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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I appreciate that the heading seems like a bold claim with such stiff competition but with Atom Bank putting out its results or the year to 31 March 2018 this week, I do think it is a serious contender.
I first covered Atom Bank HERE explaining in some detail why it was so capital intensive and that piece is worth a re-read for those interested in the nuances of the operations of a bank and its capital requirements. Suffice to say though that it takes a lot of capital to both fund operating losses and to act as a buffer to the funds lent out in case of default.
Incredibly, up to now, Atom Bank has raised almost £400 million of capital, partly from Woodford but more so form BBVA and Toscafund. BBVA is currently the largest shareholder with 39%.
The results are astonishing but not surprising. For the year to 31 March 2018, Atom continued to have a negative interest margin meaning that it was paying more on the deposits from customers than it was earning on the mortgages it was lending out! Quite obviously, this is not great as it means that the bank is “earning” negative revenue. I appreciate that a lot of the Woodford Patient Capital holdings make limited revenue but think this is the only one that consistently produces negative revenues, losing almost £6 million top line and over £50m bottom line.
The trouble for Atom Bank is that this situation isn’t going to change in the medium-term as there appear to be no plans to introduce current accounts in the near future which would help. Accordingly, to grow, or even to stay still, it will have to continue to offer market-leading rates on both savings accounts and mortgages which will lead to a negative net margin for a while yet.
The argument goes that as the Atom Bank brand grows, eventually it will be able to reduce the savings rates and increase the mortgage rates and actually make some money but I can’t see that happening quickly.
Having raised £150 million post-year end, the Chairman, Bridget Rosewell was quoted this week as saying that Atom will be looking to raise further funds towards the end of the year. That is because if it wants to grow its lending book from about £1.2 billion today up to £3-4 billion, it’s going to need another £100 million or so in capital as well as funds to cover ongoing losses.
As things stand, this is the perfect example of a company that loses money on every transaction but hopes to make it up in volume! I could go on about this idiocy but will leave it a couple of commentators on the FT article from the start of the week who summed it up pretty well.
Triple750 said: “This isn’t a business. Anyone can run a business at a loss, providing their funders are supportive. But I don’t see a thing that differentiates Atom from a traditional bank or BSoc. Why then, when they raise loan rates & reduce rates on deposits, should they expect not to lose their customers? This is a commodity company masquerading as something novel.”
Will Blue put it much more succinctly: “Sounds like a great business model they’ve unearthed”
Quite. Even though this is a disastrous business, Woodford may well come out intact as there is a chance that BBVA just takes the whole thing in-house at the end of the year and buys out the other shareholders at cost. This would be a ridiculous decision for its own shareholders but I’ve seen a lot worse corporate decisions.
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