A recent article in the Financial Times’ ‘Lex’ opinion column discusses the disconnect between UK fintech, online-only bank Monzo’s ambitions to raise its next financing round at a valuation of $1.5 billion (£1.17 billion) with the average account holder’s balance at £150.
The lofty valuation, if achieved, would mean each of the fintech’s 90,000 accounts, with that average balance of £150, is assigned a prospective lifetime value of $1700 (£1325). That would be roughly half of the value given to accounts held at JP Morgan, when translated into market capitalisation. JPMorgan Chase is the biggest bank in the USA by assets.
The piece ends with the cautionary conclusion:
“Monzo is a British upstart, whose customers are young and stretched. Such a flattering comparison is not yet justified”.
The valuation ambition of Monzo, and the fintech may well get close when it next calls for investors, has shades of Tesla. The electric car maker is valued at more than either Ford or GM on a fraction of their revenue and none of their profits. Similarly, many value investors believe the UK’s listed high street banks such as Lloyds Banking Group, RBS and Barclays are currently undervalued as businesses. Despite their cost cutting, streamlining, ring fencing of consumer banking assets from riskier investment banking activities and solid profitability, markets have yet to forgive the need for bailouts a decade ago and a series of scandals since.
Value investors have seen this as an opportunity. Hype over-valuing ‘trendy’ high growth, largely tech-focused business model with strong growth but small revenues and profits, if any, at the expense of solid business models in the dog house. They believe that sooner or later the market will return to fundamentals and the balance sheet will be given priority over nebulous ‘future growth potential’. At least, that’s the belief of those investing online in the stock of the high street banks.
However, a well-known hedge fund manager famous for calling the ‘credit crunch’ and Brexit, Crispin Odey of Odey Asset Management, recently warned in a letter to investors that he believes the share prices of traditional banks are, rather, more likely to be a one-way ticket down. He warns investors that banks are losing their most profitable revenue streams one by one to agile, online competitors, comparing the trend to that which has seen department stores fail to deal with the rise of ecommerce.
“Foreign exchange, consumer finance, small company lending”, are all highlighted as once valuable drivers of profit that banks are losing out of. The end result, says Crispin, is that high street banks have become a:
“Serial lagging sector, luring every year value investors to their deaths”.
The loss of these revenue drivers, he believes, means traditional banks are running out of places to look for ‘repeatable economic growth’.
Certainly food for thought for those investing online in ISAs and SIPPs who see banking stocks as a strong value play. It should, however, be highlighted that Odey’s track record has suffered over the past couple of years. His hedge fund has tanked as a result of wrongly timed predictions on a dollar bull run and a bearish bet on China. On the other hand, it now looks as though both those forecasts will come to pass – just a year or so too late for Odey. Perhaps the future is bleak for many traditional banking stocks but the question is when reality will hit or if the current trend concerning Odey can still be headed off by old banks embracing new technology and taking the fight back to arguably over-valued fintechs.