Britain’s biggest IPO of 2025: what you need to know

Photo: Shawbrook.

Shawbrook bank is set to be the biggest London listing this year when it comes to market next month and it gives retail investors the rare opportunity to buy in alongside professional investors.

I’ve scoured the hundreds of pages of documents, run the rule on the numbers, and had exclusive access to grill management and this looks like a good business coming to the market at a bad time, which could create an attractive price at the IPO.

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The price is right

Let’s get straight down to brass tacks on valuation. With the price range now set at between 350p and 390p depending on demand, Shawbrook is valued at between £1.8 billion and £2 billion. The bank made 43p in earnings per share last year, up from 42p the year before. That puts it on a reasonable range of 8.1 to 9.1 times earnings.

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That valuation is in line with other mid-cap financial stocks, but looks cheap for a growing business when compared to the wider FTSE 250 on around 12 times, and is in stark contrast to the S&P 500 on 26 times. Sure, there’s little to no dividend on offer at Shawbrook, but its growth not income that’s the story here.

The closest comparison is probably FTSE 250 listed Paragon Banking Group (LSE:PAG) that has a £16 billion loan book and trades on 8.5 times earnings, but that’s lower growth at 5%, pays a 4.5% dividend, and is more heavily focused on buy-to-let mortgages. Big high street banks such as Lloyds Banking Group (LSE:LLOY) trade on 12.7 times earnings, and NatWest Group (LSE:NWG) on 9 times earnings, which is all the same ballpark.

Another price point to consider was when rival challenger bank Aldermore was taken private by South Africa’s FirstRand in 2017 which paid £1.1 billion, or 313p per share. That was worth 12.7 times earnings for a loan book that was growing 20% a year.

When Shawbrook de-listed in 2017 for around £868 million, they paid 340p per share, or 12.7 times 2016 earnings of 26.8p per share. Now, you’re arguably being offered a bigger and better business at a better price.

Kicking the tyres

So, what are you getting in this share offer? Well, Shawbrook is a bread-and-butter bank. It is largely funded by £16.7 billion in deposits, 60% of which is in stickier fixed-rate savings accounts, from customers and offers £17.1 billion in loans to small businesses, commercial real estate and retail mortgages.

It doesn’t have a casino-style investment bank with high-risk trading, and it doesn’t own lots of different businesses such as pensions and insurance. What it does have that differentiates it from its UK competitors is growth, as it grew its loan book by 14% in the first half of the year, while rivals such as Lloyds are crawling along at 2%, and Paragon around 5%.

Handing out more loans is actually very easy, it’s getting paid back that can be tricky. But the business looks reasonably well placed. Management said one of the key investments during the past decade has been over £300 million in technology to monitor risk and loan exposure.

The loan book looks balanced - of the £17.1 billion loans and advances to customers, the split is 20% small business loans, 42% commercial real estate, 32% retail mortgages, and 5% consumer loans. Management say they want to get that loan book to £30 billion by 2030, and that doesn’t look too much of a stretch as it only has to continue to grow at its current rate.

In terms of the geographic risks, there isn’t one large concentration - the split is roughly 30% London, 20% the South East, 11% North West, 7% West Midlands, South West, Yorkshire, and East Midlands respectively, with the balance in Scotland, Northern Ireland, East Anglia and Wales.

Clean sheet

Profitability in the banking sector is strong at the moment and Shawbrook is no exception, with pre-tax profit up 28% to £163.1 million in the six months to June this year, from £127.1 million in the same period last year. Net operating income, or the amount received in loan interest less the amount paid out on savings, was up 15.5% to £335.5 million, and costs were largely flat, up just 0.5% to £166.9 million.

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Perhaps more importantly though the profit and loss, or income statement, looks clean to me, and by that I mean there aren’t lots of adjustments between the statutory profits and the one management usually like to focus on, which is the adjusted numbers. To my mind, lots of adjustments are always a red flag.

Thankfully, not only are Shawbrook’s numbers for the six months to June 2025 pretty clean, with just £5.5 million in adjustments for management restructuring and a strategic review, but the 2024 annual results included just £1.3 million in adjustments for restructuring and timeshare provisions, likewise 2023 had £15.4 million in restructuring and that timeshare issue again, a portion of which was written back the next year anyway.

So, we’ve got a well-balanced and profitable business with numbers that pass the sniff test. Lifting the bonnet on what’s driving the profitability, the latest half-year figures show pre-tax profit split 37% commercial real estate loans, 33% small business loans, 5% consumer credit, and 25% retail mortgages. The interesting thing is that as higher rates feed through into mortgage renewals, the profitability of that division has doubled on the same period last year.

That, I think, is one of the elements for shareholders here, that this business has built up a large book of loans, but is yet to see the full effect of higher profits from increased interest rates. It’s a bit like a snake swallowing a rat, interest rates shot up in 2022, but most people in the UK are on two- to five-year fixes. So, banks don’t see the full increase in profitability until sometime in late 2027.

This is backed up by analysis from Deutsche Bank that shows most of the UK mortgage market is now on fixed rates, with floating rate mortgages having fallen in popularity to around 7% of the market. The analysis showed the UK also rushed to lock in the last of the lower rates in 2022 on five-year fixes. So, while the peak of mortgage refinancing is still to come within the next two years, it will be less of a shock with rates hovering around the 4% mark.

Credit: Shawbrook.

Credit concerns

The current concern is that problems in US private credit markets are indicative of widespread poor loan standards. Credit markets are confidence driven, so only a fool would say Shawbrook will be unaffected. But, crucially for Shawbrook they have no exposure to the specific private credit markets and structured finance, or collateralised loan obligations or (CLOs), that are in the eye of the storm. So, while they could suffer from an increased cost of borrowing as credit risk rises, they should recover faster without having to recognise specific loan losses.

Management are keen to point out that the loan book is 97% secured against assets. Looking in detail at the loan loss analysis, there hasn’t been a spike or meaningful increase in underperforming loans since interest rates increased sharply three years ago.

Caveat emptor, or bank buyer beware

All investors in banks need to be aware that you sit as a tiny portion of equity on top of a mountain of loans. Shawbrook’s no different in that respect, as it’s total equity of £1.7 billion is just a tenth of the £17.1 billion in loans, or to use the preferred industry measure which weights each loan according to its risk - the £1.7 billion total capital is 15.8% of the £10.6 billion in risk-weighted assets as at the end of June. This isn’t a criticism, just something anyone looking at bank shares should be aware of.

Where Shawbrook does differ is its potential to be more profitable than competitors in a higher interest rate environment. As one of the new challenger banks born out of the 2008 banking crisis, it is a pure digital platform with no high street footprint. This when combined with investment in new loan analysis and monitoring technology has allowed them to keep costs down. The cost to net income ratio of 40% at the end of June was down from 42.1% a year earlier, with management guiding to a target of 30% to 35% during the next five years.

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So, as interest rates rise on loans, and the net interest margin, or difference between what it offers customers and pays on savings, widens to 4.4% at the end of June, up from 4.2% a year earlier, then it has an outsized effect on shareholders returns, with the return on equity up to 17% at the end of June, from 14.5% a year earlier. It’s that snake and the rat again.

The difference is clear when you look at rival Lloyds Bank that had a cost to income ratio of 55%, and net interest margin of 3.04% in its most recent figures, with pre-tax profits at the halfway stage up only 5%.

Why are they selling?

It’s always important to look at who is selling because if the business is so good, why get rid? Shawbrook was founded by the private equity unit within the Royal Bank of Scotland called the Special Opportunities Fund, or RBS SOF, when they bought Whiteaway Laidlaw Bank in 2011 and rebranded it as Shawbrook.

The Special Opportunities Fund felt restricted by parent Royal Bank of Scotland’s lack of support for Shawbrook and other investment ideas, so they decided to go it alone, and led a management buyout of RBS SOF and rebranded as Pollen Street Capital in 2013.

To realise some cash, Pollen Street then listed Shawbrook in 2015, valuing the business at around £725 million, or 290p, but it had a bumpy ride in public life. The shares underperformed after it recognised provisions for some problem loans and costs related to complaints on timeshares. Pollen Street decided to find a new investor in BC Capital and together they formed the vehicle Marlin Bidco to take it private again in 2017 for around £868 million (340p a share, or around 12.6 times 2017 earning per share of 26.8p).

Credit: Shawbrook.

The circle of life

The reason they are selling now all has to do with private equity fund lifecycles. The business of private equity depends on the performance of each fund, one following the other. Each fund asks investors for money to be “locked-up” for the life of the fund in return for promising higher returns than listed equity. The private equity managers then find businesses to buy with that cash, turn the business around before selling it on at a profit, and returning the cash at the end.

The standard life of a fund is five years, but when you add roughly two years of fundraising at the start and two years of selling and returning cash at the end, that extends to about nine to 10 years, and in the current climate where finding exits is tricky, it can be even longer.

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Crucially, investors are reluctant to hand over more money for new funds if they haven’t been paid back for the last one, and right now the whole industry is suffering serious indigestion, holding a record amount of assets they can’t sell.

When BC Capital first invested in Shawbrook it was fundraising and investing its BCEC X fund from 2016 to 2018, so it could sit within that fund. Pollen Street has been invested since 2011 and was raising Pollen Street III fund around the time of the take private. Either way, this asset was bought in 2017 and it’s now 2025. We know they tried to float the business in 2022, but that was scuppered by an inflation crisis and the mini-budget fallout.

What this all means is that while not exactly forced sellers, both private equity owners are highly motived sellers who are keen to get this deal away because, at some point, liquidity, or realising cash, becomes more important than squeezing the last penny from the price.

Market mood music

One of the most important elements of any IPO is what the market appetite is like for the shares, and here there are several reasons why the backdrop looks good. The first part is how easy it is to understand the story, and Shawbrook scores highly here; it’s simple, it’s a British bank for British people, it’s profitable, growing with a settled management team and clear targets.

For investment managers, pension funds and sovereign wealth around the world have portfolios that are now overweight a US tech sector that is reaching extreme valuations, so this IPO offers a good opportunity to get pure UK economy exposure at a much lower valuation, and rebalance those weightings.

The other element here is wider industry enthusiasm for the shares. The UK stock market desperately needs this IPO to be a success, because listing activity is at multi-year lows, which means no fees for bankers. In some corners this has been called a referendum on UK Plc as a destination for foreign investment. If this IPO is a success, then it opens the door to billions more in business, so all the banks involved, and even those that aren’t, are motivated to support the listing.

On the retail side, the UK market has been starved of decent opportunities for the past few years, so there is a pent-up demand which, while it doesn’t guarantee buying the shares, it should generate some interest in the offering.

Halloween horror show

With Halloween fast approaching there are always concerns about skeletons in the banking closet. The big problem hitting UK banks at the moment is compensation for mis-selling of motor finance, but in this respect Shawbrook looks good, with little to no exposure.

The motor finance provided by the bank is mainly to high-net-worth individuals who, for example take out a loan to buy a £150,000 Ferrari, rather than the personal contract purchase (PCP) and hire purchase (HP) contracts, with monthly repayment that were used in the mis-selling.

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The other big headache is the threat of taxes from the Labour government on the record profits in the banking sector. The banking surcharge is currently 3% of profits over £100 million, and a levy on assets over £20 billion. What that suggests is that anything coming down the track is likely to be more painful for big banks making billions that were bailed out by the taxpayer, rather than small banks such as Shawbrook, which made around £300 million last year and had no bailouts.

The other element to be aware of is a share overhang from the owners. They are only selling around a fifth of their total holding in this offer, so eventually there will be some selling pressure to come if they want to exit completely. However, for now they are locked up from selling for 180 days from the IPO date.

Conclusion

After that aborted attempt at listed life in 2017, and the failed 2022 float, what’s different now? Well, the scale is completely different as the loan book is now three and half times bigger.

The business is growing at double digits and has a clear path to almost double in size again. The pricing between 8.1 to 9.1 earnings looks fair on a number of different measures, and it’s rare that retail investors get the opportunity to invest alongside the professionals in an opportunity that looks well supported across the market.

The retail minimum application is £250. This looks like a good business coming to market at a bad time, but that could well benefit savvy investors in the long run.

John Ficenec is a freelance contributor and not a direct employee of interactive investor.