Challenger banks have long been seen as a potential menace to established lenders like Lloyds (LSE:LLOY). With their digital-first models and slick apps, these upstarts were supposed to upend branch-based incumbents. Yet this hasn’t really happened. Indeed, the Lloyds share price is up 200% in five years (excluding dividends)!
However, FinTech giant Revolut’s hoping to gain a full UK banking licence. And after growing strongly last year, it says it’s “focused on revolutionising global financial access through innovative products“.
Could Revolut become a risk to Lloyds? Let’s discuss.
Already a bank (kind of)
Somewhat confusingly, Revolut already holds a UK banking licence, but with significant restrictions. It’s been trying to become a fully fledged bank for ages, but it has 10m+ UK customers and over 60m worldwide.
As far as I know, it’s the first neobank to apply with over 1m UK customers, so this is making the regulatory process far more complex.
Revolut co-founder and CEO Nik Storonsky has criticised this as “extreme bureaucracy”. It shows how the UK’s financial regulators set very high barriers to entry for new banks.
Of course, this is to protect consumers and ensure stability of the financial system. But I think it also insulates established, large players like Lloyds.
Jump ship?
I’m one of Revolut’s 10m+ customers, and I use the app whenever I travel abroad. Would I switch my main current account over to Revolut from Santander? Possibly, yes. The company’s been bundling in a lot of attractive perks with its various card plans, so it might be a natural step for me in future.
Therefore, I do think it’s possible Revolut could poach millions of Lloyds/Halifax customers in future. This is a potential risk.
However, Lloyds is also the UK’s biggest mortgage lender, sitting on a £318bn mortgage book. It would take decades for Revolut to get anywhere near that sort of scale.
Moreover, I don’t see most businesses jumping ship, as stability matters more than flashy features for businesses. And, of course, Lloyds has been around for centuries. Business deposits are significantly larger and more valuable to banks than consumer deposits.
Plus, many small- and medium-sized businesses still need cash-handling locally and favour face-to-face relationships. While Lloyds has been reducing its high street presence, it still has hundreds of branches across the UK. Here, it has an edge over digital-only rivals.
Strong growth
Revolut was in talks recently to secure new funding at a valuation of $65bn (£49bn). Interestingly, that’s a similar market value as Lloyds (£50bn).
Last year, Revolut’s revenues rose 72% to $4bn (£3.1bn), with pre-tax profit surging 149% to $1.4bn. Net profit topped $1bn.
These figures put Revolut on a price-to-sales ratio of 16 and price-to-earnings (P/E) multiple of 65. This is a punchy valuation, especially if global growth slows due to rising competition.
A realistic threat?
My view is that the FinTech risk is real, but that Lloyds has deep competitive advantages that are difficult to erode. And while a P/E ratio of 12.6 might seem high for Lloyds, that falls to 8.7 by 2026, according to forecasts.
With the forward-looking dividend yield close to 5%, I think Lloyds is worth considering for income investors. Revolut might be the hare, but Lloyds is the oldest tortoise around.
