Promising Q3 figures from challenger bank TSB, the spin-off from Lloyds Banking Group (LSE: LLOY), underline that the big four UK banks have a freshfight on their hands.
TSB is just one of a string of new challengers looking to topple the big boys, alongside Virgin Money, M&S Bank, Tesco Bank, Aldermore, Metro Bank, Shawbrook, Williams & Glyn and Santander UK.
Thats quite a roster of pretenders, with some strong existing brand names in there. TSB is already a member of the FTSE 250. Banco Santander has continental scale. Bank investors must take the threat to market share seriously.
Dancing With The Big Boys
The challengers are starting small, but they have big ambitions. TSB posted a 32% rise in pre-tax profit in the third quarter, if only to 41 million.
This is small change forBarclays (LSE: BARC), Lloyds Banking Group, HSBC Holdings (LSE: HSBA) and Royal Bank of Scotland Group (LSE: RBS), who measure profitsin billions, but small can also be beautiful.
Just look at TSBs common equity tier 1 capital ratio of 18.8%. Thats uncommonly healthy, given that the big banks have been battling to get theirs into double figures.
Better still, the challengers can distance themselves from the banking sectors dreadful past. No legacy computer systems (aside from TSB, which still uses Lloyds IT), no legacy mis-selling complaints and no legacy reputational damage: thats all to the good.
The Challengers Challenge
The downside is thatthey still have to shoulder all the regulatory costs that come with being a bank these days, and fund them from a much smaller customer base.
The big four still manage 77% of UK current accounts, and with barely 3% of customers bothering to switch each year, despite the newseven-day switching service, their dominance will be hard to shift.
None of the challengers have come up with a knock-out product as yet. Extras such as interest on current account balances are expensive to offer, especially if youre just starting out.
I cant see banks such as Aldermore or Metro being anything more than niche offerings. Tesco, given its database of Clubcard customers, might have more success in banking than in selling groceries.
Much depends on the ongoing investigation by the Competition & Markets Authority, which could break up the big fours current account stranglehold. If the government bans free banking, the challengers will be competing on a level field, and could make faster gains. Until then, they will continue to lack punching power.
Banking stocks have had another rough year. Barclays, for example, is down 25% in the last 12 months. HSBC is down nearly 10%. But that could make now a great buying opportunity for brave investors.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.