Starling Bank flags rise in bad loans as earnings jump

Starling Bank sharply increased the amount it set aside for bad loans as the digital lender that relied on UK government-backed schemes to build its loan book during the Covid-19 pandemic contends with a rise in defaults.

The privately owned fintech set aside £13.9mn for bad loans in the year to the end of March, up 40 per cent on the previous year, as it flagged a rise in mortgage arrears and “increased default rates in the unsecured proportion of [small and medium-sized enterprise] lending”.

The results come after the challenger bank attracted scrutiny from politicians after it expanded its loan book largely using government-backed lending schemes.

During the pandemic, such programmes allowed SMEs to borrow up to £5mn, with government guarantees of 80 to 100 per cent and minimal checks, to provide a lifeline to struggling companies.

The government has previously estimated that about 11 per cent of the £47bn lent by banks through its so-called bounceback scheme could be lost to fraud.

Starling’s pre-tax profits rose 55 per cent to £301mn in the year to the end of March as its total deposit base grew 4 per cent to £11bn. Revenues rose 51 per cent to £682.2mn.

The results mark the third consecutive year of positive earnings for Starling, which was the first of a cohort of digital lenders to reach profitability thanks to a push into lending. Interim chief executive John Mountain said the bank had the ambition to list on the London stock market but he did not provide a timeframe.

Starling has been trying to expand new revenue streams by franchising its software to other banks through a service called Engine. Mountain said it had “heavily invested” in Engine because “we’re confident it can one day become as big as the UK bank, or bigger.”

Investor Chrysalis, Starling’s second-largest backer, last month told the Financial Times that the push could help boost the bank’s valuation to about £10bn.

Staff costs rose 69 per cent to £230mn in the year to the end of March as the group hired more people to expand its technology franchise while it also beefed up its anti-financial crime capabilities. The bank’s headcount increased by 898 to 3,660.

Starling has 4.2mn customers, up from 3.6mn a year earlier, and serves about 9 per cent of the SME banking market.

The lender, whose founder Anne Boden stepped down last year, will from June 24 be led by Raman Bhatia, the outgoing chief executive of energy provider Ovo.