OakNorth enjoys 73% increase in profits as digital bank recovers bad debts

OakNorth Bank, the SoftBank-backed digital lender, grew pretax profits by more than 70% last year, driven by strong loan growth as the economic outlook improved.

The British bank, which typically lends between £500,000 and £25million to businesses and property developers in the UK, is also on track to recover most of the defaults incurred in recent years.

OakNorth was launched in September 2015 by chief executive Rishi Khosla and co-founder Joel Perlman after selling their previous business, which outsourced research for investment banks in India, to credit rating group Moody’s.

Direct lending accounts for the vast majority of revenue for OakNorth Group, which owns the bank and other subsidiaries, including a credit software platform it licenses to lenders in other countries, including Capital One and PNC in the United States and SMBC in Japan. OakNorth Bank is also rolling out the software, which Khosla says has helped improve its efficiency and credit experience. The group has integrated teams spread over several sites, including in India, with expertise in credit science.

In 2019, OakNorth was valued at $2.8 billion in a $440 million funding round led by Japanese conglomerate SoftBank’s Vision Fund.

Khosla, a Conservative Party donor, said the group had no plans to raise new funds given its profitability. “We’ve built a well-balanced model, delivering value to customers while conserving capital so we don’t have to go to market,” he told the Financial Times.

OakNorth’s revenue rose 26% year-on-year to £176m in 2021, while pre-tax profit rose 73% to £134.5m. Results were boosted by a net reversal of £3.7m in bad debt provisions, compared to a charge of £21.6m in 2020, due to an improved economic outlook and quality loan portfolio.

Gross new loans increased by 60% to £1.8bn in 2021.

The FT reported last year that OakNorth had incurred nearly £100million in defaults from just 10 borrowers, largely from downgraded loans to property developers. The latest results showed two additional faults, although Khosla said six had been fully recovered and the overall recovery rate would be around 90%.

“We expect to continue to have strong credit performance on an annualized basis,” Khosla said. The overall health of the loan portfolio was robust despite headwinds in energy and food prices driven sharply higher by Russia’s invasion of Ukraine, he added.