UK Challenger Banks Struggle To Compete


Challenger banks in the U.K. are having a hard time competing with the country’s big four financial institutions.

While challengers such as Metro Bank, Santander and Monzo were expected to put a stop to the dominance of the big four, they are instead failing to thrive, according to the Financial Times. Last week, Santander lost 1.5 billion pounds ($1.8 billion) from the valuation of its business, while shares in Metro Bank fell 30 percent after it was forced to cancel a planned bond sale.

“If you want to promote competition in the sector . . . then you need to make the environment more conducive for them to grow . . . The Bank of England has been quite draconian compared to other parts of the world,” said Lloyd Harris, lead credit portfolio manager at Merian Global Investors, according to the FT.

Challenger banks have also been impacted by “ring-fencing,” a set of rules that applies to any bank with more than 25 billion pounds ($30.7 billion) in customer deposits. As a result, Santander had to legally transfer 25 billion euros ($27.2 billion) of assets from its U.K. bank to a U.K. branch of its Spanish parent, as well as duplicate certain functions between the two units.

And back in June, the challenger banks reportedly failed stress tests carried out by the Bank of England, which “found widespread weaknesses among the U.K.’s challenger banks in stress tests that showed new lenders cutting corners in an aggressive pursuit of growth.” Not only that, but “a senior regulator at the central bank wrote to chief executives this week, ordering them to tighten standards and correct ‘overly optimistic’ risk modeling.”

Now after last week’s share price drop, Metro Bank is believed to be a takeover target. However, the bank’s advisors are reportedly hoping that an end to political uncertainty would make it easier to survive on its own. It will attempt to raise debt again before the end of the year.

Phillip Monks, chief executive of Aldermore, a specialist lender, said: “It’s clearly evident the challenger bank experiment hasn’t succeeded yet, but I wouldn’t say it has failed . . . I think there are some things in the landscape that give confidence the experiment can work.”