Banks are a bit of a hobby horse for me. My first job in journalism involved international banking and finance; I was a banking correspondent for years, and I’ve maintained a keen interest in the industry ever since.
It’s been a bumpy ride, particularly for the so-called Big Four – Barclays, HSBC, Lloyds and NatWest. Pummelled by the Global Financial Crisis, prodded and poked by online start-ups and squeezed by years of low interest rates, mainstream lenders disappointed investors for years.
Then the tide turned. All four are now at five-year highs, with Lloyds and NatWest unveiling robust interim figures last week, and Barclays and HSBC due to report in the next few days.
While market pundits are focusing on these giants of the industry, smart investors may choose to look elsewhere. Yes, the Big Four believe they can deliver long-term returns but, after their recent run, the upside is far more limited than it was.
Fortunately, there are many more fish in the financial sea and smaller, more specialist specimens could be a better bet for investors.
There are many more fish in the financial sea and smaller, more specialist specimens could be a better bet for investors
SECURE TRUST
Secure Trust is a case in point. Focused on specialist lending, it operates in resilient, profitable markets and is expected to grow at pace. Midas first tipped the shares in the summer of 2023, when they had slumped to £5.56. Today, they are £10.25, soaring more than 80 per cent in two years.
Despite this rally, they are still cheap compared to their peers, and brokers believe they could hit at least £15.
The group works with more than 1,000 retailers, from DFS to Optical Express, so they can offer interest-free loans on items ranging from sofas and jewellery to glasses, dental crowns and implants. Premier League clubs are customers too, including Arsenal, Manchester United and West Ham – using Secure Trust to offer season ticket deals to fans.
The business has been growing fast and should continue in that vein, buoyed by demand from consumers and companies alike.
Real-estate finance is another big area for Secure Trust, with it lending money to property developers, from professional buy-to-let landlords to small housebuilders.
The firm has developed long-standing relationships with clients and visits every property before lending against it, so bad loans are few and far between.
Secure also provides loans to firms secured against invoices or physical assets. This is a multi-billion-pound sector and Secure Trust has a fraction of it but hopes to gain market share as it cements a reputation for service, reliability and technical prowess.
Savers turn to Secure Trust, too, with customer deposits soaring 15 per cent year on year to almost £3.4 billion. ISA, bond and easy-access rates are attractive and the bank has invested heavily in technology to make life as easy as possible for customers. Vehicle finance has been an Achilles heel in recent years, The business is smaller than other divisions but the entire industry has been under investigation, amid allegations of misselling to consumers.
This month, Secure Trust announced it would be steering away from this sector, to bolster profits over time. An ambitious new boss joins next month, too – Ian Corfield, who is expected to accelerate growth across the bank.
At £10.25, Secure Trust shares should deliver strong, long-term growth – with rising dividends, too.
ARBUTHNOT BANKING GROUP
Arbuthnot used to own Secure Trust, nurturing the bank until it was mature enough to stand on its own two feet.
A banking group in its own right, the firm has a long and rich pedigree, combining old-fashioned personal service with tip-top technology and entrepreneurial spirit.
The approach has served customers well – and Midas investors are not doing badly, either. I recommended Arbuthnot shares four months ago at £8.95. Today, they are £9.35, with brokers suggesting they should top £15 in the next year or two.
The business has traditionally worked with wealthy individuals, lending them money, offering advice and providing them with a trusted spot to park their savings.
This remains a cornerstone of the group, but other activities include mortgage lending, financing classic cars and leasing trucks and buses.
Caution is a watchword in every division. President Sir Henry Angest owns 58 per cent of Arbuthnot shares and does not want to see that stock damaged by careless lending decisions.
This philosophy meant that lending in certain divisions fell from last year to this, sending profits down for the six months to June 30. Those close to the bank, however, believe this is just a short-term blip.
Arbuthnot’s prospects are strong, the bank has plenty of cash and Sir Henry is confident about the future, hiking the half-year dividend by 10 per cent to 22p, with 53p forecast for the full year.
That puts Arbuthnot shares on a yield of 5.6 per cent, with more expected for 2026 and beyond. At £9.35, the shares are extremely cheap compared to peers. That makes them a buy, particularly for investors with a long-term horizon.
MANX FINANCIAL GROUP
Manx Financial Group is another small bank, combining mainstream lending and deposit-taking with specialist divisions, spanning interest-free credit for car repairs, loans to tiny businesses and even craft breweries.
The Sumerians were an ancient civilisation from Mesopotamia, with their own religion and deities, including Ninkasi, the goddess of beer. Today, Ninkasi is a thriving business, leasing fermentation tanks and carbon capture kits to craft brewers so they can expand and develop more efficiently. With more than 200 tanks, capable of brewing around a million litres of beer, Ninkasi is the largest firm of its kind in the UK, and Manx Financial owns 95 per cent of it.
Manx also owns Payment Assist, which offers buy-now, pay-later loans to help motorists spread the cost of car repairs. Used by garages nationwide, the business has signed five new deals in the past six months alone, with car dealerships, bodywork shops and Nissan Motor.
Manx Financial is chaired by billionaire Jim Mellon, who has made his fortune by backing and nurturing successful companies.
He unveiled record half-year results for Manx last month, including a 48 per cent hike in the dividend to 0.68p a share. Yet Manx shares remain stubbornly low, at just 27p. At this level, they are a firm buy.
- Traded on: AIM
- Ticker: MFX
- Contact: mfg.im or 01624 694694
TWENTYFOUR INCOME FUND
TwentyFour Income Fund is a specialist lender too, investing in bonds that pay high rates of interest and passing that interest on to shareholders in the form of generous dividends.
In the year to March, the dividend rose 11 per cent to 11.07p. With TwentyFour shares trading at £1.12, that means the stock is yielding nearly 10 per cent per annum.
Dividends are paid every quarter, with smallish amounts in the first nine months, topped up at the end of the year.
The group joined the stock market 12 years ago, and it has since grown nearly six-fold, rewarding shareholders along the way. Chaired by financial market veteran, Bronwyn Curtis, and run by bond whizz Aza Teeuwen, TwentyFour seeks out deals across Europe, where interest rates are high but the chances of default are low.
Current investments include a package of UK household mortgages, a cluster of loans to business customers at Lloyds and several Continental transactions, too. Mr Teeuwen works hard to make sure that deals are sound and the group has been repaid in full on every bond since launch.
TwentyFour invests in complex products but its track record is reassuring and the dividend enticing. At £1.12, the shares should appeal to adventurous investors.
