UK Challenger Banks Explore SRT Issuance to Manage Maturing Loan Portfolios

U.K. challenger banks are emerging as an attractive and novel investment opportunity for significant risk transfer, or SRT, investors, as the smaller lenders attempt to optimize capital using synthetic structures. Allica Bank, which is among the first to explore SRTs through the British Business Bank’s, or BBB’s, ENABLE structure, has been cited as a model example for peer institutions, which sources say is opening the door for other specialist lenders interested in risk transfer solutions.

Challenger banks have focused mainly on growth for much of the past decade, expanding portfolios and looking for the fastest route to scale in a sector where incumbent lenders had a significant first-mover advantage. But this model now appears to be running out of road, making such institutions turn to SRT structures to create a new niche for specialist investors.

Loan growth across U.K. challenger, specialist and digital banks slowed to just 4.5% in 2025 from 8.9% in 2024, according to a recent EY’s analysis of 19 lenders, which noted that loans make up 56% of the assets in its challenger bank database. Median CET1 ratios held steady at 15.5%, and net interest margins rose to 2.9% from 2.7% over the same period. The numbers show that banks are well-capitalized and profitable but could benefit from new capital optimization tools.

As challenger banks mature and build larger small and medium-size enterprise, or SME, and commercial portfolios, the ability to diversify and recycle capital becomes more important. Michael Strevens, director at the BBB, thinks that SRTs are one option that challenger banks could reach for.

“We want to get other types of institutional investment money into UK SMEs, and SRT investors are another source of capital supporting SME lending, so we would be keen to support that,” he tells Octus.

For many smaller lenders, however, a conventional synthetic SRT is still difficult to execute. A first-time issuer usually requires a large, homogenous asset pool, along with strong legal, advisory and data infrastructure to transfer junior risk to a third-party investor while retaining the senior tranche. The BBB’s goal is to create a more gradual route into the market, using its ENABLE Guarantee programme alongside private risk capital.

“[Classic SRT] is something that will be in their future, but I think it is probably more in the medium- to long-term future than in the short-term,” Strevens explains. “If they do an SRT classic where they retain the senior risk and sell off the junior to an asset manager, they can do it. It is quite expensive, a lot of advice, and they do not know until after they have done it whether they can get the capital optimization they were anticipating.”

The scale of the transactions is another practical constraint, as challenger banks often struggle to group a large corporate or SME bucket together.

“They do not have billion-pound portfolios that they can invest all that time and money into,” Strevens adds.

The BBB’s recent £350 million ENABLE Guarantee transaction with Allica offers an early example of how challenger banks can bring private capital into an SRT structure. The deal is expected to support up to £700 million of asset-finance lending to U.K. SMEs and is the first ENABLE arrangement with a bank to include a junior private investor.

The structure transfers credit risk across the full capital stack, combining the credit linked note, or CLN, mechanism with BBB’s government-back portfolio guarantee. This gives Allica access to outside capital, while the BBB supports the senior tranche, establishing a model that Stevens believes is fully replicable for peer lenders.

“These are two technologies that exist and are well proven, and it is just a case of bringing them together. I feel like it should be highly repeatable,” Strevens said.

The BBB is already working on further transactions, and Strevens noted that he is tracking interest from other banks in the space. Investor appetite is also evident.

“The investors themselves are very keen to speak to us about it, asking if there are going to be more transactions. These are asset classes that they want to try and look to get into.”

The investor base for challenger bank deals differs from the established market for large corporate SRTs. The firms interested in this type of risk tend to be looking to diversify from large, concentrated positions and assess granular pools through an ABS-style lens, Strevens said.

“It is going to be investors that are used to doing more of an ABS kind of analysis and are willing to do the work for a smaller ticket size,” he added. The most likely commitments in these types of SRTs could range from about £4 million to £50 million.

Strevens thinks that this could open the door to a wider group of specialist credit investors, with Sona Asset Management’s participation in the Allica deal forming the template. For the BBB, the main objective is not just to provide guarantee but to help newer lenders build the skills and capabilities needed for consistent SRT issuance.

“It is almost a bit like a school,” Strevens says. A bank can first become familiar with portfolio reporting, external due diligence and investor requirements through the ENABLE-backed structure. It can then add a junior investor before taking on the additional regulatory and execution work needed for a classic SRT.

“If you were to go straight into an SRT, and you have never done anything like it before, that is a lot to learn,” Strevens explains, adding that SRT investors are a potential major source of capital that can support the U.K. SME sector.

Not every challenger bank is set to become an SRT issuer. Factors like portfolio size, data quality, transaction costs and compliance with regulatory requirements still pose barriers. The example Allica is setting, however, signals that smaller lenders may not need to wait until they can execute a large stand-alone SRT before accessing private risk capital.

Other specialist lenders, such as Metro Bank, could provide insight into the next steps of growing that side of the SRT market. The bank planned its inaugural SRT on an approximately £1.3 billion portfolio of SME loans expected to close in the second half of 2026, Octus reported earlier in the year.

Metro Bank’s deal not only demonstrates that a challenger bank can complete an SRT but also reflects the changing economics of their approach. Metro reported £6.7 billion risk-weighted assets at the end of 2025, following a rotation toward higher-risk corporate, commercial and SME lending, all of which generated roughly £2 billion new originations throughout the year. As balance sheets move to business lending, capital consumption becomes more material. SRTs can offer challenger banks a way to keep growing their higher return portfolios without relying solely on equity.

Challenger banks’ route into the SRT realm will not be uniform in the long run. Larger challenger banks with sizable portfolios will have the bandwidth to go into conventional structures, while for smaller lenders, the BBB’s ENABLE Guarantee can provide the training wheels. Sources familiar with the matter said that talks with challenger banks wanting to benefit from the senior guarantee are already underway.