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Challenger Banks: Opportunities & Challenges

Challenger Banks: Opportunities & Challenges

Challenger Banks: Opportunities & Challenges

The so-called “Challenger Banks’, the collective term used to describe the new banking players that emerged since the Global Financial Crisis, have made a significant impact in the market.

In this analysis, we look at the 2018 financial performance of these banks, to highlight their achievements, potential and the challenges they face.

The commentary on this site was prepared based on the 2018 results of the challenger bank sector, and does not reflect the impact of COVID-19 on the UK economy and the challenger bank sector.

COVID-19 represents new challenges for the banking sector and KPMG welcome the opportunity to discuss these further with you. In particular, the following areas are ones which we see presenting a particular challenge for the sector as they navigate the impact of COVID-19:

  • Impact of government support initiatives, including both business funding initiatives and tax led initiatives
  • Operational resilience
  • Customer service strategy
  • Approach to continuing to treat customers fairly
  • Accounting and regulatory capital implications of payment holidays and increased arrears on the impairment requirements of IFRS 9

The peer-to-peer interactive dashboard of Challenger Bank results has been updated to reflect the 2019 year end results published by the sector, and can be accessed here.

To dive even further into the data, we’ve created a peer-to-peer interactive dashboard which can be accessed here.

A word on definitions…

These newer bank entrants have historically been referred to as a single, homogeneous group known as the “Challenger Banks”. Although the shortfalls of this term are well publicised, the term has gained currency through lack of a suitable alternative. To provide some more nuanced discussion we have, therefore, classified these banks into a series of peer groups based on certain characteristics as follows:

  • Retail full service
  • Specialist lenders – mortgage focused
  • Specialist lenders – mixed lending books
  • Retailer banks

In addition, there are a number of digital banks such as Monzo, Starling and N26 who have begun to enter the UK market in recent years. Due to the age of these institutions, we have not included them within our financial analysis peer groups. Throughout our analysis, we refer to the ‘Incumbents’ and ‘Big 5’, being Lloyds Banking group, Santander UK, RBS, HSBC and Barclays.

More detail on the characteristics of these groups is available here.

Recent developments

Since we last discussed themes in the sector, much has happened, including:

  • Consolidation: Virgin Money has been acquired by CYBG, and OneSavings Bank recently announced an all share offer for Charter Court Financial Services.
  • Take-privates: Shawbrook and Aldermore have both been taken private after a relatively short period as listed entities.
  • New entrants: New entrants continue to enter the market, for example N26 entering the UK market and Marcus by Goldman Sachs entering the retail deposits market, and a number of new specialist lenders.


Size (total assets £bn) 2017 2018
Gross yield 4.2% 4.0%
Cost of funds 1.2% 1.3%
Cost of risk 0.40% 0.42%
Cost: income ratio 61.6% 60.4%
Pre-tax return on tangible equity 14.3% 15.9%
Loan book growth 15.9% 14.0%
CET1 ratio 15.5% 15.6%

Note: KPIs exclude outliers
Source: KPMG analysis
Financial analysis notes and basis of preparation

Financial performance highlights

Our predictions

Making predictions about the future of the challenger bank sector is a dangerous game. At the risk of being a hostage to fortune, here is our take as at June 2019:

  1. Bigger may well be better. For those challengers who aspire to challenge the Big 5, further scale is needed. There is the potential for more consolidation in the sector.
  2. Funding in focus. Managing the pressures on cost of funding as TFS funding falls due for repayment will be a challenge. We expect more of the challengers to diversify sources of funding, for example through instant access savings and asset backed financing.
  3. Niche is the new black. Competition in core products will result in a number of participants developing products for specific niches to maintain yield. In particular, we expect to see more participants focusing on the SME sector to drive yield.
  4. Risk weightings reign supreme. We expect a number of challengers to continue to explore the development of models for AIRB, particularly those with significant mortgage books.
  5. Mobile first, but monetising to follow. And we must not forget about the newest entrants - the digital-only banks. Digital new entrants will continue to grab headlines (for good, or bad, reasons), but the key challenge they face is how they can successfully monetise their customer bases and support the valuations being put on them.
  6. Did someone say the B-word? Brexit continues to loom large over the UK outlook, and the shape of the UK’s exit from the European Union may have a significant impact on the trajectory of the challengers. At the very least, Brexit has reduced equity investor appetite for companies wholly or mainly focused on the UK.

Source: KPMG analysis
Financial analysis notes and basis of preparation

Explore the evolution of gross yield further in our interactive dashboard.

Threats and headwinds

Continued asset growth

Each bank peer group has reported continued growth in total assets with the retail full service growing total assets by an average of 5.9% and the specialist lenders by an average of 14.3%. But achieving this growth profitably is becoming tougher:

  • Taking on the incumbents. The full service retail challengers have continued to grow their mortgage books, taking market share from the Big 5 incumbents banks.
  • Trade-offs. In certain products, asset growth has only been possible at the expense of pricing.

Compression in yields

Banks have reported compression in yields in certain market segments, primarily mortgages:

  • A crowded market place. Since the crisis, the market place has become increasingly crowded with a large number of new banks launching. In particular, the establishment of the ring-fenced banks has led to excess liquidity within these entities which has been deployed into the mortgage market, increasing competition.
  • Bountiful liquidity driven by availability of cheap funding for those providing current accounts, excess liquidity in the newly formed ring-fenced banks and the Term Funding Scheme (“TFS”). TFS funds drawn at the closure of the scheme in February 2018 totalled £127 billion.
    Source: Bank of England.
    Read more about the impact on cost of funding

The compression in yields has resulted in some institutions, including Tesco Bank, taking the decision to withdraw from the mortgage market.

The opportunities

Mortgage lending

Responses for mortgage lenders include:

  • Focus on niches which command higher yields. Examples include first time buyers (including Help to Buy) and lending into retirement with some of the incumbents announcing moves into this space. In BTL, niche areas of potential focus include portfolio landlords and Houses in Multiple Occupation.
  • Maintain focus on the growing market segments. Examples include more complex mortgages where the industrialised underwriting approach is not appropriate, for example in areas such as complex incomes (e.g. self-employed, growing gig economy).

SME lending

SME lending continues to see strong demand, with opportunities including:

  • Specialised and asset finance. Whilst the mainstream/prime market has seen intense competition which has impacted yields, there continue to be opportunities for higher yields in more specialised areas (e.g. where specific asset knowledge is required).
  • Cash flow solutions. There is an increasing need for cash flow solutions, especially as businesses are tying up working capital stock piling in anticipation of Brexit. Integrated payments and finance solutions are anticipated to grow.
  • Capability & Innovation fund. The Capability & Innovation Fund launched as part of the Williams and Glyn package of remedies has focused attention on SME lending. A number of challengers have benefitted from this, including Metro, Co-op Bank and Starling.

Key contacts

Tom Lewin

Tom Lewin
Partner, Deal Advisory
tom.lewin@kpmg.co.uk

Peter Westlake

Peter Westlake
Director, Strategy
peter.westlake@kpmg.co.uk

Source: KPMG analysis
Financial analysis notes and basis of preparation

Explore the evolution of cost of funding further in our interactive dashboard.

The challenger sector as a whole reported increased cost of funding during 2018, reflecting new challenges from the market. This was most acutely seen in the specialist lenders where fast growing institutions have been seeking to attract new funding.

Threats and headwinds

New entrants

New entrants, including Marcus by Goldman Sachs’ retail savings proposition, have entered the UK savings market, putting pressure on pricing. Many of the challenger banks have historically relied on the best buy tables for acquiring funding, and do not have the benefit of large savings back-books or current account propositions.

The end of Bank of England funding schemes

Term Funding Scheme (TFS) and Funding for Lending Scheme (FLS)

The two Bank of England funding schemes, TFS and FLS, have provided access to cheap funding for challenger banks since 2016 and 2012 respectively. The closure of both schemes in early 2018 and the four year pay-down period will push challengers to look for new sources of liquidity to repay the borrowings over the coming years. This has served to further increase the competition for retail deposits.

Term Funding Scheme (TFS)

Increasing regulatory requirements

Capital markets activity around institutions’ minimum requirement for own funds and eligible liabilities (MREL) moved sharply into focus during 2018 and will be even more prominent in the coming year as we move towards January 2020 implementation date. As a result, we expect to see greater issuance of MREL-eligible instruments from UK challenger banks and building societies. Currently, 5 challenger banks fall within the scope of MREL, although we expect this to increase as the challengers continue to grow in size.

The opportunities

Diversify retail proposition

Many of the Challengers are currently funded entirely through notice and fixed terms savings products. In an increasingly competitive market, a response to funding pressures may be to diversify into other retail deposit products. Although a number of the digital challengers have built their business models centered on current accounts, very few of the specialist lenders have entered this market. Equally, a number of the challengers have not yet made the decision to access the instant access savings market which represents c.55% of deposit balances in the UK.

Current accounts
Instant access savings

Access new forms of funding

For the challenger banks who have larger funding requirements, the institutional market could provide an alternative source of funding whilst allowing them to grow their lending capabilities, and optimising the mix of funding cost and tenor.

Two examples of this are:

Key contacts

Alexandra Skeggs

Alexandra Skeggs
Managing Director, Deal Advisory
alexandra.skeggs@kpmg.co.uk

Source: KPMG analysis
Financial analysis notes and basis of preparation

Explore the evolution of cost of risk further in our interactive dashboard.

Threats and headwinds

Benign conditions have flattered most lenders and asset classes over recent years. We believe that the latest reported cost of risk data represents baseline loss rates. Retail lending has been especially shielded, with a macroeconomic backdrop of very high employment levels and improved regulations restricting the riskiest lending.

Ultimately, late credit cycle lending has a nasty habit of looking foolish in retrospect.

Macro-economic risk

Some classes of lending are more cyclically exposed than others to a downturn. We’ve outlined below how some of the major classes of lending might respond:

Mortgages: minor cost of risk increase

Even in a downturn credit losses for most UK mortgage books should be low outside of extreme scenarios; LTVs are strong enough to absorb moderate price corrections, rates are low, many people are fixing at longer terms and new affordability checks ensure good interest coverage.

Some specialty mortgages may be affected differently, for instance equity release or limited company buy to let lending.

Cards/Personal Unsecured: moderate cost of risk increase

In a sustained downturn credit losses will always increase on unsecured lending. Well managed books should still be profitable as demand for credit increases, provided that pricing and limit discipline is maintained.

SME: moderate cost of risk increase

Losses are likely to increase from current levels. Loss rates are likely to vary a lot across the various different lending models that service this client base. Where asset finance has been provided to businesses in the services sector in relation to soft assets, losses may be highest as a result of low residual values.

CRE: moderate cost of risk increase

CRE is a very mixed market at the moment. For example non-prime retail CRE prices have dropped significantly and will continue to do so as the move to online retail continues to bite. Meanwhile warehousing yields continue to tighten with strong demand. For lenders we can expect to see a similarly mixed impact, some lenders will see losses while others may emerge unscathed.

Brexit

Although the slowdown in business investment associated with Brexit uncertainty has not yet significantly impacted challenger bank cost of risk, a disorderly Brexit represents the single biggest risk to the benign credit environment currently being experienced by the challenger bank sector.

Read more about the outlook for the UK economy in KPMG’s UK Economic Outlook.

The opportunities

Get the basics right: Focus on best practice

Challenger banks who have focussed on best practice will be best placed to respond to a turning in the credit cycle:

  • Understanding the book. Without detailed stratifications of risk exposure and sensitivity it is hard to identify emergent pockets of risk. Cost of risk can only increase from the current suppressed levels; measuring, monitoring and anticipating credit losses and risk concentration is essential.
  • Underwriting quality. With so little feedback in the form of borrower defaults, it is hard to know whether underwriting and pricing are appropriate. Maintaining standards in this environment must focus on first principles and fundamentals.
  • Cautious growth. Exercise caution in selecting which areas to continue to grow. Given pressure on yields, this may lead to decisions to pull back from or entirely exit areas of the market.

Underwriting & Pricing

If the composition of the current lending book ceases to meet a bank’s risk appetite for the associated return, then taking the decision to exit the line of business may be most efficient way to release capital. For example, a number of market participants are in the process of exploring selling or securitising certain loan portfolios.

Key contacts

Alex McGowan

Alex McGowan
Managing Director, Deal Advisory
alex.mcgowan@kpmg.co.uk

Source: KPMG analysis
Financial analysis notes and basis of preparation

Explore the evolution of cost bases further in our interactive dashboard.

Cost:Income Ratio: value creation through operating model cost optimisation

The recent trends in cost:income ratio have been mixed across the different peer groups of the challenger banks. The average cost:income ratio for Full Service Retail challengers in 2018 was 83.2%. Meanwhile the Specialist Challengers, Specialist - Mortgages peer group have achieved an average cost:income ratio of 35.2%.

Assessing cost:income ratio in isolation of understanding the business model and the underlying operating model which is required to deliver it provides an over-simplified view of efficiency (e.g. a branch based proposition will intrinsically have a higher cost:income ratio than one that is badged as purely digital).

A further consideration is that whilst these are all categorised as challenger banks, they have not all been created equal. Those that have been carved out from larger organisations are now being hampered by legacy operating costs and the investment required to update compared to those which have been established without the ‘legacy debt’, with new operating models which are underpinned by modern technology platforms.

The opportunities

Irrespective of the distinct peer groups, themes around transformation and innovation to control and reduce cost and become increasingly efficient continue to be dominant for the Challenger Banks as pressure around income yields intensifies.

For the Full Service Retail Banks with larger and/or complex operating models, the challenge will be in achieving the volume and scale required to reduce the unit economics around cost to acquire and cost to serve which underpin their operating cost base.

For the Specialist Challengers, the challenge will be positioning for growth through the introduction of new products, propositions and services or even expansion into new markets or geographies, without the cost base increasing uncontrollably. There are a number of strategies that the challengers are employing:

“Digitisation Plus”

Increased digitisation of the Operating Model

Whilst process efficiency achieved through lean and process simplification and the use of robotic process automation has become common-place in reducing costs, elevating this to the next level where Data and Analytics combined with Machine Learning and Artificial Intelligence are incorporated into the Operating Model will be the real step change for Full Service Retail Banks.

Creating fully automated end to end customer journeys from the initial interaction to making the right decision and then executing on that decision without any human intervention will drive real efficiencies.

Some players have started to make progress in this area, for example AliPay whose lending products takes three minutes end to end from taking in the customer data, making a decision through to disbursing the funds to the customer account.

“Eco-system Efficiency”

Becoming a utility player

Whilst some of the Specialist Challengers have actively developed their Operating Models based on utilising an eco-system of partners to reduce operating costs, Full Service Retail Banks continue to maintain a number of in-house capabilities which are cost intensive.

With the ever increasing level of intermediation happening across the entire value chain, Full Service Retail Challengers have the potential to utilise a wider range of partners which provides an opportunity to reduce costs through removing the need to have in-house capabilities.

For example, Chetwood Financial, one of the newest challenger banks, see a key component of the operating model strategy being to utilise an eco-system of partners to deliver elements of components of the operating model instead of the investment on building these capabilities in-house.

“Become a platform player”

Leveraging the operating model more effectively

Challengers have the ability to improve cost:income ratio through leveraging their existing operating model by the provision of banking services to other organisations.

For example, Starling has launched a partnership with Form3 to provide real time access to Faster Payments or OakNorth which is actively looking at how they could develop and take to a global banking market a “banking as a service” model that allows other institutions wanting to get into the commercial banking / lending space a scalable solution. There is potential for more of the full service retail challengers to move in similar directions.

“Spans & layers”

Efficient organisational design

Increased digitisation and automation, the utilisation of eco-system partners and creating more effective back office functions, creates the potential to streamline the organisation by standardising spans of control and reducing management layers. This is most applicable to the more legacy Full Service Retail Challengers who have the size, breadth and depth of operating model to take advantage of this strategy.

“Joining forces”

Consolidation to maximise operating models and the cost:income ratio

The most radical strategy to improve the cost:income ratio is consolidation. We have already begun to see the effect of this consolidation, such as through the CYBG/Virgin Money and OneSavings Bank/Charter Court Financial Services transactions.

“Technology Estate Optimisation”

Cloud adoption and technology agility

The costs associated with the technology estate of all challenger banks are a major driver of cost:income ratios.

Effective strategy and subsequent execution to operate off a technology estate which is flexible and agile from how it is hosted (e.g. cloud based) through to how the platform can be scaled using modular functionality, through to the ease of integration into other technical components, e.g. ability to utilise APIs to adapt to the services and propositions at speed reduces cost and is effective to maintain.

Full Service Retail Banks operating analogous to the big banks have the opportunity in this instance to learn from the incumbents, for example LBG who are accelerating their move to a cloud based architecture using the fintech Thought Machine.

Key contacts

Axe Ali

Axe Ali
Director, Deal Advisory
axe.ali@kpmg.co.uk

Phil Murden

Phil Murden
Partner, Management Consulting
phil.murden@kpmg.co.uk

Two dates loom large for challenger banks’ capital: January 2020, for MREL and January 2022 for Basel 4. Both dates have the impact of increasing the amount of capital required and both will continue to encourage those banks that can to invest in moving to the internal ratings basis (“IRB”) of capital calculation.

Threats and headwinds

MREL

  • MREL (“Minimum requirement for own funds and eligible liabilities”) currently affects only a select four of the larger challenger banking groups (CYBG/Virgin Money, Metro, Tesco and Co-op Bank). It is the requirement to carry bail-in-able capital to support a bank in case of insolvency. It is calculated as the equivalent of Pillar 1 and Pillar 2A capital, so is driven to a considerable extent by a bank’s risk weighted assets. MREL capital can be debt that is capable of conversion to capital or write-off under certain circumstances.
  • The Bank of England determines whether a bank falls within the MREL regime and considers factors such as size (£15bn to £25bn of assets) and the number of current accounts (more than 40,000).
  • To the extent that a bank does not have sufficient capital to meet its MREL requirements, it can issue a range of MREL compliant instruments. The need to carry more capital, whether that be senior non-preferred or subordinated debt, adds to a bank’s cost of capital.

Basel 4

  • Basel IV (or more accurately the second phase of Basel III), the details of which were published in December 2017 and come into force in January 2022, will impact all challenger banks and is likely to increase their capital requirements whether they are on the standardised or IRB approach to capital calculation.
  • For banks that use the standardised approach, the impact is a move towards using asset risk weights which reflect the risks of the lending. Residential and buy-to-let lending risk weights will rise in stages in line with loan to value ratios. Additionally risk weights for commercial property investment lending will rise. These are precisely the types of lending that many challenger banks have seen as attractive niches and have focused upon.
  • Moving to the more sophisticated IRB approach to capital, as three challenger banks have (CYBG/Virgin, TSB and Co-op Bank), reduces capital requirements compared with the standardised approach. However, Basel IV has introduced minimum floors that restrict the impact of IRB to a maximum of 72.5% of the equivalent standardised approach capital requirements. Nevertheless, IRB accreditation is still valuable for a bank that is caught by or has ambitions to grow to a size that may be caught by MREL.
  • To gain IRB accreditation, banks are required to have significant amounts of data about how their lending books have performed in the past, to build and demonstrate the effectiveness of a range of complex, predictive credit loss models. Although IFRS 9 has meant many banks have had to invest more in credit risk loss modelling, the step up to IRB is still significant and a hurdle.

Read more about Basel 4.

Key contacts

Simon Walker

Simon Walker
Partner, Risk Consulting
simon.walker@kpmg.co.uk

Steven Hall

Steven Hall
Partner, Risk Consulting
steven.hall@kpmg.co.uk


Overall the future for challenger banks requires more capital and will reward those who invest more in capital planning, modelling and careful product design.

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Term Funding Scheme (TFS)

The Term Funding Scheme was part of the package announced by the Monetary Policy Committee in 2016 with the aim to pass‑through the cut in the Bank Rate to the interest rates faced by households and businesses.

Participating banks and building societies were able to borrow at a rate close to the Bank Rate for up to four years.

The Scheme closed in February 2018 and drawn funds will need to be repaid within four years of the transaction date.

  • Total borrowings
  • Challenger borrowings

Source: Bank of England, as at 31 March 2019

Current accounts

Pros Cons
  • Potentially low cost of funding
  • Large available market
  • Digital entrants have shown that demand exists for alternative current account providers
  • Systems costs may be prohibitively high
  • Attracting customers to switch their main current account has proven difficult
  • Level of bonuses and other features attached to current accounts may offset lower funding costs

Instant access savings

Pros Cons
  • Access to the largest part of the UK savings market (c. 55% of deposit balances)
  • Compared to current accounts, a relatively simple product to launch
  • Some systems development for those currently only offering term and notice accounts
  • Higher customer expectation of online/mobile interface
  • Historically many customers have used instant access accounts with their primary current account provider, limiting access for the challenger banks
  • Increasingly competitive, as evidenced by increase in best buy rates since entry to Marcus to the market

Asset based financing

Institutional investor base (securitisation or covered bonds)

Pros Cons
  • Cheap funding with pricing based on an asset pool /and the issuer credit rating
  • Issuance program can be set up to allow swift market access
  • May be able to receive derecognition of assets and reduction in associated capital
  • Large initial admin requirement and ongoing burden
  • Treasury may lack experience in the instruments
  • Enhanced levels of disclosure required

Corporate / unsecured financing

Institutional investor base (senior unsecured bonds)

Pros Cons
  • Simple structure with a minimal ongoing administrative burden
  • Highly liquid institutional investor market
  • Issuance program can be set up to allow swift market access
  • More expensive than asset based financing
  • Pricing may be dependant on the issuer's financial position as well as the underlying rates
  • Treasury functions may lack experience in the instruments

Classifications

Peer group description Characterised by Examples
Full service retail Full range of lending products
Current account
Branch network
CYBG/Virgin Money
Metro Bank
TSB
Co-op Bank
Specialist lenders More limited product set
Targeting specific customer niches
Primarily mortgage lenders:
Charter Court Financial Services
OneSavings Bank
Cambridge & Counties Bank
Paragon
Mixed lending books:
Aldermore
Close Brothers
Shawbrook
Retailer banks Limited product range
Leveraging the retailer’s brand
M&S Bank
Sainsbury’s Bank
Tesco Bank
Digital banks Mobile-first, app based Atom
Monzo
Starling
Tandem

The full classification of banks within our dataset is available in the basis of preparation.

Notes on preparation

In the interactive dashboard, the banks are classified as follows:

  • Retail full service: CYBG plc (Clydesdale Bank Plc prior to 2015), Co-op Bank Bank Holdings Ltd (Co-op Bank Bank plc prior to 2016), Bank of Ireland (UK) plc, Svenska Handelsbanken AB (publ) (UK division), Metro Bank plc, TSB Banking Group plc, Virgin Money Holdings plc.
  • Retailer: Tesco Personal Finance Group Ltd, Marks and Spencer Financial Services plc, Sainsbury's Bank plc.
  • Specialist - mixed: AIB Group (UK) plc, Aldermore Group plc, Cynergy Bank Ltd (Bank of Cyprus UK Ltd prior to 2018), Close Brothers Group plc, Provident Financial plc, Secure Trust Bank plc, Shawbrook Group plc, Unity Trust Bank plc.
  • Specialist – mortgages: Cambridge & Counties Bank Ltd, Charter Court Financial Services Group plc (Charter Court Financial Services Group Ltd prior to 2017), Hoggant Limited (holding company for Hampshire Trust) for 2015-17 and Hampshire Trust plc for 2014/13, OneSavings Bank plc, Paragon Banking Group plc (Paragon Banking Group plc prior to 2017), United Trust Bank Ltd.

CYBG has a September year end, and as a result the 2018 financial statements do not include the impact of the acquisition of Virgin Money. Virgin Money's financial results are separately presented within the dashboard.

The dashboard focusses on UK challenger banks with an established trading record over the 2014-2018 period. As a result, the dashboard does not include the results of many of the new 'digital' challengers that have shorter trading records.

Within the 'Specialist' category, banks have been classified as 'Specialist – mortgages' where their lending books are predominantly secured on property. These books may include owner occupied residential mortgages, buy-to-let residential mortgages and SME lending secured on property.

Information has been obtained from published annual financial statements. No adjustments have been made for one-off/non-recurring items. Loans and advances to customers are presented inclusive of fair value adjustments for hedged risk.

We have taken the following approach to calculate each of the key performance indicators used in this report. These key performance indicators use the reported results. Given that there are no standard definitions for these items, they may differ to the KPIs reported by the banks in their published financial statements.

  • Pre-tax return on tangible equity: profit before tax attributable to the shareholders, divided by the average of opening and closing tangible equity.
  • Gross yield: the gross yield is calculated as interest income divided by the average of the opening and closing total assets.
  • Cost of funding: cost of funding is calculated as total interest expense divided by the average of opening and closing total liabilities.
  • Net interest margin (NIM): the NIM is calculated as total net interest income divided by the average of the total assets.
  • Cost-to-income ratio: the CTI ratio for each sub-division of Challengers is calculated as total operating expenses divided by total operating income. Separately disclosed costs relating to stock exchange listings are excluded from total operating expenses.
  • Cost of risk: Impairment charge on loans and advances to customers divided by the average of opening and closing loans and advances to customers.
  • RWA intensity: RWA intensity is calculated as risk weighted assets divided by total assets.
  • Loan:deposit: Loans and advances to customers divided by customer deposits.

Peer group averages are calculated as a simple average of the banks within the peer group. The following banks have been excluded from calculation of peer group averages either because information is not available or that the institution is an outlier:

  • Pre-tax return on tangible equity: Co-operative bank, Handelsbanken and Provident.
  • Loan book growth rate: Handelsbanken, Hampshire Trust, Charter Court Financial Services (2014-16).
  • Gross yield: Handelsbanken and Provident.
  • Cost of funding: Handelsbanken.
  • Net interest margin: Handelsbanken, Provident.
  • Cost:income ratio: Co-op, Hampshire Trust (2014-15)
  • Cost of risk: Handelsbanken, Provident.
  • Total assets and liabilities growth rates: Provident, Hampshire Trust
  • CET1 ratio: Handelsbanken, Charter Court Financial Services (2014-16), United Trust Bank (2014-16)
  • Loan:deposit ratio: Handelsbanken, Paragon
  • RWAs as a percentage of total assets: Handelsbanken, Cambridge & Counties, Charter Court Financial Services (2014-16), United Trust Bank (2014-16).

At the time of publication, 2018 data was not available for Hampshire Trust or Cynergy Bank.

The financial results for entities with reporting periods longer than 12 months have been adjusted as follows:

  • The 2015 results for Sainsbury’s Bank reflect the 14 month period to 28 February 2015. The income and expenses presented in the dashboard have been adjusted downwards by a factor of 14/12.
  • The 2018 results for Aldermore reflect the 18 month period to 30 June 2018. The income and expenses presented in the dashboard have been adjusted downwards by a factor of 18/12.

Handelsbanken present their results in Swedish Krona. These have been translated into sterling (£) using the relevant period end or period average exchange rate.