Loan growth among challenger, specialist and digital banks slowed last year, hitting profits and prompting some to warn that it could mean a “recalibration” in the sector.
Loan growth across the sector fell to 4.5 per cent in 2025, according to data from EY, compared with 8.9 per cent a year before, with many challenger banks posting drops in profit for the year.
This decline in the rate of loan growth increases the pressure on non-traditional banks, many of which are struggling to compete with the high street lenders as customer growth slows and many retail clients prove unwilling to move their primary bank accounts away from an incumbent.
“The 2025 analysis reflects a longer-term recalibration across the sector . . . while the sector is continuing to deliver strong growth, it’s becoming harder to sustain by volume alone,” said Ian Cosgrove, head of challenger and specialist banks at EY UK.
Deposit growth among challenger, specialist and digital banks also fell to 6.7 per cent from 12.3 per cent year on year, with property development lending particularly subdued early in the year.
However, EY’s analysis showed improved efficiency among lenders, with net interest margins rising from 2.7 per cent in 2024 to 2.9 per cent last year, and cost-to-income falling from 65 per cent to 58.2 per cent over the same period.
EY’s data represents 56 per cent of the total assets of 52 UK challenger banks.
Profit among some challenger banks suffered in 2025. Starling posted a drop in statutory pre-tax profit from £301mn in 2024 to £223mn last year, and mortgage and small and medium-sized enterprise specialist Atom Bank reported a drop in pre-tax profit of £2mn year on year to £5mn.
“Looking ahead, as wider economic growth continues to moderate, the midsized banks that continue a disciplined strategy of prioritising sustainability and resilience over volume should be well placed to continue growing in the medium term,” said Dan Cooper, head of banking and capital markets at EY UK & Ireland.
Among the non-traditional banks, neobanks have been hit hardest by macroeconomic uncertainty, with profits being propped up by net interest income — the difference between the amount charged on loans and paid out on deposits. Many are looking to build out other sources of revenue, for instance Starling’s drive to gain new clients for Engine, its software-as-a-service product.
Specialist banks, such as Paragon Bank, have missed out on the big returns gained by other banks from higher interest rates due to their lack of current account offering, which was compounded by their exposure to rate-sensitive sectors like mortgages.
But some are expecting them to see outsized benefits from a rate tightening cycle, as they reap rewards from an expected rise in demand in the buy-to-let market and SME lending. They will be spared the hit to profits that will arise from tightening spreads on current accounts.
“Amid fierce competition, many challengers are pursuing new routes to scale through targeted M&A, diversification and consolidation,” Cosgrove said. “Strong capital buffers, consolidation and capability-led transactions will likely be defining features of the segment’s continued growth and evolution in 2026 and beyond.”