Aldermore Bank is the third 'challenger' bank to list its shares this year. Should you invest?
Aldermore Bank has announced that it intends to list its shares on the London Stock Exchange. The bank aims to raise £300 million to accelerate its growth in the savings and lending markets.
The bad news for private investors is that Aldermore's initial public offering (IPO) is open only to institutional investors. Any small shareholders wishing to climb aboard Aldermore's wagon will have to wait until after dealing in its shares commences on Friday 17th October. So should you put your money into the challenger bank?
About Aldermore
Launched in May 2009, Aldermore is one of the UK's youngest banks. Despite launching during the global financial crisis, Aldermore made its first profit within three years of launch.
Many will not have heard of Aldermore, simply because it does not offer current accounts and personal loans, nor does it operate a branch network. Instead, Aldermore offers savings accounts and mortgages to personal customers, plus commercial finance to British businesses. Despite being a less well-known savings provider, Aldermore frequently appears in the best buy tables, ahead of much bigger banks.
In its latest update in June, the bank revealed that it had £4.8 billion of assets, and around 160,000 customers.
As well as winning customers, Aldermore is also making money. Its latest financial results included the following figures:
- Profit before tax up by 249% to £18.6 million (from £5.3 million)
- Return on equity of 11.7% (excluding IPO costs)
- Net lending up by 19% to £4 billion (from £3.4 billion)
- Customer deposits up by 11% to £3.9 billion
- Cost/income ratio of 64% (excluding IPO costs) (down from 77%)
- 'Tier One capital ratio' (a measure of balance sheet strength) of 10.9% (as good, or better, than many high street banks)
Another thing that Aldermore's new shareholders won't have to worry about is huge fines caused by historical PPI mis-selling, rate-rigging and so on. What's more, as a technology-led bank, Aldermore has encountered none of the IT problems that have plagued big banking names over the past 12-18 months.
Essentially Aldermore is a clean, modern and scandal-free bank. But can it continue to compete with the big boys?
Aldermore's IPO
Aldermore's owners (mostly private-equity funds and its senior managers) announced their intention to float its shares in an IPO on the main market in London last month. This will be the third flotation of a challenger bank this year, following in the footsteps of US-owned OneSavings Bank and Lloyds Banking Group's flotation of TSB. Since then Virgin Money has announced its own IPO, aiming to raise £150 million.
Aldermore has revealed a price range of between 217p and 265p per share. At the midpoint of this range, the bank would be valued at around £800 million. Aldermore intends to sell shares worth £300 million in its IPO, which could increase by a further 15% (another £45 million) if demand is sufficiently strong.
Aldermore expects to announce its final pricing on or around 17th October, with conditional dealing in its shares expected to begin on the same day. Given that private investors are excluded from this IPO, the first opportunity they will have to buy shares will be the following week.
Should you buy shares in Aldermore?
Aldermore is about as different from Britain's big banks as it is possible to be. It is small, lean, highly focused, and a low-cost operation with just 12 regional centres. Its profits are growing and are not constantly undermined by regulatory fines for past misconduct.
As well as having no mis-selling or 'taxpayer bailout' issues, there is a lot of political support for clean, niche banks such as Aldermore to compete against the established giants.
Despite these strengths, there are a number of issues that potential Aldermore shareholders should be aware of before buying.
In particular, Aldermore does not have access to ultra-cheap wholesale funding like the big players do. Hefty regulatory costs are likely to weigh heavier on smaller-scale banks too. That means Aldermore's net interest margin is likely to be smaller than those achieved by its larger rivals, especially when it pays such high rates of interest on its savings products.
Another problem that Aldermore faces is the loyalty - or, more accurately, lethargy - that holds people back from switching banks. When it comes to keeping our money in a safe place, the big banks still control the vast majority of the savings, mortgage and lending markets.
Personally, I'm excited about Aldermore's arrival as a listed company, but whether or not I buy its shares will depend entirely on their pricing. If they come in at the lower end of the 217p-265p range, then I might well be tempted to buy some in the open market in a fortnight's time.
What do you think? Will you be investing in Aldermore? Let us know your thoughts in the comments box below.
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