Neobanks should take heart from Monzo’s performance in 2022

UK-based neobank Monzo has had quite the bittersweet year. The company’s full-year financial results for 2022 paint a picture of a business that’s growing rapidly, though at the cost of sticky, large losses.

However, it’s not all bad news: Monzo has been cash-flow positive since October 2022, and it “reached profitability” after the end of its most recent fiscal year.

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Monzo has been through a few tumultuous years.

When COVID struck, Monzo laid off staff, closed offices, raised a down round and saw founder Tom Blomfield leave the company. After seeing its valuation fall to a post-money price of £1.3 billion in 2020, however, the company bounced back. In late 2021, it raised a $500 million round at a pre-money valuation of $4 billion, providing it with a massive cash injection and raising the value of its efforts many times.

Since then, Monzo has continued to grow, and now that it is both cash-flow positive and profitable, it can fund its own efforts. That puts it in good company, joining Starling, another UK-based neobank that is also profitable and growing thanks to rising interest rates.

Similar themes are at work at Monzo. Today, we’re diving into the company’s fiscal 2023 results and considering what its recent profitability tells us about its performance this past year (spoiler alert: good things). We’ll close with a few notes on other neobanks worth $1 billion or more. We are compiling an IPO list in our heads, after all. To work!

Yet another benefactor of interest rates

Here are Monzo’s key results, extracted from its annual report:

• Monzo’s net operating income, defined as revenues less credit loss-related expenses, increased by 88% to £214.5 million from a year earlier.
• Expenses (staffing, depreciation and impairment, and other operating costs) also rose 42% to £330.9 million in the year.
• The company’s rising cost basis weighed on its larger revenues, leading to a loss of £116.3 million, narrowing 2% from its fiscal 2022 loss of £119 million.

How did the company grow so much? Its net fees and commissions rose 64% to £132.9 million from a year earlier, as its customers spent more, and its Monzo Plus, Premium and Business subscription efforts drew more customers. The biggest driver by far, however, was interest incomes. Net interest income rose a whopping 382% to £164.2 million from fiscal 2022.

But that growth did not come cheap: Anticipated credit loss expenses skyrocketed to £101.2 million in FY 2023 from only £14 million a year earlier.

Monzo’s vastly bigger loan book powered both this surge in interest incomes and credit loss provisions. According to its results, “total gross loans and advances to customers” expanded to £759.7 million in FY 2023 from £258.8 million in fiscal 2022.

Not all of Monzo’s interest income came from loans, though. The neobank also saw revenue from “cash and balances at central banks” and “treasury assets” rise dramatically.

As Monzo detailed in the annual report (emphasis ours):

To safely optimise the mix of our balance sheet, maintain appropriate hedging and improve margins while retaining liquidity, we used some cash balances to invest in treasury assets and for customers to borrow from us. The increase in base rate from 0.5% to 4.0% in FY2023 resulted in interest on our cash balances increasing by £43.7m. The increase in rates and growth of our treasury portfolio to £2.7bn, resulted in treasury interest income also increasing by 1,125% to £29.4m (£2.4m in FY2022).

So here we have yet another example of a fintech company that’s benefiting from the high interest rate environment. Each company is slightly different, but they do share the core element of rising interest-related incomes in recent quarters.

Finally, considering that Monzo managed to get into the black after the end of fiscal 2023, we can infer that the company was working towards profitability throughout the year. If we had a quarterly breakdown of its results, I expect that we would see sequential improvement as the company’s FY 2023 progressed.

Now’s a good time to be a neobank

After seeing how Robinhood and Coinbase benefited from rising interest rates and considering Starling’s performance, we had a hunch that the new interest rate climate was going to prove a boon for fintechs of various stripes. With Monzo’s results, we now have enough data to be confident in our general outlook.

We can see some of our thesis at work in Nubank’s results. The Latin American neobank, worth more than $30 billion today, had this to share in its most recent financial report (emphasis ours):

Interest Income and Gains (Losses) on Financial Instruments increased 103% YoY, or 105% YoY FXN, to $1,255.5 million in Q1’23. The increase reflected mainly higher three factors: (1) higher interest income in the consumer finance portfolio, associated with the ongoing expansion of both personal loans and credit cards; (2) credit mix, mainly associated with the increase of installments with interest within the credit card portfolio; and (3) the continuous rise in Brazil’s interest rates (the interbank deposit rate or “CDI”) which accumulated 3.21% quarterly in Q1’23 versus 2.42% quarterly in Q1’22.

So we’re seeing a positive impact on neobank performance in the UK and Brazil, and likely in the United States as well.

Which neobanks should we expect to benefit similarly? The good news could extend to Chime, Varo and Current in the U.S., to pick a few. We expect that UK’s Revolut and Monese would enjoy similar gains. N26 in the EU is another obvious name to keep in mind.

Is the economy strong enough for more neobank IPOs? Sure, but with the fintech valuations still so depressed, we doubt that any new IPO filings will drop anytime soon. Still, Monzo’s results are one more ray of warm sunshine for this particular subsector of the beleaguered fintech market. And in 2023, all bits of good news are welcome.