Digital bank Starling makes first acquisition in quest for faster growth

Starling Bank updates

UK digital bank Starling has struck a £50m deal for a buy-to-let mortgage group, the first acquisition by the Goldman Sachs-backed start-up that is targeting an initial public offering within two years.

The cash and share purchase of Hampshire-based Fleet Mortgages is intended as the first of a series of deals by Starling, which is looking to deploy its £6.7bn of deposits and build on its rapid expansion during the coronavirus pandemic, according to people familiar with the matter.

Established seven years ago, Fleet manages £1.75bn of mortgages and anticipates originating another £800m this year. The acquisition will be finalised on Monday, the people said.

Demand for mortgages has surged in the UK over the past 12 months after the government offered buyers temporary relief on the Stamp Duty tax. With millions having worked from home since the pandemic, appetite for larger properties outside of city centres has been also fuelled demand.

Increasing competition between lenders, however, is expected to push mortgage rates lower and squeeze margins for banks.

As part of the deal, Starling will become the sole funder 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 large UK banks.

Starling declined to comment.

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

Chief executive Anne Boden told the Financial Times her bank was “pulling away” from its start-up peers and was eyeing an initial public offering in late 2022 or early 2023. Revenue surged 600 per cent last year during the pandemic and it made a pre-tax profit of £7.3m in the first quarter.

Starling is pursuing a more traditional strategy than some fintech peers such as Monzo and Revolut, focusing on building a 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 book swelled from £54m to more than £2.2bn, thanks mainly to emergency government-backed coronavirus business interruption loans and bounceback loans.

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

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