per cent in 2015 (63% excluding conduct related costs).

The picture is certainly positive, but challengers are not without their own challenges. The decision to add an 8 per cent surcharge to profits in excess of £25m looks set to cost challengers dear. If applied to 2015 it would have added an extra £70m to their overall tax bill.

The buy-to-let (BTL) market is a significant contributor towards the overall profitability of the challenger banking sector, recent changes to the BTL sector saw some challenger banks suffer a temporary drop in share price of up to 10 per cent. However, banks are already finding solutions such as adjusting their credit models or tightening their lending. Whilst the Challengers look well placed to overcome both the policy changes on BTL and the bank surcharge, this does indicate that the initial goodwill towards challenger banks is wearing thin.

Warren Mead, Head of Challenger Banking, at KPMG comments:

“Many challenger banks offer a high quality service while operating more efficiently than the big five, albeit in niche markets. This leaves them poised to take further market share in the year ahead. But, the challengers have grown up, and shouldn’t expect significant assistance from regulators or policymakers. Several will also begin to really realise both the benefits and difficulties that being a large listed company brings. 

“I expect to see the divergence between large and small challengers widen. Several challenger banks have targeted profitable niches such as buy-to-let or specialist commercial lending but competition in these areas is reaching saturation so they will need to start widening their nets and working harder to compete with single-service fintech firms, such as payment companies or lending platforms.

“Small challengers and digital only banks are building a personalised, transparent and data rich banking environment, completely free from the restrictions of legacy systems and culture. But in a market where customer inertia is one of the most powerful forces, will they be different enough to reach scale?”

Watch Warren Mead explain the report findings here.

Download the full report.


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Notes to editors

Notes to editors

* This report makes reference to the 2015 results of the UK headquartered banks grouped as follows: 

Larger Challengers:

Clydesdale and Yorkshire Banking Group, Handelsbanken (UK division), Paragon, TSB, Virgin Money and Williams & Glynn. 

Smaller Challengers:

AIB (UK division), Aldermore, Close Brothers, Metro Bank, OneSavings Bank, Shawbrook Group and Secure Trust Bank.

** The Big Five banks: Barclays, HSBC, Lloyds Bank, Royal Bank of Scotland and Santander. 

For media enquiries, please contact:

Christina Bridge

T: +44 (0) 20 7311 4252


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


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 revenue of £1.96 billion in the year ended September 2015. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 174,000 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.

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