Bank North analyst Hardman & Co update on rapid lending rollout

Bank North is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.

Q1: Your report is on a private company. How can potential investors get involved if they want to?

A1: Being private, investors are accessing the company at a very different stage of its life than when investing in a listed vehicle with all the opportunities, and risks that that involves. Bank North has done a series of equity raises for retail investors, so our note is an update for them, and information for retail investors who may wish to invest in future rounds should there be any.

Q2: You called your recent note “Jam today “. What can you tell us about it?

A2: With the company having obtained its banking licence and progressing through its mobilisation period, this report updates investors on its rapid lending rollout – currently running better than plan in volumes, margins and loan to value (LTV). Further progress has been made, with recruitment, systems testing (including the savings product) and the risk management framework all moving the group forward out of its mobilisation period. The Series B capital raise is continuing, noting how some financials have been adversely affected by the Ukrainian crisis, while the valuations of others have risen. In this note, we highlight how their characteristics are closest to those of the risers.

Q3: So tell us a bit more about the lending the bank has done?

A3: The first loan completed in January. Applications for over £200m have now been received. Of these, £120m meet current criteria and £50m are in an actively advanced stage of pipeline, which suggests that the bank’s first year’s target of £50m (and our £10m forecast by September) will be exceeded. Current inbound enquiries are running at ca.£10m per week. At the end of 1Q, three brokerships had been onboarded; now the number is 10. The plan for a full run-rate was 20-25. Despite loan volumes exceeding expectations, Bank North is far from running at full capacity. I mentioned £120m of the £200m application meet current criteria. Of the remaining £80m, many will be progressed in the future as the company expands its geographical footprint, so some will be capturing those by new pods and larger loans will also be accepted, as they will not fall foul of concentration caps.

The average margin is ca.460bps, against the plan of 415bps. This, in part, reflects lower competition (positive for long-term earnings) and, in part, the risk outlook. While the LTV had not been targeted explicitly, it was expected to be around 65% and, in practice, has been more in the high-50% region. The security is thus better than expected, even though the margin is also better. The qualitative service measurers are also positive.

Q4: And the overall trading conditions?

A4: A key question on many investors’ minds is how sensitive companies are to a higher inflation and intertest rate environment. Bank North is unusual in that it is a clear beneficiary from rising interest rates. It has surplus liquidity funded by non-interest-bearing equity funding and, as interest rates rise, so does its income. From the current level of low rates, the impact on credit is expected to be small. We do not expect impairments to become a material factor until the base rate rises above 2%. The incremental strain from small rate changes appears modest relative to, say, the affordability impact of energy and food pricing. Clearly, the more that rates increase, the greater the pressure.

It is also benefitting from wider spreads. Some major competitors are focusing on larger loans. There has been a strategic u-turn from its closest competitor, driven by the technology focus of major shareholder, and this creates opportunities for customers, staff and brokers. Finally, there is less competition with risk of recession, but it is important to recognise that they do not have back book to worry about. As a low-cost model, the relative pain of rising costs will be below-average.

Q5:And what has happened to the share price of banks that are similar to Bank North?

A5: If we look for banks with similar business characteristics to Bank North, we would look for those with strong deposit bases and SME businesses. We believe the closest comparators would be Arbuthnot Banking Group (ARBB) and the two Irish banks, Bank of Ireland (BKIR) and Allied Irish Banks (AIB). We have written extensively on ARBB, the closest peer, most recently on 7 April 2022, with our report Back to profitable growth with interest-rate kicker. Between the start of the year and publication of our report, the share prices of these three banks rose by 11%, 14% and 28%, respectively.

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