Can Starling Bank stand on its own two feet?

But even as Boden basks in the glory of having reported a full year of profits — an achievement for start-ups, which usually burn cash — questions are being asked about how Starling has achieved such rapid growth. Many in the banking world say 2023 is the crunch year in which Boden has to prove her bank is capable of standing on its own two feet.

The first charge levelled at Starling is that the bulk of its business loan book resulted not from the careful cultivation of potential clients over time, but from an opportunistic grab at the government’s Covid loan schemes. These were run through banks but guaranteed against default, either all or in part, by the taxpayer. In Starling’s case, its financial results for the year to March 2022 show that all but £651,000 of its £2 billion of lending to small business was as a result of these loan schemes.

“What many challenger banks found during Covid was that government-supported lending suddenly provided a low-risk, capital-light way to grow at pace,” said Ian Gordon, banks analyst at Investec.

Lord (Theodore) Agnew, who resigned as the minister responsible for fighting fraud, accused Starling of using bounce back loans as a “God-sent opportunity” to swell its balance sheet. Boden was furious.

Starling claims the huge weight of Covid scheme loans in its commercial book is an accident of timing; it had only just started small business accounts when the pandemic hit, so of course it did not have much other lending. It said that 86 per cent of the customers who opened accounts at the time did not get a loan; they just wanted an account at a point when the big players were shutting their doors to new business.

Starling lent £1.3 billion through bounce bank loans to small firms (out of a total of £47 billion among all the lenders). Boden told a parliamentary committee last month that a third of them were not performing — indicating that taxpayers are likely to be left with a bill.

Starling also lent £497 million through the coronavirus business interruption loan scheme (CBILS), which was for larger businesses and had a smaller government guarantee. The bank distributed a further £137 million via the recovery loan scheme, which replaced CBILS.

It is not only in Covid loans where Starling has benefited from government schemes. In 2019, it got a £100 million grant from the Banking Competition Remedies (BCR) fund, which was set up after Royal Bank of Scotland — now NatWest — failed to carve out a new bank, Williams & Glyn, as a punishment for receiving state aid in its 2008 bailout.

Some £32.1 million of this cash, the accounts to March show, appeared to help Starling turn a £31.5 million loss into a £32.1 million profit.

The bank said it was now lending to firms outside the government schemes, which have ended. But on personal lending, it acknowledged it had “paused” new loans.

Starling’s chief banking officer, Helen Bierton, said it was adding to its product range “all the time” and was “working on new lending products”.

Starling has £1.2 billion of mortgages on its balance sheet but very little of this appears to be its own lending. It has bought mortgage books from other companies, reputedly taking part keenly in several auctions. Notably, it paid £50 million for buy-to-let specialist Fleet Mortgages in July 2021. It is reported to be planning to start its own lending, too, and is eyeing expansion in other ways.

But at the same time, Starling could be facing a fall in its valuation, which was set at £2.5 billion at a fundraising in April. In November, Chrysalis, the investment fund run by Jupiter, said its external valuer had put a “downward adjustment” on its holding in Starling.

Jupiter’s UK Mid Cap fund is looking for a buyer for its stake to avoid breaching the 10 per cent limit on a single holding in the fund.

Starling argued that it was in a different position to other fintechs, saying it will make annual pre-tax profits of £275 million.

Boden has long said her aim is for a stock market float — as she outlined in her book Banking On It, where she describes her New Year’s Day trip. For now, that seems to be less of a priority — not surprising, perhaps, as the market has dried up since Russia’s invasion of Ukraine. “An IPO remains an option but not a necessity for us as we do not need to raise capital,” a spokesperson said.

Revolut misses accounts deadline

Fears are growing about the financial position of digital bank Revolut after it missed another deadline to publish its accounts.

HMRC requires accounts to be filed at Companies House nine months after the financial year ends, but Revolut missed its September 2022 deadline, so it was given an extension until yesterday.

However, Revolut, once one of Britain’s most valuable financial start-ups, has also missed that deadline. Delays in filing can lead to the prosecution of company directors and civil penalties.

Revolut was set up by Nikolay Storonsky, above, and Vlad Yatsenko in 2015 to sell banking services, such as currency exchange, via mobile phone applications

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Revolut was set up by Nikolay Storonsky and Vlad Yatsenko in 2015 to sell banking services, such as currency exchange, via mobile phone applications. It has grown rapidly, expanding into the US and Japan. That strong growth has led to several fundraisings, and in 2021, it secured backing from Japan’s SoftBank and Tiger Global Management, giving it a $33 billion valuation. However, Revolut is yet to secure a UK banking licence.

A report in the Financial Times in September suggested that Revolut is “under pressure” from its auditors to improve internal controls after UK regulators highlighted significant flaws in the auditing of its accounts, including an “unacceptably high” risk of “material misstatement”.

The Financial Times claimed BDO’s audit of Revolut was criticised by the Financial Reporting Council, saying it suffered from an “inedaquate” approach to revenue recognition and, “as a result, the risk of an undetected misstatement was unacceptably high”.

Revolut recorded a net loss of £168 million in its last annual results in 2020. It said: “Our accounts are finalised and we expect to confirm the previously reported news that we are profitable. We intend to file accounts in the new year.”