It has been a better year than expected for Britain’s specialist banks.
At the start of 2025, Panmure Liberum thought the outlook depended on how far regulators and government would lean into pragmatism.
Nine months on, the bet has paid off: the sector has re-rated, share prices have perked up and there is a sense that the worst of the regulatory overhang is behind it.
The mood has been helped by a Supreme Court ruling on motor finance that dodged a worst-case scenario, a clampdown on claims management companies (CMCs) peddling spurious complaints.
And it has been lifted further by a tweak to MREL, the capital rules that had threatened to crimp growth for mid-sized lenders such as Paragon Banking Group PLC (LSE:PAG) and OSB Group PLC (LSE:OSB).
Throw in some warmer words from ministers about making the UK a financial services hub, and sentiment has shifted.
Not that risks have disappeared. Public finances remain stretched and talk of fresh tax raids, perhaps by raising the bank surcharge, the extra levy on profits above £100 million, could yet spoil the party.
Higher personal taxes would hit demand for loans just as surely as they would squeeze repayment capacity.
And while falling interest rates should in theory reduce funding costs, the fight for deposits remains fierce as banks scramble to replace cheap money borrowed during the pandemic.
On valuations, Panmure insists there is still value to be found. Paragon, a buy-to-let and commercial lender, is on about 8 times forecast earnings with a 5% dividend yield.
OSB, another property-focused lender, trades more cheaply still, though it carries some baggage from past regulatory run-ins. DF Capital, the small business financier, has been upgrading guidance yet its shares change hands for just 7 times 2027 earnings.
Even Vanquis, the credit card group that has been the standout performer this year with shares up more than 100%, is priced at only 4 times earnings in two years’ time.
Interest margins, the spread between what banks earn on loans and pay on deposits, are another point of debate. They widened in the rate-rising cycle of 2022-23 but will inevitably come under pressure as rates fall.
Panmure argues the market has already factored this in, and each lender has quirks that help soften the blow.
Vanquis earns far fatter margins than mainstream banks, so a few basis points here or there matter less. OSB has a book of low-margin loans written in choppier times that will roll off and be replaced at healthier spreads. Paragon’s move into higher-yielding commercial lending gives it another buffer.
The conclusion? Regulation looks less hostile, valuations are still modest and the sector has shown resilience. There are tax clouds on the horizon, but after a few lean years, investors in these lenders might finally feel that the balance of risks has shifted in their favour.