Challenger banks outperformed the UK’s big five banks in 2015 but accountancy giant KPMG has warned that the sectors goodwill is waning.
Challengers saw their lending assets increase by 31.5% in 2015 compared to a decline of 4.9% for the big five retail banks: Barclays, HSBC, Lloyd’s Banking Group, Royal Bank of Scotland and Santander.
Total pre-tax profits for challenger banks, such as TSB, Aldermore, Shawbrook, Virgin Money and Metro Bank Group – rose by £194m to £1.28bn. During the same period the big five saw a combined profit drop of £5.6bn.
KPMG attributed the rise of the challenger banks to a number of legacy and regulatory issues affecting the larger banks.
It said: “In 2015 and 2016 a new breed of challengers have emerged – the Digitally Focused Challengers such as Atom, Fidor Bank, Mondo and Starling”
“The scale benefits that should be gained by the big five have been partly eroded by unwieldy legacy IT systems, compliance issues, regulatory change and costly real estate.
“So in 2015, as in 2014, despite being significantly smaller, the challengers have outperformed the big five on costs, with an average cost-to-income ratio of 59.6% (excluding Clydesdale) compared to 80.6%.”
And this improvement has led KPMG to tell the challengers that they need to realise that they are now all “grown up” and as such should not expect special treatment.
It said: “With the challenger banks continuing to outperform the big five it is little wonder that the public support has started to wane.
“The message is clear, the landscape has changed, the challengers have grown up and they should expect no special treatment as they continue their journey.”