How exposed are the Challenger Bank to defaults as a result of Rona?

I was wondering how exposed some of the high profile challengers are to defaults and write offs on overdrafts in light of the rona situation. I have had a look at Monzo and was a bit surprised when seeing some of the numbers in their last audited accounts as I was not aware that they have had so much capital out in overdrafts that long.

The clips that I found more relevant are below.

Looking at year end Feb 19 they had about 18m gross overdraft with a provision of 3m against it for accounts where the OD’s that have experienced significant increase in credit risk since initial recognition but no objective evidence of impairment.

I would presume that the outstanding OD’s have grown significant in the 12 months since Feb 19 and given the customer base who may have been impacted a lot by the Rona, there may be some quite large numbers in the Feb 20 accounts that might bring questions on the models and risk profiles.

I have no experience of how they handle debt management and collection/renewals of OD’s etc , but would be interested to know others thoughts especially if they have experience as a customer


This overdraft exposure at Monzo is very new to me and your findings are quite insightful. I have no idea what is the right provisions for overdraft should be at this kind of time. But I do notice consumer banks like Citi in the US have increased their provisions across all segments by a large amount. Hope Monzo can manage through this.

What’s the overdraft default rate? I have never heard of overdrafts threatening any bank, rather the opposite. They’re essentially risk-less profit (outside the US were people can’t just default every other week).

I was very surprised as they seemed to have ramped up quite quick on this after going from the “mini” licence to full and I imagine that the overdraft balances now are significantly higher with the growth.
The risks that I see and I might be completely wrong …

  • if churn is high they may have some “ex customers” who have OD’s not paid off and if they are say 250 to 1k each what action will they take to recover when they probably also don’t want to be seen as a “ruthless” debt collector . Of course money is due whe its due but they may have a delicate PR consideration

  • They may have had a significant number of EU nationals who were in UK for uni, language courses or seasonal labour etc and if they have OD’s and have gone back to EU , how or would they try to collect from someone who is now resident elsewhere in EU

  • If a decent amount of customer base is young/millenial etc they have a risk of a fair amount of furlough customers or gig workers who currently don’t have a gig

With the larger banks its hard to see this in the numbers as they have so many segments and its blended , but it stood out for me when i looked here and my gut feel is that probably have more credit risk than they budgeted and envisaged.

As capital raising gets harder if they do have a big dent here then some of the investors may start asking a lot more about business models and risk before stumping up the next round.

Its too early to see a default rate as last public accounts are Feb 19 and unlikely to see Feb 20 for another 6 months I think, but even at Feb 19 they had 3m out of 18m where they access credit risk had got worse since they approved the OD


I’m not too concerned at the moment by Monzo’s overdraft exposure. I know from personal experience they have been very strict with who they’ll offer an overdraft to - a common complaint has been “Bank X will offer me an OD of thousands but Monzo won’t offer me one at all” - so I would be very surprised if they’ve overexposed themselves.

I would suggest until you find the equivalent figures for Starling and Revolut (and Metro, for giggles), to pick out the other main Challenger Banks, it’s impossible to draw any conclusions.


Its quite interesting, Revolut fall out the mix as only a pre paid card promoter for Wirecard in their last account.

But, at Feb 19, Monzo has approved over 80m of OD’s to be drawn down of which about 18m had been taken. I would assume with their growth that may have double in approved amounts and the draw down may be way higher than 22% there was at Feb 19 which then had a 3m provision on 18m

Starling’s provisions are nowhere near as heavy which maybe be of course as less prudent, later in starting so less actual to put in a risk number, or they may just have better quality debt. Saying that they did have approved OD of 30m , drawn down 9m which at 30% or so is a lot higher draw down than Monzo.

My gut feel is that these guys are having a lot of conversations about provisions and cash and balance sheet exposures given the change in circumstances for potentially a big % of their OD holders and making a dent in reg capital and this may be a bigger issue for some than a loss in interchange net fees for the next few months

monzo equity

I think you’re spending a lot of time hypothesizing about Monzo’s overdraft without ever saying anything about historical default rates on overdraft. You can’t just assume things without a single data point to back it up.

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I’m just happy you started spacing out your paragraphs @hongkonggooner.

Big banks have recently reported massive increases in bad loan provisions given their exposures to small and big corporates and industries under pressure.

So, it’s good that you’ve analysed Monzo’s accounts - never would’ve thought they had this type of credit risk (aren’t they a deposit-taking bank?)

Has anyone here worked at Wonga #amirite

Good point.

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They only report once a year and then usually 9 months after the year end so its not so easy. But looking at numbers and the customer base then in my opinion I think there is a risk. Of course its only an opinion as the only ones who really know are the Board.

When I look at the PL for that year it doesn’t make sense for tem to have to furlough and preserve cash due to reduction in revenues.

Of course again it 12 months out of date and they have been scaling and also raised a stack of cash.
But, if I look at y/e Feb 19 they have net revenue before provisions of give or take 13m and annual operating expenses of 60m so if revenue dropped 50% on an annual basis that would be a couple months or so burn so at face value I don’t see an urgent need for preservation as the revenue loss should be immaterial to runway.

Maybe in year Feb 2020 the revenue has exploded up so has more of any impact , costs should not be relevant as would have been in all the budgets for the last raises so no surprises I would think.

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I spoke too soon :smile:

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Lesson learned and point taken :wink:

This is markdown, not a Word or Google Doc :smile:

I even have a text to markdown converter for code documentation.

I’ve got a small website and keep getting a ear bashing for my blog posts as english word has never been my strong point.

I am a pure mathematician by degree who became a chartered accountant by profession before seeing the light and am way more comfortable with excel and spreadsheets than letters and words !

Old habits die hard…

Use Latex for the Greek notation - in pie charts. Don’t.

Check out the Dark Side of Valuation by Aswath Damodaran - it’s an old book but his writing style is awesome, as are his blog posts on Musings on Markets. I think he’s set the benchmark for how we should express our analysis that most people without fancy degrees can understand.

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23% provision on overdrafts starting to creep up . Interesting to see undrawn commitments of 278m. Maybe a reason some OD facilities have been pulled recently if not used.

Will have big effect on how they have to model provisions for reg capital I assume and maybe why they took some of that recent cash to support the Balance Sheet and offset some of this risk.