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Shawbrook Group (LSE:SHAW) is set to join the FTSE 250 in the latest reshuffle. The stock is up 12% after launching on the stock market at the end of October.
At first sight, another UK bank isn’t really something to get excited about. But a closer look reveals a differentiated business model that generates superior returns to its rivals.
Not another bank stock
Banks aren’t particularly hard to find on the UK stock market. But Shawbrook is different to the likes of Lloyds Banking Group and Metro Bank — and I think it might be better.
Possibly the most important difference is that it focuses on products associated with specialist property financing and niche business loans. And there are a couple of reasons for this.
One is that there’s less competition from bigger banks that typically focus on larger markets. Another is that customers typically value speed and flexibility over pricing.
This means Shawbrook’s loans typically come with much higher interest rates than other banks. And that shows up in some attractive operating metrics.
Margins and profits
One of the key metrics for assessing bank profitability is net interest margin. This measures the difference between what the firm pays on its deposits and what it receives on its loans.
Shawbrook’s net interest margin is around 5%. And that’s around double what other UK competitors such as Lloyds and Metro Bank have achieved in recent years.
Return on equity – another key metric — is also very high. Shawbrook achieves around 17%, which is again roughly double what Lloyds manages and well above Metro Bank’s results.
In other words, it’s pretty clear that the FTSE 250 newcomer isn’t just another bank. It’s got a differentiated strategy and this leads to returns that stand out from the crowd.
Risks
Despite some very positive results and an interesting strategy, there are some issues to consider. One of these is the risk that comes with building development loans.
Specialist property loans bring the risks associated with the property market. These include demand falling as buy-to-let landlords struggle with higher taxes and regulations.
This part of the business also includes loans to developers. But a very weak construction PMI reading earlier this week from the UK indicates that the industry is faltering right now.
Given this, paying a significant premium to book value (especially compared to other banks) might seem risky at the moment. And that’s something to be aware of.
Watching and waiting
Shawbrook is a really interesting-looking business that’s going on my watch list. But it isn’t my top opportunity right now, so I’m going to hold tight and look for a better entry point.
There’s a chance one might be on the way. After a strong IPO, there’s a good chance some additional selling might come in a few months – and I’ll be ready if it does.
This story originally appeared on Motley Fool
