A British startup bank advised by former chancellor Philip Hammond saw profits jump last year despite the COVID-19 pandemic.
OakNorth Bank's annual accounts, published on Monday, showed pre-tax profits rose by 18% to £77.6m ($107m) last year. The increase came despite a £17.4m charge to cover potential losses linked to the pandemic.
"My view: we had a very good 2020," founder and chief executive Rishi Khosla told Yahoo Finance UK.
OakNorth's operating income rose 34% to £140.1m last year. Deposits increased by 15% to £2.3bn. Net lending rose by £400m to take the total loan book to £3.5bn.
"The profitability, in my mind, is just a demonstration of the fact that we have a solid business model and that business model continues to prove itself," Khosla said.
"We’ve always said to ourselves that we’re building a business to be able to support clients in the good and the bad times. If you can support clients through cycle, that’s how you build an amazing reputation. I believe we absolutely did that last year."
Founded in 2013 and operational since 2015, OakNorth focuses on what it calls the "missing middle" in UK business banking — mid-sized, entrepreneurial businesses that are looking for money to help them grow. Founder Rishi Khosla has in the past described the business as a bank for entrepreneurs. Typical customers include healthy fast food chain Leon and Staycity Group, Europe’s leading "aparthotel" operator.
OakNorth claims to use more advanced software than traditional banks and takes a forward-looking — rather than backward-looking — view on businesses and industries. The bank breaks the UK economy down into 262 sub-sectors to give it a more "granular" view of performance.
"In something like hospitality, it would go from hospitality to hotels, to conference-based hotels, city centre business hotels, resort hotels," Khosla said.
OakNorth Bank is part of the broader OakNorth Group, which licenses the bank's proprietary lending software to other institutions around the world. The group has raised over $1bn (£720m) in investment and was valued at $2.8bn in a 2019 funding round led by Japan's SoftBank (9984.T).
Last January OakNorth hired former UK chancellor Philip Hammond as a special adviser. The bank's chairman, Cyrus Ardalan, said Hammond's support had been "invaluable" through the pandemic.
Hammond and the bank's other special advisers — former regulators Lord Adair Turner and Martin Stewart — helped OakNorth "think through" issues like liquidity, risk management, and public pronouncements from the Treasury and Bank of England, Khosla said.
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“All of them have seen many, many cycles and obviously been close to many crises which have happened over the last couple of decades," he said.
OakNorth took part in the government-backed lending scheme CBILs but Khosla said Hammond had not lobbied the government or government agencies on OakNorth's behalf.
“We were very clear when we brought him in that we’re interested in having him really from a knowledge perspective," he said.
OakNorth stress tested its loan book as the pandemic hit last year and repeated the process throughout the year. The bank ended up taking a £17.4m charge to cover potential losses. Khosla said the provision was based on modelling that was "materially worse than the Bank of England scenario".
In total, OakNorth has now set aside £32m to cover possible bad loans — almost triple the size of its provisions at the end of 2019. Loans in stage three — the final stage before default — rose sharply last year, signifying the increasing likelihood that provisions may be drawn down.
OakNorth has lent over £5bn to date but is yet to make a loss on a loan. The track record has faced scrutiny in recent months after the Financial Times reported that OakNorth had experienced £100m in defaults since inception.
“By definition to have got through five and a half years without having any loan write offs I think is phenomenal," Khosla said. "Do I think that we’ll continue this for the next five and a half years? Absolutely not. It’s totally unrealistic. Are we going to have some loan write-offs? Of course we are.
"However, do I think that we’re going to continue to have loan write-offs which are materially below any industry norms and therefore performing within the top decile of banks globally? Yes."
The defaults to date covered 10 loans, six of which have been fully recovered. Four remain outstanding and OakNorth took a £5m charge in its account to cover potential losses on these loans.
Khosla said OakNorth had started 2021 in a "very strong" position and said he was optimistic about prospects for the 12 months ahead. He wrote in the accounts that 2020 marked the end of "Season One" for OakNorth. Season Two was "fundamentally about scaling the business," he said.
Chairman Cyrus Ardalan said the bank "exceeded my expectations" in 2020 by "helping to protect the livelihoods of thousands, built its deposit customer base to over 170,000 individuals, and it has maintained its exemplary track record of zero loan write-offs."