Monzo, the digital banking service, has announced its first-ever annual profit. This achievement comes despite a noted increase in bad loans. This landmark year demonstrates significant growth and resilience for the company.
This financial milestone underscores Monzo’s capacity to navigate a challenging economic landscape. However, it also highlights issues surrounding increased bad loan provisions.
A Landmark Year for Monzo
TS Anil, Monzo’s chief executive, celebrated a “landmark year” for the company, which reported a shift from a pre-tax loss of £116.3 million in 2023 to a profit of £15.4 million in the 13 months to the end of March. Gross revenues more than doubled to £880 million from £355.6 million, signalling robust growth and operational efficiency.
During this period, Monzo experienced an 88 per cent increase in its deposit base, rising to £11.2 billion. This substantial growth included a change of year-end from February to March, allowing for a more comprehensive financial overview.
Surge in Bad Loans
However, the bank’s provisions for future credit losses significantly increased to £176.9 million from £101.2 million the previous year. Anil explained that this 75 per cent increase in bad debt provision was in accordance with the 84 per cent rise in Monzo’s total lending balances, reaching £1.4 billion.
This escalation in lending balances is partly attributed to Monzo’s entry into the “buy now pay later” market through its Flex product. Customer borrowing, including overdrafts and Flex, surged to £1.5 billion from £540 million a year earlier.
Arrears and Defaults
Despite overall progress, Monzo faced challenges with rising arrears and defaults. Approximately £49 million of gross lending is currently in arrears, with £84.6 million in default.
Anil observed, “We saw some minor increases in arrears as the cost-of-living crisis played out.” He emphasised that Monzo lends only a small portion of its balance sheet, with a loan-to-deposit ratio under 15 per cent.
Realised and expected credit losses totalled £204 million, reflecting the bank’s cautious approach to lending. Anil reassured, “We’ve always been incredibly disciplined with our lending.”
Competitive Market Position
Monzo is part of a growing group of online-only lenders and fintechs, including Starling Bank and Revolut, which are steadily gaining market share from traditional high street banks. Monzo, founded in 2015, now serves 9.7 million customers, including more than 400,000 business clients, underscoring its expanding footprint.
Under Anil’s four-year leadership, Monzo has capitalised on higher interest rates. The bank’s net interest income — the difference between interest earned on loans and interest paid on deposits — rose by 167 per cent to approximately £438 million.
International Expansion Plans
Monzo is also looking to grow internationally. While it already has operations in the US, the bank recently announced plans to enter continental Europe by opening an office in Dublin in the coming months. This move signifies Monzo’s ambition to broaden its market reach and establish a stronger international presence.
This step towards international expansion is being closely watched by industry analysts and stakeholders, who see it as a critical move for Monzo’s long-term growth strategy.
Challenges and Regulatory Scrutiny
Three years ago, Monzo revealed that it was being investigated by the Financial Conduct Authority (FCA) for potential breaches of anti-money laundering regulations. Recently, the FCA notified Monzo that it was no longer assessing criminal liability but would continue the inquiry as a civil matter.
Monzo disclosed, “This could have a negative impact on our financial position, but we won’t know when or what the outcome will be for some time.” This ongoing scrutiny serves as a reminder of the regulatory hurdles that come with rapid growth and innovation in the banking sector.
Future Prospects
Looking ahead, Monzo is seen as a strong candidate for a stock market flotation. Although Anil stated that it was too early to speculate on such plans, the bank’s robust financial performance and strategic initiatives make it a promising contender in the financial markets.
Monzo’s ability to achieve its first annual profit, despite a surge in bad loans, highlights its operational resilience and strategic foresight. As the bank continues to expand its services and geographical reach, it remains poised for future growth and success.
Monzo’s first annual profit represents a significant milestone in its growth journey. This achievement underscores the bank’s strategic resilience amidst economic challenges.
While the surge in bad loans presents ongoing concerns, Monzo’s disciplined lending practices and international expansion plans suggest a promising future. The bank’s ability to adapt and thrive indicates a strong potential for sustained success in the evolving financial landscape.
