Specialist challenger banks are offering an increasingly attractive alternative to the high street lenders for investors says broker Liberum, with the potential for healthy payouts over the next 24 months.

The broker says that even in a stress test that assumes GDP falling by 14% and UK unemployment rising to 8% in 2020 all the challenger banks remain well-capitalised.

Key markets for the specialist lenders are showing a strong pick up due to pent up demand for credit, Liberum adds.

The housing market is further helped by the stamp duty holiday until March 2021; COVID-19 is expected to see SME’s cash flow deficit increase to GBP40-70bn with banks’ volumes boosted by government guarantee schemes.

Specialist lenders remain highly profitable despite having to hold punitive levels of capital, it said, especially for mortgage lending compared to large UK banks.

Liberum also believes that the long-term trends in BTL (buy-to-let) and Asset Finance are not fully understood by the market.

“As large UK banks focus on cost reduction and price-sensitive mainstream lending, the specialist lenders are filling the gap in those lending markets which require greater sophistication and bespoke service.

“Moreover, with regulation increasingly demanding a more ‘high touch’ approach to underwriting, the specialist banks have been taking advantage as are now leaders in areas such as professional BTL and asset finance.”

In particular, Liberum has buy ratings on One Savings Bank PLC (LON:OSB) with a target price of 535p, Paragon Banking Group PLC (LON:PAG) with a 535p target and Virgin Money UK PLC (LON:VMUK) with a 165p target.

Close Brothers (LON:CBG) is a hold and Metro Bank PLC (LON:MTRO), where the target price is 94p, a sell.

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