We think recent float Charter Court Financial Services (CCFS), which joined the stock market on 29 September 2017, has the ability to hit the ground running as a public company.

It is a highly specialised bank, focusing mainly on the professional buy-to-let market. This sector has traditionally been dominated by private investors. Tax and regulatory changes to buy-to-let rules announced last year now make it less appealing to amateur private landlords and shifting focus to more serious professional operators.

Charter Court fits neatly into the ‘challenger’ end of the market and its closest peer in terms of business model is OneSavings Bank (OSB). Charter Court has some impressive past performance to help it stand out from the crowd; it doubled its loan book in 2015 and again in 2016 with impairments (or bad loans) running at zero.

Aside from buy-to-let mortgages, it also provides second charge mortgages and bridging loans. It has the capacity to grow in this space as more mainstream lenders tend to steer clear of the complex underwriting criteria put in place by the Prudential Regulation Authority.

The company has targeted 20% loan book growth and a return on equity of around 25% in the medium term. If it can hit these numbers then the current valuation looks way too low.

The Wolverhampton-based lender has a higher risk appetite than some of its peers according to Ian Gordon, an analyst at Investec. While banking and risk-taking are not considered a good combination in today’s market, the success in keeping a lid on impairments to date suggests the company is good at managing these risks.

Charter Court is a well-capitalised bank. It has a common equity tier one ratio of around 13% to protect against economic shocks. It operates in a niche part of the market which the large incumbents are not active in, so it has more limited competition.

Although the UK economic outlook is somewhat uncertain, the company is well used to navigating a volatile backdrop having been set up in the teeth of the financial crisis back in 2008.

Investec forecasts pre-tax profit of £109.1m in 2017, £130.6m in 2018 and £159.4m in 2019, demonstrating the impressive growth potential for Charter Court.

Gordon at Investec says he believes investors should at least double their money on a three-year view and he says Charter Court is a ‘shockingly cheap bank’. (DS)

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