Aldermore Bank share issue: pros and cons

The so-called 'challenger' bank Aldermore is to float. What does it have to offer?

Aldermore Bank is one of several companies about to float on the London Stock Exchange, although private investors will have wait until dealing begins on 17th October.

One of the so-called 'challenger banks', Aldermore is looking to raise £300 million to accelerate its growth in the savings and lending markets. But are its shares worth a look?

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?

Pros and cons

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.

And that could stunt its future growth.

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, with the possibility of 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.