Aldermore is a private-equity funded bank operating across similar divisions as Shawbrook but with a larger exposure to mortgages. Aldermore is Shawbrook’s poorer cousin in more respects than this: costs are high, net interest margins are low, and the approach to growth appears to be more aggressive and risky. The sector is clearly benefitting from significant tailwinds as the economy recovers and funding costs fall. When this tide changes, I think Aldermore will struggle to manage the transition.
Aldermore’s operating profit is weighted towards the mortgage business, with 63% of group operating profit coming from the two mortgage units. The remainder is largely secured lending to SMEs.
Aldermore doesn’t break down their gross asset yield and net interest margin by division but we can get a rough estimate for the numbers that are given. The main issue with this estimate is the Invoice Finance division. Aldermore generates a significant proportion of fee income from this business, we have just included interest income and expense below. This is inaccurate but offers a comparison against other divisions. Readers should be aware that this doesn’t reflect the whole economics of the business.
The return on Asset Finance is high relative other divisions but quite low relative to Shawbrook.
As with Shawbrook, wheeled vehicles comprise a significant part of the security here. At a minimum, ~42% of this division’s loans are secured by wheeled assets, based on the vague disclosure given. If we look at the loan book by industry, ~45% of exposure is to sectors which are likely to have assets which are largely wheeled assets but it could be significantly above this level.
20% of the book is exposed to “soft” assets with no or minimal secondary value. How is this different from unsecured lending? I am not sure. The whole point of asset finance is to supply money to businesses that require lots of assets. If you are lending to a business without valuable assets…that is just unsecured lending.
Management note that “soft” asset lending is an area targeted for future growth. I don’t like the sound of this at all. Net interest margins are low, impairments are also low but I am not quite sure I see the logic here. It feels like management are just looking for volume wherever they can find it.
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