Britain's upstart banks face a bumpy ride through Brexit fall-out

Sun Jul 3, 2016 6:45am EDT
 
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By Sinead Cruise and Lawrence White

LONDON (Reuters) - Facing the prospect of their first UK recession, Britain's small specialist lenders could struggle to cope with a downturn, especially in the small and medium-sized business sector that is their lifeblood.

The promises of the so-called challenger banks, many just a few years old, to improve customer choice and challenge the dominance of big High Street lenders are looking shaky after Britain voted to leave the European Union, some investors and analysts say.

Challenger banks' ability to take business from lenders HSBC (HSBA.L: Quote), Lloyds Banking Group (LLOY.L: Quote), Barclays (BARC.L: Quote) and Royal Bank of Scotland (RBS.L: Quote) relies on healthy bank funding markets and a buoyant UK economy with rising demand for loans.

But as economists slash UK growth forecasts and borrowers and home buyers run for cover, those three factors could be under threat.

The UK could go into recession in the coming year, according to economists and strategists polled by Reuters. Britain last had a recession in 2008-2009, following the financial crisis.

"The outlook for the important small-to-medium enterprise sector looks likely to be hardest hit and a credit cycle inevitable. We think it's logical that banks have sold off so dramatically," Matthew Beesley, head of global equities at Henderson Global Investors told Reuters.

Marcus Stuttard, head of the London Stock Exchange's AIM board which provides funding for small businesses, told a government committee it was likely "companies will delay making investing decisions and therefore requesting finance" until Britain's economic future looked more secure.

Financial sector shares fell sharply after the referendum result last Friday. Among challenger banks, shares of Aldermore ALD.L, OneSavings Bank (OSBO.L: Quote), Shawbrook SHAW.L and Virgin Money VM.L have fallen an average 37 percent. Britain's four largest banks fell an average of 21 percent in the same period.   Continued...

 
Rain clouds pass over Canary Wharf financial financial district in London, Britain July 1, 2016. REUTERS/Reinhard Krause