Goldman-backed Starling Bank reports 26% drop in annual profit as it flags Covid loan fraud issue

Starling Bank reported a nearly 26% year-over-year drop in pre-tax profit to £223.4 million for the year ending March 31, 2025, despite a 5% increase in revenue to £714 million. The decline was attributed to a £29 million fine from the FCA for financial crime prevention failings and a £28.2 million provision related to Covid-era Bounce Back Loan Scheme (BBLS) loans that potentially did not comply with guarantee requirements. The bank voluntarily removed the government guarantee on these loans after identifying weaknesses in its historic fraud checks.

Analysis

Starling Bank reported a significant deterioration in profitability for the fiscal year ending March 31, 2025, with pre-tax profit plummeting nearly 26% year-over-year to £223.4 million. This decline occurred despite a 5% increase in revenue to £714 million, which itself marks a sharp deceleration from the over 50% revenue growth reported in the prior fiscal year. The profit compression was primarily driven by two significant charges: a £29 million fine from the Financial Conduct Authority due to failings in its financial crime prevention systems, and a specific £28.2 million provision related to Covid-era Bounce Back Loan Scheme (BBLS) loans. The BBLS issue stemmed from weaknesses in historic fraud checks, leading Starling to voluntarily relinquish government guarantees on these affected loans; this is separate from an £800,000 Expected Credit Loss provision held for other BBLS loans where guarantees might merely be unavailable. While the CFO characterized these as 'legacy issues' dealt with transparently, they highlight past operational and compliance shortcomings. The slowing revenue growth, coupled with these charges, in a competitive fintech landscape populated by rivals like Monzo and Revolut, raises questions about future growth trajectory and profitability resilience, especially for a firm last valued at £2.5 billion in 2022 and backed by prominent investors such as Goldman Sachs and Fidelity.

Key Decisions for Investors

• Investors should scrutinize the remediation of Starling's financial crime and fraud controls to confirm the containment of these 'legacy issues' and prevent recurrence.
• Closely monitor Starling's revenue trajectory and customer acquisition metrics given the sharp deceleration in growth from over 50% to 5%, assessing its competitive strength against rivals like Monzo and Revolut.
• Re-evaluate Starling's £2.5 billion valuation from 2022 considering the recent profit decline, slowed growth, and financial impact of regulatory penalties and provisions, particularly if considering new investments or anticipating liquidity events.