Starling Bank faces questions over reliance on state-backed funding

It was a pivotal moment for Starling Bank when it reported its first annual profit earlier this month.

The shift, after nearly five years of losses since Starling’s app opened to customers, was partly the result of the company’s push into the mortgage market, through a series of acquisitions over the past year.

But its rapid growth to become a £3.3bn lender is largely thanks to taxpayer-backed funding in the form of a £100mn grant and its participation in the government’s emergency coronavirus pandemic “Bounce Back” lending scheme.

These loans, which are 100 per cent guaranteed by taxpayers, were issued by banks to quickly support struggling businesses during the pandemic. Concerns are now escalating over the amount that could be lost due to fraud and defaults.

This could be particularly problematic for Starling: bounce back loans represent more than 40 per cent of its lending book. According to the bank’s latest figures, about 25 per cent of its £1.4bn exposure is in arrears. Starling has already claimed £61mn from the taxpayer support scheme to cover defaults.

Starling’s rapid growth through bounce back loans has prompted questions over the strength of its anti-fraud checks. Lord Theodore Agnew, who quit as the government’s anti-fraud minister this year, said Starling was among the worst banks on this front.

Anne Boden, founder and chief executive of Starling, has staunchly defended its efforts. “We did all the checks necessary and more, and did a really good job,” she said. “We’re doing everything we can to make sure we’re transparent in this.”

Some politicians are worried the cost of fraud will hit taxpayers. Of the £47bn of bounce back loans issued by UK lenders, the government estimates up to £5bn could be lost to fraud.

“Starling and all other lenders need to demonstrate that appropriate checks were made to reduce the incidence of fraud,” said Conservative MP Kevin Hollinrake, chair of the Parliamentary group on fair business banking. “If they have not, then they should not call upon the government guarantee.”

Banks have so far claimed £352mn of taxpayer money from the guarantee to cover bounce back loan losses. Of this, about £72mn was potentially claimed by businesses fraudulently, according to the British Business Bank, which oversees the scheme.

Although some banks, such as Metro, have claimed more than Starling, their larger balance sheets have been less reliant on bounce back loans for growth.

For Starling, bounce back loans have been instrumental in its transformation from a digital upstart to a fully fledged lender within the space of a couple of years.

It was created in 2014 as one of the first app-based banks in the UK, initially offering current accounts to individuals. After securing backing from billionaire Harald McPike, an investor based in the Bahamas, the bank brought on board Goldman Sachs, Fidelity and other high-profile shareholders. It fetched a £2.5bn valuation at its last funding round in April.

Its progress has not always been smooth. In 2015, several members of the founding team departed. Among them was co-founder and chief technology officer Tom Blomfield, who became chief executive of rival bank Monzo until 2020.

Boden’s ambitious growth plans won Starling £100mn of taxpayer funding in 2019 on the premise that it would increase competition in UK business banking by reaching certain targets. These included lending £913mn to businesses by the end of 2023.

The bank’s latest accounts show that of the £100mn taxpayer grant, £33mn was used to offset administrative costs, helping Starling achieve a profit in the year to the end of March.

This £100mn grant was part of a £425mn pot disbursed by an independent body called Banking Competition Remedies, which has a remit to enhance business banking for customers.

Banks that failed to meet their stated goals, such as Nationwide and Metro, had to return their funding.

Starling hit its stated targets, but only with the help of bounce back loans. In November 2019, it had lent just £23mn excluding loans bought from other companies, according to Lord Agnew. By June 2021, it had dished out £1.6bn of bounce back loans.

At one point last year, the bank’s total exposure to government-backed loans, including the Coronavirus Business Interruption Loan Scheme, amounted to £2.2bn — representing more than 90 per cent of its total loans at the time.

David Brier, chief executive of consultancy 11:FS, said Starling having most of its loan book in emergency government loans “is highly concentrating their risk especially given the profile of [bounce back] loans”.

He added: “Their push into a bigger mortgage book with longer durations and fewer defaults is a good step to broadening their risk and also maturing their streams of revenue and profitability.”

Starling entered the mortgage market last year and has since built up £1.2bn of home loans mainly through acquisitions. Its bounce back loans holding has dropped to £1.4bn as customers have started to repay.

The bank recently agreed to buy a £500mn mortgage book from specialist lender Masthaven. Last year, it acquired Fleet Mortgages, a company that focuses on professional landlords, for £50mn in cash and shares. It also bought a loan book worth about £1bn from Kensington Mortgages.

It is pursuing other revenue streams, including the licensing of its banking technology platform, Engine, to other companies. Although Engine does not yet generate revenue, Starling expects this to be “significant” over time.