B-North aims to raise capital ahead of getting its banking licence (due spring 2020) and attacking the huge, profitable and poorly served SME lending market. B-North combines i) state-of-the-art technology (built from scratch to address customers’ needs), ii) offering an unparalleled service/innovative remuneration to the £20bn+ p.a. commercial broker channel, and iii) experienced bankers based in empowered regional hubs. It should be lower cost than peers, and technology will bring it close to customers. The financial model leads to a market share of just 2.5% in 2027. Delivery of this sees a highly profitable, and valuable, bank, in our view.
- Investor returns: We again emphasise the importance of investors considering a range of possible forecasts and valuation ratings. Updating for the impact on ratings of the recent market turmoil, we still see a base-case scenario of a market value of ca.3x the capital raised, with the most likely exit in three to four years.
- Bank capital raises: Several banks/near banks have raised capital, but what may appear a crowded space is not. Few are direct competition, let alone with the same business model. B-North’s reasons for raising capital are different. There is clearly appetite to fund challenger banks and potential buyers of B-North down the line.
- Valuation: Given the growth profile of the company and associated uncertainties, any valuation must be treated with extreme caution. In our initiation, we gave a range of approaches and sensitivities. Updating these for recent market moves still indicates a market value around three times the equity raised.
- Risks: Credit risk is key for any bank. B-North will establish independent credit functions, and its technology brings it close to customers interfacing with their internal information. It has multiple options to address any loan growth shortfall. The economic cycle is important. The model is yet to be tested, and capital raised.
- Investment summary: B-North is still at the pre-revenue stage. Its model should be low-cost and deliver a superior service to customers and intermediaries. It has a conservative credit culture and uses state-of-the-art technology, written from scratch, to originate, service and manage its business. Funding will be via the deep best-buy retail deposit comparison sites. The potential market is huge, profitable and under-served, and major incumbents have selectively become uncompetitive.
