These are testing times for some of Britain’s challenger banks. The Brexit vote, plunging gilt yields and the slowing housing market have all taken their toll. The big unanswered question is how they are likely to fare in a downturn. For the most part, they are recession virgins.
The reception yesterday to Aldermore Group’s perfectly respectable figures illustrated how nervous investors are. First-half profits soared by 45 per cent to £63 million and there was virtually no evidence of any deterioration in loan quality, but still the doubters doubted.
The shares ended the day down 8 per cent at 141½p. That compares with a float price 17 months ago of 192p and a peak price last summer north of 300p.
Banks are complicated geared bets on the economies in which they operate and the test will be whether the lashings of loans sprayed about by the challengers in the past five years will be repaid in full in the face of a probable rise in unemployment and business failures.
In these anxious times Aldermore’s speedy loanbook growth — up another 11 per cent to £6.8 billion in the past six months — becomes more of a liability than an asset. Analysts were focused on the £211 million in loans to small-time property developers and the reluctance of the company to guide as much as in the past. Its exposure to buy-to-let borrowers — at 40 per cent of the loanbook — was another potential concern.
Its core capital ratio worsened from 11.8 per cent to 11 per cent, which is probably the low point, but any nasty surprises in the next 18 months could knock the bank off course and even require it to raise more capital.
Aldermore is accounting for future defaults more conservatively but still cannot justify a provision of more than £6.4 million for impairments.
Concerns about lower interest rates are probably overdone. While mainstream banks pay so little interest, their margins will come under threat because they can’t turn savings rates negative. Aldermore has more of a cushion. Its cost of funding is 1.9 per cent and it plans to pass on the base rate cut in full to borrowers and depositors. Its net interest margin in the past six months was unchanged at 3.6 per cent.
Overall, the shares look cheap. They trade on only six times forecast full-year profits and one times tangible book value. But that doesn’t mean they can’t go cheaper.
MY ADVICE Hold
WHY Shares inexpensive, but Aldermore is vulnerable to UK downturn
Witan Investment Trust
Some investors may be wondering whether Witan is having a bit of a wobble. The £1.5 billion investment trust underperformed its benchmark by 1.3 per cent in the first half of the year and the shares trade at a 7 per cent discount to net assets.
Only a few months ago it was celebrating a hefty 3.5 per cent outperformance for the full 2015 year, while its shares spent much of time at a modest premium. The post-referendum turmoil in financial markets has taken its toll a bit, but yesterday’s numbers exaggerate the underperformance. The collapse in gilt yields has boosted the value of Witan’s £200 million of borrowings, which have to be marked to market. Strip out this effect and the trust lagged its benchmark by only 0.2 per cent.
It’s much too early to start doubting the trust’s unusual philosophy of handing its assets to a dozen or so external fund managers and keeping them on their toes by dismissing one or two each year. America’s Trilogy got the boot in this period. There’s an irony that the replacement was Somerset Capital Management, the fund management house headed by Jacob Rees-Mogg, Parliament’s arch-Brexiteer. It’s an ill wind.
The worst external managers were those masters of the universe at Lansdowne, whose liking for banks, airlines and telecoms proved costly. They underperformed their benchmark by a whopping 14 percent. Still, they have previously done very nicely for Witan.
Investors should keep the faith. Over five years Witan ranks fifth out of 25 UK listed global investment trusts for total return.
MY ADVICE Buy
WHY Good investment philosophy, wide discount
TUI Group
Fritz Joussen, the chief executive of TUI, could be forgiven for throwing in the beach towel after the unremitting “geopolitical incidents” of the past few years.
Terrorist attacks have all but closed down Tunisia as a destination, sharply reduced the appeal of Egypt and sparked a 40 per cent slump in summer bookings to Turkey, while the tragic hits on cities such as Paris, Brussels and Nice do nothing to encourage travel.
Then there’s the slump in the value of the pound after the EU referendum, which might have been expected to deter Britons from flying to euroland. In fact, Mr Joussen not only delivered strong third-quarter results, with the summer programme 87 per cent sold, but he also reassured investors that his target of raising underlying full-year operating profits by at least 10 per cent remained intact.
The sceptics will point out that, with prices locked in for this year and a big proportion of all-inclusive holidays, the impact of the weak pound was always going to be delayed until next year.
Mr Joussen conceded as much yesterday, although he remained bullish about TUI’s prospects. The way the company has come through the turbulence of the past year, few would bet against him.
MY ADVICE Hold
WHY A resilient performer
And finally . . .
Card Factory was looking a bit dog-eared yesterday. Like-for-like sales growth at the 850-shop chain drooped to 0.2 per cent in the six months to July because of weak footfall. Revenue growth at its personalised gifts website gettingpersonal.co.uk ground to a halt. And the fall in sterling is doing nothing for margins on those personalised soft toys and beer tankards. The hint of another surplus cash payout, to be announced on September 27, wasn’t enough to restore good cheer. The shares fell 7 per cent to 298½p.
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