Digital bank Starling makes first acquisition in search of faster growth

Starling Bank Updates

British digital bank Starling has signed a £50m deal for a rental mortgage group, the first acquisition by the Goldman Sachs-backed start-up targeting an IPO within two years.

The purchase of cash and shares of the Hampshire-based Fleet Mortgages is slated to be the first of a series of deals by Starling, which aims to leverage its £6.7bn deposits and build on its rapid expansion during the coronavirus pandemic, according to people familiar with the matter.

Founded seven years ago, Fleet manages £1.75 billion in mortgages and expects to spend a further £800 million this year. The acquisition was due to close on Monday, the people said.

Demand for mortgages has risen sharply in the UK over the past 12 months after the government offered buyers temporary relief from stamp duty. With millions of people working from home since the start of the pandemic, demand for larger properties outside of city centers has also fueled demand.

However, increasing competition among lenders is expected to lower mortgage rates and put pressure on margins for banks.

As part of the deal, Starling will become the sole financier of Fleet’s buy-to-let mortgages to landlords and Fleet will continue to operate under its own brand. Previously, Fleet financed itself with loans from major British banks.

Starling declined to comment.

Starling said last week it was on track to achieve its first full year of profitability, after its participation in the government’s Covid-19 bailout loans boosted revenues.

Chief executive Anne Boden told the Financial Times that her bank “pulled out” of its startup peers and was eyeing an IPO in late 2022 or early 2023. Revenue jumped 600 percent last year during the pandemic and it made a pre-tax profit. of £7.3 million in the first quarter.

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Starling follows a more traditional strategy than some fintech peers like Monzo and Revolut, focusing on building substantial lending business from its own balance sheet.

The bank had lent only a small amount by the time the pandemic hit, but its loan portfolio grew from £54 million to more than £2.2 billion, mainly thanks to government-backed emergency loans for business interruption due to the coronavirus and bounceback loans.

Starling is worth more than £1 billion after a £272 million fundraising round in March, and it attracted a further £50 million from Goldman in April. Still, that valuation dwarfs rival Revolut, which was valued at $33 billion after a new investment announced earlier this month.