July 16, 2024

Advancing Digital Excellence

Pioneering Technological Innovation

Neobank Starling has tricky path to chart to a tech listing

2 min read

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In fintech, the rising tide of interest rates could lift everyone closer to their IPO. Starling Bank was the first of the UK neobanks to make a profit three years ago and continued the form at results on Wednesday. Profits before tax were £301mn in the year to March and up by half compared with the year before. Net interest income rose 70 per cent. 

This makes Starling the likeliest of the crop to test public investors’ appetite for a digital neobank. Raman Bhatia must first take over as chief executive later this month. But with Starling already hyping up the first sales in its banking software as a service business, called Engine, the countdown is under way. 

The big problem for neobanks and early investors looking to cash out is the equities markets’ unfavourable view of European banks since the financial crisis. That is slowly changing, especially this year as banks return larger amounts of cash to shareholders.

But with big UK banks trading on about eight times forward earnings, a similar rating would value Starling well below the £2.5bn valuation it commanded at its last private funding round in 2022.

A sprinkling of technology would help but it is early days: Engine has just two customers. Starling’s technology does show promise. Its implementation time is measured in months rather than the years needed for traditional bank technology overhauls.

Starling’s own non-staff unit running costs halved between 2022 and 2024, suggesting marginal technology costs are near zero. The bank’s cost-to- income ratio of 51 per cent is below Lloyds and NatWest. Neobank peer Monzo had a cost-to-income ratio of 57 per cent last year.

Brazilian neobank Nubank, listed in New York and worth $45bn, demonstrates the potential power of technology on overheads. Its cost-to- income ratio was 32 per cent in the first quarter of the year. A punchy valuation of 24 times forward earnings is the kind Starling and others would like to achieve. That is possible for a UK fintech — Wise trades similarly — but remains a bold pitch for a UK bank. On current earnings, it would bump Starling’s valuation past £5bn.

That looks a stretch. A UK-focused fintech will struggle to replicate Nu’s scale of more than 80mn active customers. High-margin recurring revenues from software sales would undoubtedly help. Such talk, however, is reminiscent of some ill-fated ecommerce IPOs promising great tech platforms in the last IPO round; investors should be wary. Starling will need more evidence from the tech part of its fintech model before its next steps to market.

Line chart of Rebased , $ terms showing Neobank Nu is outperforming

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