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(Sharecast News) - RBC Capital Markets initiated coverage of Shawbrook on Wednesday with an 'outperform' rating and 475p price target.
RBC said it likes Shawbrook because it thinks the market is mispricing the whole specialty lender sub-sector, which is trading at the lowest valuation in the last decade, despite being expected to deliver top quartile value creation across European banks.
"In our view SHAW has better tech, greater diversification and will grow faster than peers over the medium term," it said. "However, we prefer Paragon & OSB versus SHAW because: (i) we are ahead of consensus; (ii) there is no PE overhang; (iii) they are expected to deliver higher value creation and total shareholder return yields; (iv) they do not have securitisation risk; and (v) they have a better cost profile."
RBC noted that Shawbrook has performed around 25 transactions over 15 years. It has identified a top 10 M&A target list for the company after reviewing around 180 specialty lenders using a five factor framework and its proprietary methodology.
RBC said that unlike consensus, it has embedded M&A into its model and estimates that Shawbrook will grow faster than peers.
RBC Capital also said it believes political risk is overly discounted. "Although some landlords are pressing pause due to volatile rate expectations, the environment remains constructive, with demand materially higher than supply and continuing professionalisation," it said.
"Landlords will adapt to any changes in the upcoming budget, passing on headwinds to renters.
"Whilst retail banks are starting to do more professional BTL, they are currently sticking to the vanilla end of the spectrum."
RBC argued that Shawbrook is ahead of peers on tech. "We have performed a small survey, testing how quick and easy it is to open an instant access savings account across the specialty lenders," it said. "SHAW was not the quickest account to open, but respondents universally ranked SHAW as providing the best user experience."
RBC said it appreciates that opening a deposit account only scratches the surface of a bank's technological capabilities, "but for a metric that is very hard to access from the outside, it is a start".
Finally, RBC said it does not expect Shawbrook to buy Aldermore as per recent press reports.
"An acquisition of ALD would very likely trigger MREL (Minimum Requirement for Own Funds and Eligible Liabilities), even if the bank was acquired excluding its motor book.
"On this basis we calculate that the transaction could generate EPS accretion of 26% and a return on investment of 11% (ex motor: +20% EPS, +9% ROI). These metrics are not attractive enough to support an acquisition in our view."
