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Starling Bank’s profits fell by more than a quarter last year as the digital bank set aside £28mn to cover potential compliance issues with Covid-19 government-backed loans and was fined for lax financial crime controls.
The neobank on Wednesday said its pre-tax profit fell to £223mn in the year to the end of March, down from £301mn in the previous 12 months, on a 4.7 per cent rise in revenues.
It said its earnings were hit by a £29mn penalty from the UK financial regulator late last year for “shockingly lax” protections against financial crime, as well as newly-disclosed provisions for problems with some of its Covid-19 loans.
The bank admitted on Wednesday that some of the loans it extended under a government-backed scheme during the Covid-19 pandemic “potentially did not comply with a guarantee requirement”.
Starling was criticised for a lending push during the crisis, building out a portfolio of loans to new customers that had a 100 per cent guarantee from the British Business Bank, subject to eligibility. The “bounce back” loans were issued by banks to support struggling businesses quickly during the pandemic, and grew to become a significant chunk of Starling’s lending book.
But the scheme has since come under scrutiny, with the government estimating in 2022 that as much as £4.9bn of the £47bn lent by banks between May 2020 and March 2021 was lost to fraudsters.
Starling said it had communicated its discovery that some of the loans may not comply to the [British Business Bank] and “volunteered to remove the government guarantee on those loans”, resulting in a £28.2mn provision equivalent to about 2 per cent of its lending under the government scheme.
It added it “may be exposed to further risks resulting in non-compliance with the eligibility requirements” that could affect its ability to claim under the guarantee contract or “retain payments already claimed under the guarantee contract”.
Part of the concern around Starling’s pandemic lending was that it had made loans quickly to companies that were not already clients, while having little experience in lending, potentially opening the door to fraudulent companies set up for the sole purpose of benefiting from the scheme.
The Financial Times previously reported that Starling was pursuing several debtors that never showed signs of active trading as it had filed several winding-up petitions against companies that defaulted on their loans.
“We were the only ones accepting new bank customers [as part of the bounce back scheme],” acknowledged chief executive Raman Bhatia, who took over last year after founder Anne Boden stepped down.
The new chief executive, who previously led energy supplier Ovo, said the bank had invested in boosting its senior management team and financial crime processes.
“In the last year we demonstrated our commitment to addressing legacy matters, investing in our people and capabilities so we now move forward from a position of strength,” said Bhatia.
