Allica Bank’s recently launched asset finance offering sees itself as starting up just at the right moment in time, hoping to play a significant role in the economic recovery as a funder of SMEs cut adrift by the challenger bank’s bigger and more established rivals. Alejandro Gonzalez talks to Allica’s new asset finance boss, Richard Cameron, about his plans.
Richard Cameron, Allica Bank’s head of asset finance, has either one of the most exciting new jobs in UK leasing or one of the most terrifying, I’m just not sure which.
His role is exciting because the opportunity to build an asset finance proposition from scratch for one the UK’s newest banks, sourcing the latest technology and recruiting your own team, does not come up often, but it must be a bit terrifying jumping into this sector right in the midst of a pandemic and just as the UK economy faces a double-dip recession.
But talking to Cameron by video conference he betrays no signs of a man embarking on a hazardous mission. Far from it, he’s upbeat and excited about getting on with the challenge, and what’s more he’s got plenty of top-tier UK banking experience and is armed with a four-year roadmap for getting Allica to its desired destination.
“We want to lend in excess of £100m this year,” he says as he explains how SME funding has changed during the pandemic.
“What has happened over the last 12 months is that SMEs’ cash reserves have run down as a result of the Covid trading environment and that’s seen many businesses turn to bank facilities, such as CBILS and BBLS, to carry on trading.
“I’m fairly certain that, as the vaccine is rolled out across the UK, the addressable market, and the opportunities for ourselves and my peers in this sector, will see an oversupply of needs for what we can do,” he says.
Since gaining its banking licence in September 2019 Allica’s directors have moved at lightning speed to put the bank on a technological footing and has appointed key people without apparent pause during lockdown.
Term funding scheme
Under its banking licence, Allica is permitted to fund loans with customer deposits from savings accounts and, under the government’s Term Funding Scheme, recently extended to October 2021, is able to benefit from near-zero per cent Bank of England borrowing that rewards SME lending.
The regulatory, reporting and capital requirements for banks are comprehensive too, Cameron reminds me.
At this early stage of its growth, Allica is interested in pursuing non-regulated commercial lending only, “but this may change in the future,” he adds.
“Allica bank’s DNA is to serve SMEs, up to circa £50m turnover per annum, with asset finance loans of up to £250,000, and the bank is funded to support customer transactions of up to £2m on property.
“This year is about stabilisation early on, then growing our portfolio, and later we will be introducing enhancements, such as increasing our maximum transaction size as the portfolio starts to build,” he says.
Cameron’s Allica journey began in June 2020 when the bank signalled its intention to get a slice of the UK’s asset finance market – valued at £35.7bn, according to the Finance & Leasing Association 2019 figures – by appointing him to lead the bank’s asset finance proposition.
Cameron has nearly 30 years’ experience in financial services and has held positions with the UK’s top asset finance banks by value, including RBS-owned Lombard as well as spells with NatWest (RBS) and the Lloyds Banking Group.
A couple months after joining the challenger, Allica appointed a new chief executive when its CEO since April 2018, Mark Stephens, the former founding director of Aldermore, announced his retirement and resignation from executive roles.
Allica’s new CEO is Richard Davies, a C-suite executive with solid fintech credentials who comes to the bank from five-year-old digital bank Revolut, where he led the group’s global banking proposition, including launching its bank in Europe and developing its plans in the UK.
Cameron says one the benefits of joining a young bank is the lack of luggage – specifically legacy IT systems and processes – often associated with the more established banks, and also he adds, “we are entirely forward-focused on supporting business funding without the challenges our peers have with managing forbearance requests.”
“Covid has exposed fragilities and lack of customer self-service in the asset finance market. That’s something we have addressed with straight-through processing,” he says.
Allica has partnered with NetSol Technologies, a US-based provider of asset finance software and IT services to develop “a paperless digital portal that allows our brokers 24/7 login access, it offers a 24-hour turnaround on credit decisions with same day payout, plus it comes with real-time updates.”
As a growing business, Allica has been recruiting plenty of talent during lockdown. Currently it has around 130 staff members, of which 80 have been taken on since March 2020.
Also, the bank is not hindered with legacy management structures that can bedevil the average incumbent bank. “I matrix manage,” says Cameron.
“We have five business development managers, but they run through our head of intermediaries, I have an asset finance mission squad made up of a product owner and some key people. We have three in the operations team and three underwriters, but they sit in the different functions of the bank. The whole point is not to create any internal or external silos.
“We’ve built a cross-functional team from the outset. Where we are today is where many big banks want to be, with some banks reverse engineering their operations to get there,” he says.
Cameron says he knows of at least two UK bank asset finance providers who are resizing pools of staff and switching their focus, all of which is being achieved at some cost. “We’ve got none of that,” he adds.
But, along with the rewards there are also risks for any young bank, particularly in a downturn. John Cronin, financials analyst, investment banking, for Goodbody, says: “Last year, in a listed-company context, if you look at niche lenders such as OneSavings, Paragon Bank and Close Brothers, they all massively outperformed their larger bank peers.
“I believe specialisation is going to present significant growth angles for lenders like Allica Bank and the market it is pursuing presents a growth opportunity, it is also one that is largely underserviced by larger banks, but no bank, including Allica Bank, can guarantee it won’t meet with certain loan losses as the year progresses.”
In Allica’s favour, its board has concluded it has secured the commitment of further equity from its existing investors, and that management has demonstrated a credible plan to manage its regulatory capital requirements by controlling new lending volumes, according to the bank’s most recent financial statement.
Against this backdrop, the stock market is powering ahead, demand for commercial lending is up and, more significantly, Allica’s leadership believes it has spotted a funding gap in the market.
In September 2020, Allica announced it had secured an investment of £26m from its majority shareholder, Warwick Capital Partners Ltd, and is currently in talks to raise a further £100m in equity.
Allica reported it has had over £1bn of enquiries from SMEs last year. “The bank is building significant momentum in lending and deposits. Allica has secured over £100m in deposits over the last six months and is now averaging over £25m per month in committed loan offers to established SMEs,” it said in a September 2020 statement.
The FTSE100 has also had a great start to the year, up about 6 per cent on where it was before the Covid-19 vaccine rollout.
David Cummings, chief investment officer, equities, for Aviva Investors, told the BBC in mid-January that the markets are confident a vaccine-led recovery is on the way.
“The market is taking the view that post Q1, economic activity will normalise and be supported by strong fiscal support, with government spending, and this will be reinforced by a Joe Biden administration in the US.
“Also, there is continuing support, monetary policy-wise, and interest rates are expected to stay low. As far as the market is concerned, the pandemic is over, and investors are looking to where we will be in 9 to 12 months’ time,” Cummings told reporters.
In a statement, Allica says it is seeing evidence that “a significant funding gap is opening up for established SMEs who make up a quarter of the economy – those typically employing 5-100 employees with annual turnover between £1m-£25m – as mainstream lenders reduce SME lending appetite and non-bank lenders face significant funding pressures.”
In an interview with The Financial Times, Allica’s chief executive said: “A lot of incumbent lenders have either withdrawn from the market because of their own issues or focused on government schemes [to help struggling businesses] — the irony is a third of the market that is not badly impacted is seeing the least supply of finance.”
Cameron explains that with SME risk profiles shifting up slightly because of Covid, the big banks are unlikely to move up the risk curve to serve SMEs who no longer fit their credit criterion.
“Many SME customers who once sat in the cross-hairs of the tier-one banks through their credit appetite, because of the way that Covid has affected balance sheets and trading, have moved into the next cluster of funders as an addressable market,” says Cameron.
In the aftermath of the 2008 global financial crisis, “when Shawbrook, Aldermore and others opened their doors to serve such customers in 2009 and 2010, these specialist lenders were able to move into this space created by the big banks,” recalls Cameron.
“That’s what is happening now. The tier-one banks will have viable business that sit within their portfolios but may not want to lend them any more money because these SMEs have CBILS or cashflow products on their books.
“What that means for banks, such as us, is the need to become more projection-led when it comes to lending. You can’t use backward-looking data for many businesses because the business case won’t look so great, the skill is in assessing sales and revenue potential. We need to ask, is the business viable?,” he says.
Cameron also has another target in his sights: “In a sense, my biggest competitor isn’t Close Brothers, Hitachi, Shawbrook, Aldermore, United Trust Bank and the others, it’s cash and bank facilities.
“When you look at the amount of fixed asset funding in the UK, asset finance doesn’t fund more than a quarter of what’s put on a company’s balance sheet, this is because companies tend to use bank facilities, such as cash and property, to buy assets.”
Meanwhile, Allica’s chief executive says its £100m funding round, expected to conclude in early 2021, will allow the bank not just to broaden its service and product lines, but position the bank to take advantage of any M&A opportunities that may arise in the non-bank lending market.
Many non-bank lenders — unable to directly borrow from the Bank of England at rates on par with the banks — have struggled with their own funding during 2020 as borrowing on the wholesale markets has risen during Covid. Also, rising default levels among their customers have put them at risk of breaking covenants on their existing funding agreements.
Cameron says conversations have already started: “We’re in active discussions with two or three asset finance non-banks about how we might be able to support them, and I would be interested to talk to other funders who feel there’s a mutually beneficial opportunity to help each other to potentially access Allica’s balance sheet.”