Challenger banks face a bumpier ride and some are likely to be squeezed by rising competition, a report has warned.
Despite notching up a more impressive record on growth, costs and conduct issues than their bigger rivals, challengers are about to have a tougher time, particularly the larger members of the pack, according to KPMG.
The new lenders, which have sprung to life since the financial crisis, increased lending by nearly a third last year, while the five biggest banks shrank lending by 5 per cent.
However, the challengers face an “increasingly difficult and fragmented journey”, KPMG found. The government’s unpopular levy on banks that make more than £25 million in profits, which kicks in this year, will cost challengers about £70 million collectively, while a significant number will be hit by the crackdown on lending to landlords. Both initiatives “indicate that the initial goodwill towards challenger banks is wearing thin”, KPMG said.
A gap is opening between larger challengers, such as Clydesdale and Yorkshire Banking Group, TSB, Virgin Money, the Royal Bank of Scotland-owned Williams & Glyn, Handelsbanken and Paragon, and small players including Aldermore, Close Brothers, Metro Bank, OneSavings Bank, Shawbrook and Secure Trust Bank.
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Warren Mead, head of challenger banking at KPMG, said: “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.”