Bridge over troubled waters

In this note, we review B-North’s core competitive advantages. We consider how the COVID-19 crisis has i) affected the competitive environment, if anything improving the long-term outlook, ii) affected operational issues for B-North, and iii) had an impact on the timing of the banking licence process. We believe both lending and deposit spreads will be wider, incumbents will be internally focused and customer demand higher. Unlike incumbents, B-North is not facing back-book impairment or management issues. The raising of further equity is the key next step and is likely to reflect the improved outlook.

• Opportunity improved: We believe increased customer demand, a limited bank appetite to lend and increased risk are all likely to see spreads widen. B-North faces better volume opportunities and wider pricing, without the incumbent profitability drags of lower deposit pricing and back-book impairments.
• Capital raise: B-North intends to raise equity: £20m required initially for its banking licence, a process we understand is close to completion, and infrastructure, with further amounts to fund growth. In terms of timing, it may raise these funds in a single round or as an initial issue followed by another later in the year.
• Valuation: Given the growth profile of the company and associated uncertainties, any valuation must be treated with extreme caution. In our initiation report, 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 the opportunity improving. Options to extend the time to a material capital raise have short-term consequences, but do not change the fundamental model.