‘Don’t bother going to New York’: Why challenger banks are nervous about listing in London

A string of UK challenger banks have hit the headlines in recent months for grand plans to compete with their mainstream rivals on the London Stock Exchange. But executives looking to IPO have plenty to worry about.

Who are the players?

Firms that have said they plan to list include unicorn Starling, fintech lender Zopa and app-based Atom.

Starling previously looked at listing in 2022 and 2023, but plans were put on ice after founder Anne Boden stepped down as chief executive last June.

Monzo, which City A.M. understands is close to a funding round valuing it at around £4bn, is another much-anticipated candidate.

Chief executive TS Anil has hinted it will float at some point, but has been tight-lipped about the timing or location, leading some investors to fear the bank will snub the London Stock Exchange for a big-ticket listing in the US – where Monzo is expanding rapidly. The bank did not respond to a request for comment.

Fellow digital-only unicorn Oaknorth is also mulling an IPO, including listing across multiple exchanges to access a wider range of investors.

Durham-based Atom Bank previously shelved plans for a float until 2024 or 2025 due to volatile market conditions. It declined to comment this week, although chief executive Mark Mullen told City A.M. last year that London would be the “natural” destination for a listing.

The owners of specialist bank Shawbrook are reportedly exploring another IPO for the lender after plans for a £2bn blockbuster listing fell through two years ago. Shawbrook declined to comment.

A Zopa spokesperson said the firm still planned to list in London but would “wait for the right macroeconomic and market conditions”.

Tough market

Despite big lenders posting bumper profits on the back of higher interest rates, the LSE has not rewarded mainstream banking stocks.

The FTSE All-Share Banks index has dropped more than nine per cent in the last year, with analysts blaming economic uncertainty, peak profitability, margin pressure and a public image that has failed to fully recover from the financial crisis.

Robert Sage, an analyst at investment bank Peel Hunt – which helps big firms prepare for public listings – said there was “considerable pent-up demand” among challengers to IPO.

He added: “Over the past few years the issue has been the lack of market receptiveness and low valuation accorded to listed UK banks. The difference between public market and private market valuations has become extreme.”

Funding for challenger banks peaked in 2021 after a boom during the Covid-19 pandemic, with big names like Starling, Atom and Revolut – which is currently seeking a UK banking licence – subsequently seeing cuts to their valuations.

The spectre of consolidation also looms large in the fintech and mid-sized banking sectors, with analysts predicting a wave of takeovers and tie-ups as funding costs rise and some firms become flush with cash.

‘Don’t bother going to New York’

There is a significant gulf between banking stocks in London and New York. Data published by Boston Consulting Group last month showed 73 per cent of European banks were trading below book value, compared to just 37 per cent of US banks.

However, UK challengers are not inclined to simply set up shop across the pond. Sage noted a perception among investors that they are too small to attract serious international interest.

“It is not impossible, but you need a really strong differentiating factor to bring a US investor onboard and just being a bank, or a technology-driven bank, often is not enough,” he said.

“The advice from our brokers is don’t bother going to New York,” an executive from a FTSE 250 bank told City A.M.

“If you’re an international investor, you’re thinking ‘The UK is really dull – growth is weak, they’ve stepped out of Europe – and if I even invest anywhere there, is it really going to be a bank?’”

He added that he would not try to take his firm public now and went even further to say that he would not try to start a challenger bank at all.

Nick Fahy, chief executive of SME-focused Cynergy Bank, flagged “structural issues” in how the stock market values challengers.

“There are many possible futures for us – an IPO is one of them. But there’s no IPO market at the moment, and it’s probably not likely to return in the next couple of years,” he said.

“The problem for challenger banks is the FTSE doesn’t reward them in the right way. It thinks of us as endowment stocks, and we’re not.”

Another challenger chief executive said he did not expect any UK banks to IPO in 2024.

“I think what people are doing is they’re posturing,” he said. “There’s two reasons you say you’re going to IPO. One is to get the investment bankers all clamouring around you to get the best deal.

“Two, opportunistically, if you say you’ll IPO and it’s an interesting asset, you might get a strategic investor to buy you first.”

Analysts expect banking stocks to rebound as the wider economy improves, with Sage predicting strong investor appetite for neobanks – “especially those with credible growth prospects, strong funding capabilities, advanced technology platforms and a proven track record of profitability”.