Starling hikes loan loss provisions on 'pessimistic' UK outlook

By Elizabeth Howcroft

LONDON (Reuters) -Starling Bank is "pessimistic" about the outlook for the UK economy, it said on Wednesday, setting aside more cash for potential loan losses even as the digital bank reported a 55% jump in annual pretax profit, driven by higher interest rates.

In the midst of an election campaign in which Prime Minister Rishi Sunak, trailing badly in the polls, is talking up prospects for Britain's economy, Starling said it was increasing its so-called impairment provisions to around 47 million pounds ($60 million) from 34.5 million pounds the year before.

"The group's impairment assessment at March 2024 continues to be a pessimistic economic outlook for the UK," its annual report said, citing "ongoing uncertainty regarding the residual impact of cost of living on affordability, which is anticipated to lead to increasing loan balance arrears and low growth".

The hike in provisions came as the bank's overall gross lending dipped to 4.7 billion pounds in the year ended March 31 from 4.9 billion pounds the year before.

However, pretax profit jumped to 301.1 million pounds from 194.6 million pounds a year earlier, Starling's third year of profitability.

Interim CEO John Mountain said higher interest rates "undoubtedly provided a strong tailwind", as net interest income - earnings on loans minus deposit costs - leapt to around 593 million pounds from 349 million the year before.

Starling said it had bought 5 billion pounds' worth of a financial instrument designed to reduce its vulnerability to future rate cuts. The Bank of England is expected to begin lowering rates this year.

Launched in 2017, Starling is one of a handful of British digital banks without branches.

Rival, Monzo, which launched in 2015, reported its first annual profit last week. Monzo's provisions for potential loan defaults almost doubled to 204 million pounds.

Starling had 4.2 million customer accounts at the end of March, up from 3.6 million a year earlier.

The bank said it had invested heavily in its software platform, a subsidiary called Engine by Starling, which Mountain said could "one day become as big as the UK bank, or bigger".

($1 = 0.7847 pounds)

(Reporting by Elizabeth HowcroftEditing by Miral Fahmy and Mark Potter)