Written evidence submitted by Shawbrook Bank Limited
[SME0123]
Introduction to Shawbrook Bank
Founding Objective
Shawbrook Bank is a specialist British lending and savings bank that was founded in 2011 on the belief that the market dislocation following the credit crunch offered an opportunity to build a traditional deposit taker and specialist lender to SMEs and individuals. Shawbrook does not have a branch network, but has a national presence through its distribution channels.
Activities and Loan and Deposit Originations
Shawbrook’s specialist lending businesses now support over 77,000 small business and personal customers across asset finance, commercial mortgages, consumer finance, secured lending and savings. In 2012 the bank organically generated £480 million of new loans, with exceptional focus on customer service being its differentiator. In 2013 we advanced a further £997m, of which lending to SMEs was just over £700m.
Shawbrook originated customer deposits of £924m and £1.3bn in 2012 and 2013 respectively. We currently have over 11,500 SME business customers, and are actively lending to over 9,500 of these, with the balance being savings customers.
Size, Profitability and Service
Shawbrook had a customer loan book as at 31 December 2013 of c£1.4bn and has demonstrated the strength of its diversified business model over the last 12 months through a continual improvement in profitability as the business has grown. Shawbrook’s strong levels of service and relationship-building are a core part of its make-up.
Employees and Location
Shawbrook employed 305 people in the UK at 31 December 2013 and its principal locations are Brentwood in Essex, Dorking in Surrey and Glasgow.
Small and Medium Enterprises
Shawbrook has two principal business divisions which are focussed on servicing the UK SME sector:
Shawbrook Asset Finance provides traditional, regional asset finance lending to UK SMEs to fund ‘hard’, mainly wheeled assets such as commercial vehicles, commercial marine vessels, cars, vans, buses, recovery vehicles and other plant and equipment. It also finances taxi drivers and taxi fleet operators.
Block discounting and wholesale finance to small financial institutions, backed by the customer’s receivables, are also offered. Our healthcare asset finance team offer operating and finance lease facilities to healthcare providers in the UK, including to NHS trusts.
Services are provided through a mix of direct and broker distribution, with an emphasis on direct. We have experienced teams of product and market specialists and our long standing relationships across the business lines ensure a high level of repeat activity. In particular, we frequently visit customers on their own premises at times of their convenience, not ours, and offer quick decision making, partly because we empower our teams to make decisions.
As at 31 December 2013, the overall asset finance book stood at c£450m.
Shawbrook’s Commercial Lending division offers loans to experienced buy-to-let property investors for residential and mixed use (e.g. retail with living accommodation above) properties and loans to seasoned SMEs against the security of their commercial owner-occupied properties and, finally, short term loans for property refurbishments.
Our Commercial Lending division has invested heavily in developing a specialist manual underwriting team that can identify high quality clients who sometimes do not fit within the rigid criteria of tick box mortgage lenders. In that respect, we fulfil two of our key “pillars”, or values, which are that we will be “human” and “expert” in what we do.
We maintain a strong focus on our customers’ ability to pay, with careful affordability analysis, and also have strong collateral, with an average LTV of 63% (as at Dec 2013). Our strong service proposition includes the provision of an in-principle underwriting decision within 48 hours. Our product range includes niche areas that fall outside a standardised market. Our long standing partnerships with our broker distributor base secure loyalty and an efficient route to market.
As at 31 December 2013, the commercial lending book stood at £541m.
Shawbrook’s three other divisions, Consumer Lending, Secured Lending and Savings service a mix of SME and personal customers:
Consumer Lending provides a range of unsecured personal loans for a variety of purposes, primarily focused on home improvements and holiday ownership. A number of home improvement providers and retailers use Shawbrook for their consumer lending activities. As at 31 December 2013, the consumer lending book stood at £115m.
Secured Lending provides loans secured by way of a second charge on the customer’s primary residential property. As of 31/12/2013, the secured lending book stood at £294m.
Savings currently raises its funding through retail and business deposits. This provides the bank with access to a stable and flexible source of funding by offering customers attractive and competitive savings products. We do not offer “teaser” rates- our offering is simple and transparent. Our deposit book is c77% fixed period, with conservative duration, and the remainder on a notice basis. We are also participants in the Government’s Funding for Lending Scheme, albeit modestly for the present.
We are pleased to submit written evidence to the Treasury Select Committee as part of its current inquiry into SME Lending. This submission focuses on the services of Shawbrook Bank as a specialist provider of SME funding through its asset finance and commercial lending divisions, and on the specific questions posed, and on areas where we feel that the relevant authorities could spur growth in SME access to credit.
Executive Summary
EVIDENCE
Access to SME finance
Question 1:
1. Are Small and Medium sized Enterprises (SMEs) able to access credit?
1.1. Access to credit
1.2. In brief, there are alternative suppliers of credit to SMEs, but it takes time for awareness of these to grow.
1.3. In our chosen SME markets, we do not currently believe there is an overall absence or lack of supply of credit, and indeed nor is there a shortage of demand as evidenced by our own growth. However, there are problems in matching SME demand with channels of supply other than clearers because SMEs are very often unaware that new banks exist, or how to contact them. In other words, the supply gap is being filled at least partially outside the big clearers, but the SME audience is only gradually becoming aware of this. Furthermore, it is more helpful to consider the specific drivers and influence of access, as follows:
1.3.1. Risk Appetite
1.3.2. Shawbrook, like other peer banks, has ambition to lend in certain SME markets only and has a conservative risk appetite.
1.3.3. Specifically, we currently lend on a secured basis only to SMEs, with the collateral being property or hard equipment. We do not currently participate in some of the other leading product areas within SME funding, including overdrafts, invoice discounting and other forms of working capital provision, though this may change in the future.
1.3.4. As a result, we do not offer unsecured overdrafts in the way that clearing banks used more commonly to do. We provide liquidity and support with the virtues of quick decision making but our risk appetite does not extend to the higher risk areas (some of which have an equity flavour). These are products which young companies, in particular, sometimes aspire to. Some of our peers have embraced a higher risk appetite, and in some areas we have been surprised by the extent of this, though we are not influenced to raise our own appetite.
1.3.5. So, in brief, access is influenced by the quality and risk profile of the proposition.
1.3.6. High Street banks
1.3.7. We comment under Q2 on what we perceive to be some of the barriers faced by SMEs when dealing with high street banks. In addition, we feel that SMEs have generally lost confidence in the clearers and in the willingness of the large banks to take an interest in their businesses as individual cases; in short, they feel themselves to be at the mercy of vast bureaucratic organisations where the establishment of a human relationship is a real challenge. We believe that SMEs are still often unaware that specialist banks like Shawbrook exist as a source of alternative lending that is secure and fully regulated, and therefore a credible alternative.
1.3.8. Finally, SMEs are fearful that exploring alternative finance could count against them with their clearer; it is therefore likely that there is a latent level of demand of which we are not aware and of which alternative suppliers, like Shawbrook and its peers, will gradually absorb more as such awareness increases.
Question 2:
2. If not, what are the reasons SMEs do not obtain credit, including for
example:
2.1. Asset Finance and Commercial Lending – supply and demand
2.2. We have already said under Q1 that we believe SMEs to have access to a range of providers in asset finance and commercial property, at least in theory. We have also explained why such SMEs have lost confidence in the clearers and may lack the knowledge to seek out alternatives. But if a strong service is provided, the demand is there.
2.2.3. Working Capital and Invoice Discounting
2.2.4. We are aware, although we do not directly participate in this arena, that there is also a spectrum of credible providers of working capital facilities by way of invoice discounting including, at the larger volume end, divisions of clearers, and at the medium and smaller end, more specialist firms in private ownership, many of which will (as we do in our chosen markets) compete on certainty of delivery/service as these are virtues strongly valued by clients.
2.2.5. Barriers to obtaining credit from clearers
2.2.6. We believe there is a range of reasons why SMEs still perceive it to be difficult to borrow from larger banks, which include:
2.2.7. Taking these points in turn, we believe that SME customers are pessimistic about the amount of time a large bank will take to progress its proposal, partly because they believe that delegated decision making does not exist and that as a consequence they are not talking to individuals in the regions who have any real influence. An adjacent point is that by not delegating authority to branches, banks create the perception for SMEs that the decision makers are detached from their sector and geography. Finally, large banks have a reputation for credit provision to companies with a specific or implied condition that the client transfer its non-borrowing business to that bank and the accompanying administrative burden is a further barrier.
2.2.8. Shawbrook provides customers with the opportunity to talk to decision makers and does not require the borrower to transfer a range of other business.
2.2.9. To illustrate what we perceive to be the difference between a responsive and “human” interaction with a customer and that customer’s experience with a larger bank, we attach a link to a published case study at appendix A.
3. Why hasn’t the market filled the gap?
Question 3:
3.1. Whether competition amongst banks in the UK retail market has increased or decreased since the crisis, and the effect this has had on
SMEs
3.1.2 In well established markets such as those we choose, competition is gradually increasing, but the clearers remain difficult to access for the reasons explained under Q2.: we know, anecdotally, that a lot of our customers come to us because the bigger banks have either indicated they don’t want to undertake further lending as they reduce their balance sheets, or their service proposition is too slow. Shawbrook can react with a swifter, customer relationship orientated model.
3.1.3. In general we believe that the clearers are supporting SMEs less than they
were pre-crisis, but that there is a gradual increase in alternative providers, and also believe that the role of specialist providers encourages the larger banks to be less cumbersome and more transparent.
3.1.4. Credit Information
3.1.5. In addition the large banks create an uneven playing field in the provision of the information needed for more accurate credit assessment by specialist finance providers, as we do not presently have access to current account data for SMEs – we can only view ‘negative’ and not ‘positive’ data. If we were able to see all data this would help our lending decision and increase supply. Also it might encourage new lenders into other markets.
3.1.6. The Office of Fair Trading, the Competition Commission and the ‘Boosting Finance Options For Business’ Review have all highlighted a lack of information about the creditworthiness of SMEs as a potential barrier to competition in the SME banking market and SME lending in particular.*
3.1.7. Shawbrook calls upon the government to follow through on its intention to legislate to require banks to share information on their SME customers with other lenders through Credit Reference Agencies (CRA). Such legislation would improve the ability of challenger banks and alternative finance providers to conduct accurate SME credit scoring and make it easier for SMEs to seek a loan from alternative specialist finance providers.
Question 4:
4. The scope for new or alternative providers of credit to enter the SME
lending market, including the barriers to entry facing them.
4.1. Scope to grow
4.1.2. There remains excellent scope for smaller banks to play a good part as we continue to demonstrate. The decline in appetite for much SME lending from bigger banks is key to this.
4.1.3. Assistance – Funding for Lending
4.1.4. Shawbrook has taken advantage of the Funding for Lending Scheme (FLS) to assist its scope to lend to SMEs. FLS has helped Shawbrook participate to a modest extent in markets that would otherwise be closed because of the cost of a funding model that depends on retail deposits. In 2013 Shawbrook lent £83 million to SMEs in the commercial lending sector via the FLS. Access to FLS is, however, slow and could be sped up to the advantage of all concerned. The level of over-collateralisation required is also extremely high, and this limits the degree to which it can be influential.
4.1.5 Other benefits: recovery of wholesale finance and absence of legacy issues
4.1.6. We have noticed more liquidity, wholesale finance and securitization in the markets over the last 12-18 months which has benefited specialist providers.
4.1.7. New entrants, like Shawbrook, are viewed positively as having none of the legacy issues associated with UK high street banks, and are more attractive propositions to future investors who have spotted the opportunity of a growth market.
4.1.8. What would have made it easier for Shawbrook to enter the market in 2011?
4.1.9. In 2011 there was very little liquidity in the wholesale and asset-backed
capital markets and therefore the principal means of funding SME lending was open only to authorised banks. It was essential therefore to have a banking licence which we duly acquired. Clearly, more liquidity in the capital markets or other sources of reliable funding would have been helpful.
4.1.10. We have also noted that there now appears to be a smoother process for new authorisations, e.g. more efficiency than in 2011.
5. Regulation, appeals and redress
Question 5:
5.1. Whether the ‘perimeter of regulation’ — the remit of the regulators —
should be expanded to include more lending and selling of financial
products to SMEs
5.1.2. Conduct of business
5.1.3. We welcome enhanced regulatory involvement that protects the customer. We believe that standards need to be high and that good customer outcomes are vital for banks to repair trust with SMEs, but also believe that the introduction of further statutory regulation should be proportionate or there is a risk that it could inhibit supply of credit for business lending, and needs to be carefully considered for unintended consequences.
5.1.4. Capital Treatment
5.1.5. The smaller firms would have benefited, in the past, and would also do so in
the future, from a regulatory regime which narrowed the gap regarding capital treatment between those who allocate capital on a ‘standardised’ basis and those (generally much larger firms) who hold less capital for the same credits under an IRB approval.
Question 6:
6. Whether banks’ existing appeals and complaints systems work
effectively for SME customers, for example with regard to declined
lending applications, sales of interest rate hedging products, changes
to loan facilities and related allegations of mistreatment
6.1. It is hard for us to comment upon other banks’ existing appeals and
complaints systems. We have our own complaints process which we do believe works effectively. We operate a complaints policy and procedure which complies fully with the FCA’s requirements and which does not discriminate between SMEs and individuals. As we have already explained, there is always a tension between managing risk and customers’ expectations, e.g. they may have a justifiable ambition to grow but banks may perceive a lack of credit or track history.
6.1.2 Banks are not currently required to refer an SME that they have turned down
towards other sources of funding or to identify an alternative lender by sign posting SMEs to alternative sources of funding, which would support SME market growth and competition.
6.1.3 It is important that SMEs know there are alternative sources of finance.
Shawbrook works closely with associations such as the National Association of Commercial Finance Brokers, the Finance & Leasing Association and regional bodies to promote awareness of specialist banks, such as Shawbrook, which are secure and fully regulated to provide a viable alternative to high street banks.
7. SUMMARY
7.1. We continue to believe that more can be done to offer straightforward, reliable services to SMEs with good communications, from financial providers who value SME customer relationships, and that Shawbrook can make its contribution towards that goal.
8. APPENDIX A
8.1. Link to Shawbrook SME case study, published in The Times,
9 September, 2013
http://www.thetimes.co.uk/tto/business/goingforgrowth/article3863781.ece
March 2014