Five things we learnt from Starling’s 2023 Annual Report

Last week Starling Bank’s annual report was released alongside bombshell news that made those closely watching and scrutinising the fintech industry take a double take. 

No, not Anne Boden stepping down, that was big news too (!) of course, but rather that neo-banking looks like a pretty profitable business to be in, contrary to lots of predictions that it was flawed and unlikely to reach a sustainable footing.

In this article, we unpack this and four other essential learnings from the report.

1. Profits are here

“When I started Starling in 2014, I was told no one ever starts a bank, nobody wins market share and you’ll never make a profit. Today’s results prove them wrong,” said Anne Boden,Starling Bank’s founder and (outgoing) CEO last week.

The race for profitability really started across the fintech world at the start of the pandemic but Boden has long sought Starling to turn a profit. 

This was first achieved twelve months ago in 2022 when the bank posted a pre-tax profit of £32.1m on revenues of £188m,  following its pre-tax loss of £31.5m recorded two years ago.

This year was one of record revenue, however, swinging' to £453m for the year to 31 March 2023, more than double last year’s figure.

Profits, though, are accelerating much faster. 

For the year to 31 March 2023, profits jumped sixfold locking in an increase to £195m. 

Yes, still pretty small compared to tens of billions made by giant banks but the rapid rate of growth is noteworthy.

Of course, much of this was driven by higher interest rates which soared over the past 18 months. 

Starling saw its interest income jump to £403m, an increase of £276m, analysts at Liberum note. 

This, in turn, prompted a 187 per cent increase in its net interest income, the difference between cash made on paying out interest on savings and that made from lending to £348.8m.

Another interesting result of this was a return on tangible equity at 31.7 per cent, compared to the 9.3 per cent reported 12 months ago.

Boden raised eyebrows from neo-banking sceptics when she predicted near this exact figure one year ago.

2. All in on mortgages

Lending is arguably the most important thing to get right in banking, in terms of driving returns and creating a long-term sustainable business. 

Starling, therefore, has always placed its lending growth as core to the business. Overall, total lending for the year to 31 March 2023 stood at £4.9bn, compared with £3.3 bn for the previous year.

This huge growth - a rate of 47.2 per cent - mainly came from Starling’s booming mortgage lending. 

While part of this growth is organic, being from loans originated by Starling, growth has also come from the acquisition of two mortgage books which at the time of acquisition had a value of £984m.

Mortgages now account for the majority of Starling’s lending, reaching 70.5 per cent compared to 36.7 per cent of total lending in 2022.

Starling’s loan-to-deposit ratio now stands at 46 per cent compared with 36 per cent last year.

3. SME lending is taking a backseat

Starling made a name for itself during the pandemic as one of the bigger beneficiaries from the UK government's coronavirus lending schemes.

Seemingly overnight Starling was rapidly adding tens of thousands SME customers.

Last year, however, the bank saw SMEs begin to subside. This has carried on in for its latest set of numbers despite adding 800,000 net new SME customers.

Starling’s SME lending book now stands at £1.4bn compared with £2.1bn last year. Mostly this Bounce Back Loans although there was a small uptick in overdrafts for SMEs.

While Starling’s SME loan book is largely backed by UK government guarantees, the bank notes  “a presumption that credit risk has significantly increased when contractual payments are past due. Additionally, an increase in other observable data points that might point to a SICR, such as a material deterioration in credit bureau scores, are amongst other factors taken into consideration.”

In short, and presumably owing to the macroeconomic environment, SME lending is becoming less attractive. 

4. People are trusting more cash to Starling

Absolutely key to Starling’s growth - in all senses - but especially where it most matters, has been focusing its marketing efforts to build trust among its existing customers as well a strategy to attract new customers from among the ranks of the naturally more sceptical of fintech banks. I.e older people with money.

Starling’s deposit base now stands at £10.6bn, a 17 per cent increase from last year’s number. 

The figure shows the mean average Starling bank had just under £3000 in it, compared with £2,139 last year and £1,874 two years ago.

Starling continues to lead its competitor neobanks in this figure by a substantial margin.

5. Starling’s still hiring aggressively

Last year reported a headcount totalling 1,941 people. In this year’s report, we learned Starling’s headcount now stands at 2,700 a c.42 per cent increase. 

As a result of its jump in headcount, Starling has seen its total operating expenses (not including money from its BCR grants) jump 44.6 per cent in one year. 

Its specific staffing costs have increased by 37.6 per cent to £136m compared with £99m in 2022.