Move over FTSE 100 banks, there’s value in smaller lenders
FTSE 100 banks have delivered extraordinary gains over the past three years.
For me, the Silicon Valley Bank fiasco in 2023, which took place almost three years ago now, was one of the most obvious opportunities to buy UK banks at discounted levels.
Yet, while the largest lenders recovered quickly and then pushed on from inflation-linked concerns, some smaller and mid-sized banks remained underappreciated, offering compelling value for patient investors.
These institutions often benefit from niche exposures, leaner cost structures, and more flexible balance sheets. This can translate into stronger returns once market confidence returns.
With interest rates now moderating and credit conditions stabilising, smaller lenders could see their earnings power re-rated, particularly if they avoid headline-making crises and maintain disciplined lending.
For investors looking beyond the megabanks, the question is not whether UK banks can perform, but which ones remain overlooked and undervalued.
So, who do I have in mind?
Arbuthnot Banking Group
I believe Arbuthnot Banking Group (LSE:ARBB) is worth considering for both longâterm growth and incomeâoriented investors after a decade of steady expansion.
Revenue climbed from £74.7m in 2019 to around £181m in 2024, underpinning a progressive dividend policy.
The forward yield currently sits at 6.6% with cover comfortably above 2 times. Deposits and wealth inflows have remained resilient, reflecting the groupâs niche private banking and wealth management franchise.
At current levels, Arbuthnot trades on a modest forward price-to-earnings (P/E) of 7.8 times, signalling cheapness relative to larger peers.
The valuation looks even more stark on priceâtoâbook. At around 0.53 times, the market is pricing the shares at barely half reported equity.
That discount suggests either a compelling opportunity or lingering scepticism about future earnings momentum.
A key risk is economic sensitivity. This includes weaker lending margins, slower credit growth, or softer wealth management inflows could weigh on profits and dividends.
However, for investors focused on yield and value, Arbuthnotâs track record, attractive multiples, and sizeable dividend make it a name worth a closer look.
TBC Group
TBC Group (LSE:TBCG) is another attractive and more niche opportunity. This FTSE 250 bank operates in two of Eurasia’s fastest growing economies — Georgia and Uzbekistan.
Analysts forecast revenue growth around 17% on average over the next two years making it one of the fastest growing companies listed on the UK exchange.
Earnings growth also looks strong — around 11% on average.
Profitability is high, with return on equity above 23%-24%, driven by Georgiaâs underbanked, high-margin market and an improving Uzbek franchise.
The shares trade on just 4.9 times forward earnings while offering a dividend yield of 6.9% on a forward basis. The yield is covered nearly three times by earnings.
The main risk lies in Uzbekistan, where regulatory tightening, including loan growth limits and higher capital requirements, could constrain expansion and compress margins.
However, TBCâs strategic adaptations and resilient Georgian core franchise remain intact. Personally, I’m very bullish. It’s certainly worth considering very strongly.
The post Move over FTSE 100 banks, there’s value in smaller lenders appeared first on The Motley Fool UK.
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James Fox has positions in Arbuthnot Banking Group Plc and TBC Bank. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
