Net Interest - Monzo. And More.
Monzo. And More.A Roundup Looking at: Monzo; Muthoot Finance; Norinchukin; Trafigura; Pershing SquareWelcome to all new subscribers who signed up after the Banks in Disguise post. Normally, I explore one big theme a week, using my 25+ years of experience as an analyst and investor to help me understand what’s going on in finance. This week, though, is a bit of a round-up as we check back in on issues I’ve looked at before. We start with a look at UK neobank Monzo, which reported detailed earnings this week even as a private company. Then we visit an Indian finance company which has become a play on gold. After that, Norinchukin in Japan, a bank whose securities portfolio makes Silicon Valley Bank’s look well-managed. Then, Trafigura, a commodities trading firm where employees have made a lot of money over the past few years. Finally, Bill Ackman’s Pershing Square Capital Management – there’s always something to say about Bill Ackman. A full archive of over 180 issues is available for paid subscribers to peruse here, with an index open to everybody here. Any feedback, please do get in touch by replying to the email. Monzo: Growing UpIn July 2022, I wrote a post, Battle of the Challengers, about the rise of UK neobanks Starling and Monzo. Since then, they’ve continued to grow. Monzo now has 9.7 million customers and Starling over 4 million. After a wobble in 2021 when auditors expressed “material uncertainty” over its ability to survive as a going concern, Monzo in particular is back on track. Earlier this year, it raised $430 million of fresh capital at a $5 billion valuation and this week, it released results. The numbers reflect a company growing up. Customer growth was broadly similar to last year, adjusting for the additional month in the reporting period (the company shifted its financial year-end to March from February). But management had to work harder for it. Over the period, they spent £58.5 million on marketing, compared with £21.7 million the year before, equivalent to £25 per net new customer versus £14 last year (and £4 the year prior). A high number of customers still come via referrals (rewarded at a cost of £10 per new customer) but at 17% of the growth, it’s nothing like the groundswell that occurred in the first few years following the new bank’s launch. The good news is that customers are growing in profitability, with average revenue per customer increasing to £81 from £48. Looking at weekly active customers only, the company pegs this at £145 (versus £112). Some of the increase is due to higher interest rates. Monzo discloses that every 100 basis point shift in rates impacts annual interest income by £34 million – equivalent to around 8% of net interest income in the year ended March 2024 – and rates went up by 125 basis points in the period. But larger customer balances helped too. At the end of March, customers left an average £1,150 on deposit at Monzo, compared with £800 a year earlier. Against that, fees and commissions didn’t rise as much as they might have. Card spend increased by only 42%, compared with customer growth of 31%, suggesting that while card use is increasing, customers are not ramping their spend as quickly as their deposits. A small cohort of customers (0.5 million) additionally pay a subscription fee – a stable, high-margin revenue item the company is committed to grow – but, again, growth was not extraordinary last year. In combination, card transaction fees, subscription income and partnership income rose to £24 per customer from £20. One area of potential growth is credit, but it comes with clear risks. Loan volumes grew by 84% last year, roughly in line with deposits. The company offers three lending products: short-term unsecured loans (49%), credit card loans (28%) and overdrafts (23%). They each contribute to higher interest income, but also to higher credit losses. It wouldn’t have made that much difference if the company had not bothered last year: Loan loss provisions absorbed 85% of the interest income generated by loans. But provisions are established for between 12 months and life on the day the loan is made, while interest income accrues over time so, in a high-growth phase, provisions will be outsized relative to interest income and earnings will be suppressed. Yet even adjusting for this dynamic, credit did show signs of deterioration as some borrowers struggled to meet payments. The share of “stage 3” loans in the book – assets on the brink of default – grew to 6% from 4%. This includes a chunk of loans on which the bank has granted borrowers forbearance. In addition, loans at “high” or “very high” risk of going bad make up 35% of the book, up from 27%. Overall provisions for loan losses nudged up to 14.6% of the total book from 14.0% while realized losses increased to 9.75% from 7.58%. As well as credit costs, Monzo also continues to suffer costs related to fraud. Last year, it reimbursed £20.4 million to customers, equivalent to 4% of its total expense base. The company has been investing in systems to reduce fraud and currently screens out around 700 impersonation attempts per month, but the costs of both detection and remediation remain higher than the original business case likely assumed. The combination of scale and higher rates, though, mean that the company is able to squeeze out a profit despite these higher costs. With costs increasing at a slower rate than revenues, operating costs excluding marketing consumed just 64% of revenue in the most recent financial year, compared with 98% a year earlier. This year, the company expects to surpass 11m customers while also expanding abroad, including in the US. Its challenge will be how to continue to grow revenue when rates fall. Last year, the bank started using interest rate swaps to hedge risk, swapping the variable rates it earns on cash balances at the Bank of England to a 4.39% fixed interest rate. The impact on profitability of short-term rate cuts will therefore be mitigated. More products is one source of growth but on that, Monzo still lags Revolut. Further readingSubscribe to Net Interest to read the rest.Become a paying subscriber of Net Interest to get access to this post and other subscriber-only content. A subscription gets you:
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