Starling Bank, the UK-based digital challenger bank backed by Goldman Sachs, has reported a significant decline in its annual pre-tax profit, attributing the drop to issues related to COVID-19 government-backed loans and regulatory fines.

COVID Loan Compliance Issues

The bank disclosed a £28.2 million provision to address potential non-compliance with the UK's Bounce Back Loan Scheme. This scheme, designed to support small businesses during the pandemic, allowed lenders to offer loans with government guarantees. Starling Bank issued approximately £1.6 billion in such loans, but a portion of these loans may not have met the eligibility criteria, leading the bank to voluntarily remove the government guarantees on certain loans .

Regulatory Fine:

In addition to the loan compliance issues, Starling Bank faced a £29 million fine from the UK's Financial Conduct Authority (FCA) for inadequate financial crime controls. The FCA criticized the bank for "shockingly lax" anti-money laundering and sanctions screening processes, which were found to be deficient in identifying and preventing financial crimes .

Financial Performance

As a result of these challenges, Starling Bank's pre-tax profit for the year ending March 31, 2025, fell to £223 million, down from £301 million in the previous year. Despite these setbacks, the bank reported a 4.7% increase in revenues, with net interest income remaining strong at £590 million. Customer deposits grew by £1.1 billion to reach £12.1 billion, and the bank added approximately 400,000 new customers, bringing the total to 4.6 million accounts .

CEO's Response

CEO Raman Bhatia, who took over in June 2024, acknowledged the challenges faced during his first year at the helm. He emphasized the bank's commitment to addressing past issues by investing over £25 million in enhancing financial crime controls and strengthening governance structures. Bhatia expressed confidence in the bank's ability to move forward from a position of strength, focusing on organic growth and potential acquisitions . 

Outlook

Despite the recent challenges, Starling Bank remains focused on its long-term objectives. The bank is pursuing international expansion through its software-as-a-service subsidiary, Engine, and continues to explore opportunities for a public listing, although no formal plans have been confirmed. The recent investments in compliance and governance are expected to bolster the bank's position in the competitive UK banking sector.

Source:Goldman-Backed Starling Bank Profit Drops Amid COVID Loan Issue – CNBC