What went wrong at Atom Bank?

Britain’s competitive mortgage market is hurting sales at the challenger bank.

When Atom Bank chairman and founder Anthony Thomson stepped down last January he said he said he had grown the lender from “a big idea disguised as a small bank to a big idea and a big bank”. 

But the truth is the loss-making challenger bank, founded five years ago, is struggling to keep pace in its key mortgage market and repeatedly has had to pull on the coat of core investors for more cash.

Earlier this week, the Durham-based business raised another £50m from its key Spanish banking giant BBVA, London-based investment fund Toscafund and Perscitus, the family investment fund of venture capitalist Jon Moulton.

The cash call also included £10m from under-fire fund manager Neil Woodford’s Patient Capital Trust. The star investment manager Woodford came under fire last month when his £3.7bn Equity Income fund was closed following billions of pounds of withdrawals by investors, amid concerns over the proportion of unlisted stocks in the fund. 

‘Support for future plans’

The latest fundraising means the Atom, the UK’s first mobile-focused bank, has raised a total of £450m from investors, valuing the business at £530m.

Its biggest shareholders are BBVA at 39 per cent, Toscafund at 29.7 per cent and Woodford at 18 per cent.

Atom chairman Bridget Rosewell said: “This latest raise recognises the enormous progress that we have made on our journey to disrupt UK banking, and is a clear signal of our investor’s support for our future plans.”

Atom, which employs around 330 staff, was one of the first wave of digital lenders, alongside Monzo, Revolut and Starling, who aimed to break the dominance of the UK’s high street banks following the 2008 financial crisis.

Change UK banking

They have added millions of younger, web-savvy customers, but have yet to turn them into profitable account holders who use these rivals as their main account.

Atom chief executive Mark Mullen said: “What’s important to customers is good products, good service and good value so that’s where we’ve spent the majority of our time and energy. We’re growing our team here in the North East and will add 50 new roles this year to help us expand the range of products and services we offer, starting with Instant Access savings in the autumn. More than ever we are convinced of the importance of Atom’s role to drive positive change in UK banking.”

However, the largest shareholder BBVA appears to have cooled its interest in Atom. In January reports suggested the Spanish giant had hired Citi to explore a takeover of the UK start up.

But by May further reports said BBVA had shelved these plans due to Brexit ongoing uncertainty, leaving Atom to search for additional backing ahead of a hoped for initial public offering in 2022.

Pricing promotions

However, Atom’s strategy of offering low mortgage rates and high savings offers to attract customers has driven up losses, and may have caused BBVA to pause for thought.

Atom pre-tax losses increased from £42m to £53m in the year to April 2018, its most recent published accounts. 

During that period it grew its loanbook from £99m to £1.2bn and boosted customer deposits to £1.4bn.  However, it paid out £5.6m more in interest payments to savers than it received from borrowers, according to its 2017/18 annual report.

“We have used pricing promotions as an investment to build awareness among customers and brokers. While these investments result in negative revenue, they have allowed us to build a prime mortgage book,” said Mullen in the annual report.

The bank has since tightened its lending, and currently pays savers 1.9 per cent on five-year fixed-term savings, while offering prospective mortgage borrowers a rate of 3.37 per cent over the same period without product fees. This compares with last July, when Atom paid savers 2.5 per cent on five-year fixed-term savings, and offered mortgage borrowers rates as low as 1.89 per cent over the same period.

Notable Legacy

Backers will wait to see if the bank can continue its impressive loanbook growth now it has dropped its teaser rates.

Meanwhile, Thomson must be wondering if the notable legacy he has created is slipping through his fingers like sand. He also co-founded rival challenger Metro Bank, with US entrepreneur Vernon Hill in 2010, stepping down two years later. This week, Metro reported that its pre-tax profit plunged 84 per cent to £3.4m over the first six months of the year, after it was forced to sell assets and upgrade internal controls following an accounting blunder in January.