What's up you guys, sasha here now, you might have seen recently in the news in various media. Monzo bank have released their annual report and in most cases nobody would really care. Nobody would really go and read it. Nobody probably look at it much except this time.

There's a bunch of stuff in that report that is really quite important. There's a lot of people with monzo accounts. In fact, in that report they tell you how many there are. There are 3.9 million customers now that is up 2.3 million from just a year ago.

So that's quite a lot of people and the reason i wanted to make this video is because there's been a lot of speculation. There's been a lot of discussion. Is the bank in trouble? Is the money safe? What happens if they go under? What happens if they don't go under, but continue being in this precarious position? I'm gon na dive right into the depth of all numbers. I'm gon na give you my personal opinion on all this now, just to clarify this is not financial advice.

I'm not telling you whether you should or shouldn't keep your money in monzo or any other challenger bank or any other bank for that matter. That's up to you to decide! I'm just going to go and look through this report and point out a few things that i find interesting now, i'm going to link the report that i'm looking at below. It is very easy to find if you just google monza in your report, you're - probably going to go and find it there, but i'm going to link it anyway. It is for the financial year 2020, which runs through to the end of february, and here are some of the interesting things that come up right at the top of the report.

There's 147 pages in total, just just in case. You do want to read it now up top. They tell you some of the really good news about this report. They tell you that they have a new investment round of 130 million.

They tell you about the customer number that i just mentioned. They tell you that in the last year, they've launched their first tv ads and they also have the most number of people switching to them out of any bank. When you take the net switching number, that is really pretty impressive. Those are all good things, so so what exactly is the negative in this report? Why are people so worried and concerned if you scroll a little further down past all the statements from the chairman, the ceo and everybody else, who wants to make a statement in this report? There's four pages worth of various different statements relating to covet 19 and you might think that that's standard that a lot of other banks are doing the same and everyone does mention code and everyone is putting stuff together.

That addresses the situation. But the monster report does read a lot like a bunch of these could potentially be excuses why the performance in the next year or two might not be as good as they expected. Some of these genuinely are issues that they are experiencing because of the kobe situation. A lot of these, i just don't think, are necessarily related.

You can make up your own mind. You can go and read page 17 onwards in this report. If you're interested i've got some other things that i really wanted to share. Instead, now in the big numbers announced in this report, the headline figure is the 1.4 billion pounds worth of customer deposits that they now hold.

This is huge because it is up 931 million from a year ago, and that is a really really big rate of growth. But - and there is one big, but it is only equivalent to 357 pounds and 5 pence per customer. If you use a 3.9 million customers number that they've provided as well, which is not a lot because most of their accounts, don't have overdrafts, and a lot of the overdrafts are not going to be that big. It means that the average customer holds very little funds in that current account on an average basis.

Points very strongly to the fact that monzo is not used as a primary bank account by a huge proportion of their customers, because if it was you'd expect at least half an average salary to be in there as a bare minimum and 400 pounds wait, it's 357 Pounds is definitely not that, just by way of comparison in case you're interested styling released a july update just a few days ago as well, and in that update they say that they have 3.05 billion pounds which is distributed between 1.5 million accounts. So that's 470 percent. More money per account than the equivalent monzo statement. Now you have to scroll all the way down to page 26.

Before you see any real performance data and page 26 is where you see the overall financial review, the p l statement and although the statement is not very detailed, i'm going to get through into a bit more detail that you can find further down the report. There's a few really important things that you need to be aware of. First, let's talk about the costs and on the cost front, the personnel expenses amounts to 77 and a half million pounds. That is a lot of money.

It actually includes 14.4 million that is given to personnel in shares that you'll find much further down in the report. It doesn't say it on this page, and that is for 1495 people, which sounds reasonable enough until you realize that they've been growing the personnel a huge amount in the last year and the average number was only about a thousand through that year. And that means that they're actually spending quite a lot of money on all this personnel. Assuming that a bunch of these people are call center staff who are probably not paid as much as some others.

If you're going to look at what that is as a proportion of their current deposit balance, that is incredible, it is five and a half percent, and that is a mighty high number by anybody standards. This is a deposit book. Normally, that number would be far far lower for any other bank that operates current accounts because they're not really doing very much lending and they don't really have any other products. This seems like an incredibly expensive way to run this business.

The other big cost is their operational expense. We're going to get into some of the details with that. It is 70.4 million pounds, which is also a very large number. I'm gon na break it down and explain exactly where that's coming from and why.

That is an issue a bit later on in this video, so wait for that when we get there now on the revenue front, there are two major revenue streams. First is the lending interest income, and that is 24.4 million, but there's also 20.3 million in expected losses. I'm going to get into the details a little bit later on in this video, but what this really means is that the lending business currently is not really making any money. Now the only other revenue stream detailed in here is the net fee and commission income and basically almost 100 of this amount.

The 29.4 million is interchange income. So this is the income that monza gets paid every time you use your card so whenever you go and buy something in the shop whenever you travel and spend money abroad, so every time you go and get your monzo card and you pay for something and any Other card, for that matter, a proportion of the money, a small proportion of money that you are paying to the retailer, will eventually make its way to monzo. One point i wanted to note on the revenue front is that they keep highlighting this partnership model that they're building, so within the app you can go and sign up for other products by other providers and what monzo does is for recommending you, those products and services. They get a commission a cut of the money that the provider that they've recommended is going to make and they keep saying that this is the way that they want to structure their business going forward.

But the total amount that they've made in that way is just 1.4 million. So at the moment this is a relatively negligible part of the overall business and it doesn't seem like it's growing at a very fast rate. So it's probably not going to become a particularly huge component in the next year or two either. Now, let's quickly talk about the lending, as i mentioned, the lending arm of the business is not really making any money and a big important factor in that is the way that you have to account for the various components of how revenues and losses are generated.

In the lending business in the last few years have been a big change to the way banks, financial services companies have to report various items to do with revenues and losses on their accounts. Now i'm not going to go into the greatest amount of detail here. You don't really need to know it, but something called ifrs 9 governs the way that losses are reported on these accounts, and specifically, it states that you have to forecast the next 12 months of losses when you're having a credit project, and you have to report them At the point at which they are forecast as a loss item, so what this means is when monster says that they have 20.3 million. In expected, credit losses they're expecting that the lending that they've already given out to customers is going to result in that amount of loss over the coming 12 months.

Now, if you look down to page 81 in this report, which, as far as i can see, none of the media actually bothered reading that far there's some really really important bits. Here. I've looked at all the different media reports. I've looked at the news reports.

I haven't seen anybody really mention some of the stuff i'm going to talk about now and that's why. I think it is crucial that i go and mention it, because it is really really important. This is the section that is prepared by the independent auditors, and in this case the independent auditors are ernst young. You can find this information if you look towards the bottom of the section.

There's one place where it gets mentioned, and normally these parts of the report are incredibly boring. They say absolutely nothing, they say everything in a super neutral manner and you just get used to seeing exactly the same stuff stated in each single one and they actually start the same way in this one. They say we conduct our orders in accordance with international standards of auditing blah blah blah. Our responsibilities are blah blah blah.

We are independent and they tell you that we believe the ordered evidence we have obtained is sufficient and appropriate to provide a basis on our opinion. Not much interesting here, but if you continue reading here, is where it gets a bit more juicy further down. It says there is a risk that the group will not be able to execute his business plan, which could adversely impact his ability to generate profits or raise capital to meet future regulatory capital requirements. This is pretty serious.

He then says this has given rise to the following material uncertainties number one, whether the group will be able to access new funds available at the levels required number two market conditions over the coming months, in light of the continuing spread of code 19 and number three, Whether the group has the ability to execute its business plans, all three of these are major major issues. Now they said. Normally these reports don't really say anything at all. In this case, they thought it was worthwhile to go and put this relatively high up in the report, so people really should take notice on the next page at the top of the page.

In the first paragraph it says this, as stated in note 1. These events and conditions indicate that a material uncertainty exists that may cast significant doubt on the group's ability to continue as a going concern. That is incredibly serious because the official auditors of these accounts are saying that they don't have just some doubt. They don't have some concern.

They have a material amount of concern that there is a significant doubt on the group's ability to continue operating. So basically, what they're saying is based on numbers they're, seeing they think there is a very high probability relative to their normal assessments. That monza will not be able to continue operating for very long so just to understand why they might have come to these conclusions. Let's keep reading the report and look at some of the underlying numbers that maybe they saw - and maybe they thought were the reasons for putting these paragraphs into their report.

Now the bank posted a 113.8 million pound loss and their operating income was 35.7 million pounds, which is incredible because the cost base is growing so so fast that the revenues don't seem to be catching it year after year. So far, but it's going to look a little bit deeper than that. Here is a big problem that i have. Some of the basic operating costs of the business are actually higher than their total sum of revenue.

Now i've got the notes over here. Specifically 25.4 million pounds is the current account operations cost just the cost of running the business for current accounts. You know the background stuff that has to happen for the current account basic features to actually function. 10.3 million pounds is their tech cost 6.4 million.

Is the admin cost now just just those things without the offices, without the salaries, like anything else, already add up to more than the total revenue the company is making? So the one issue that they have is that the cost of earning the revenue currently that they are earning is higher than the revenue itself. So, even if they were able to scale the business by doing the same thing more, those costs would probably typically in most cases scale in the same way that the revenue would so unless they change the business model. You can't really scale this because it is loss making by default, so if they want to go and reach the bare minimum, we're just breaking even they need to find an extra revenue source of 114 million pounds without actually increasing their current cost base. So you can't do that from interchange, because the only way you can increase, interchange with the current way that the bank is going, is to increase the number of customers, increase the number of transactions and thereby increase the amount of money that monster receives.

But if you increase the number of customers, the number of transactions and the total size of your customer portfolio, you're going to increase your fixed cost as well, so you're not actually going to be making money. By doing that, so you have to go and find another way. Generally speaking, banks earn money by lending money out. That is the number one revenue stream for most banks, financial service companies and certainly the place where they earn most of their money.

At least the retail bank side of the overall bank, currently monzo have 123.9 million pounds lent out currently, as of the end of february, which is the latest point in this report provides now. Let me give you a few key statistics overdrafts with monzo used to cost 50p per day, and the data in this report covers the period when they were 50p per day. Now. Overdrafts have changed the change in april of this year, and now they cost 19, 29 or 39, depending on the customer's level of risk.

Now their own report here says that 87 of their customers, according to their expectations, will pay less than one pound per month for using the overdraft, so by their own admission, they're not expecting overdraft to actually earn them very much at all. In fact, the reason they've changed their overdraft pricing is because of regulation that came in that changed most banks, overdraft pricing and they are trying to make it based on the customer's level of risk. But the problem here is that a lot of people who previously maybe would have dipped into their overdraft, knowing it only cost them a relatively small amount. Now may choose not to do so.

So actually, the take-up of the overdrive facility may drop as a result of the fact that now a bunch of their customers are going to be paying 29 or even 39 interest for using it. Now, let's get back to the point that i was making earlier in this video, which is the ifrs 9 guidelines, mean that the losses that they're posting on their portfolio have to be recognized for the next 12 months. So what we do know is that they're expecting, roughly speaking 20.2 million pounds to be lost on a total loan book of about 123.9 million pounds, so they're expecting a 16 loss per year. Now that number is a little higher than what they were expecting before covet hit, but remember that this report goes up to the end of february and the full scale of what happened afterwards.

Hadn't been built into the provisions that were set aside at that point. So here are some really basic numbers based on the numbers in this report. If they grow this lending book and they keep exactly the same cost base as they're currently operating, let's say: they're earning 29. I've just took the middle of the three price points as just a guesstimate as to what they might be able to earn.

Let's take the 16 that they've accounted for in terms of losses, because this year is probably actually gon na be worse next year. Maybe it's a reasonable estimate, at least for the next few years. It's probably actually a reasonable estimate. If their numbers are in any way accurate, then let's go and look at their costs.

As i mentioned, one is 5.5 percent, so the salaries are 5.5, the other one's a little bit lower about five percent, so total cost base of about 10.5 percent for just operating the loans. So suddenly, the net profit on these loans that they are dishing out is about two and a half percent per year. So if they want to go make 140 million at two and a half percent they're gon na have to have a loan book of about 4.6 billion pounds. Now i know what a lot of people are going to say, they're going to say, but sasha.

None of these costs scale linearly. You don't understand how this kind of business works and trust me. I do i've built enough of these businesses. I've worked enough them to actually know how they work from the inside, but let's go and give them the benefit of the doubt.

Let's say they go and do something to improve the losses numbers slightly and let's say they go, make double what the number i've just calculated. Let's say they go make five percent returns, which is, is a reasonable assumption in order to make the 140 million that they would need to break. Even they would still need a portfolio of 2.3 billion, that's 20 times what their number currently is. So i think you can see where i'm going here.

They need to do some really drastic changes to their business in order to go and make it even break even let alone make any positive returns now. The issue is that the pricing on their lending is incredibly expensive and what this means is they're not going to attract the low-risk customers who are going to have low risk levels 26.6 on their loans is significantly above, where the market is for high street banks. For other lending providers, it's definitely not going to attract those low risk, high quality customers, and that means that the last number is likely to be in the double digits, no matter what they do. You might have seen in the last month or so they've been very desperate to try to find new revenue streams and they launched the plus account i'm going to link a video below i'm going to put it up here as well, where i go and review that Plus account, i certainly don't think that that product is going to be the savior that they're looking for.

I don't see a lot of customers wanting to go and take it up, because it is quite expensive for you actually get in return and this kind of summarizes the whole issue here for me, which is there, don't seem to be very many good ideas emanating from Monzo about how they're gon na actually begin making money, they don't do credit cards and credit cards are the biggest revenue stream for most retail banks, financial services companies, so they're, basically not doing the one thing that they really could and should be doing in order to Turn revenue, which is offer credit on a revolving basis, so that customers cannot have to pay a fixed term loan or not have to do any kind of overdraft charges or anything like that. People can borrow on credit cards, which is where everybody else makes money. They missed the boat on the business interruption, loans that a lot of other banks jumped on starling did 900 million pounds worth of business interruption, loans, and that is really important because those loans are backed by the government. And that means that, if the losses that they incur over time actually go and happen, the government will cover up to 80 percent or to 100, depending on type of loan off the loan loss the bank takes, and that means the styling is pretty much guaranteed to Be earning a reasonable amount of money from the loans that they've given out mods have been doing a lot of other stuff, which seems to have been very, very busy and a lot of work, but none of it is focused on revenue, they've gone and entered america.

They wanted to become the new big shiny bank in america. They opened up office in las vegas and lay in the same time frame. They went and closed their vegas office and they moved the la office to san francisco in order to attract better talent. All of this has wasted a huge amount of time and money, and still they don't have any kind of profitable business in the us or the uk at the end of it all.

The recently announced they're going to make 120 redundancies in their uk office because of the conditions and the way the company is going, which isn't very good signs for where they think the company's headed in the next 12 months. Now, if you are a monza customer and you have money in the bank and you're trying to figure out, what should you do or what should you not do here are a few important things that might help you, along with making your own decision about it? First monzo is a bank and therefore it is regulated by both the pra, the prudential regulation authority and also regulated by the fca and because of those regulations. They have to abide by the financial compensation scheme and what this means is the money that you hold with monzo is protected up to 85 000 pounds per person. So if the worst was to happen, a monster was to go down overnight, something bad happens and the bank shuts his doors you'd, be able to go and use this compensation scheme in order to get your money.

Now it is true. Banks don't go under very frequently. So you might be asking: well, is actually my money going to come very quickly through the scheme. How difficult will it be? The answer is this scheme does a lot more than just banks.

They cover things like financial advisors, things like insurance, things like various brokers and all that kind of stuff, and a lot of these small and medium-sized companies go under all the time, so they are used to doing this practice. They're used to paying this money, but there's two important things you need to know. First, monzo actually holds most of the deposit money that they have on their books with central banks and that's really critical, because that means if the money needs to be accessed, to pay compensation to get the money out of the bank in case it fails. That is going to be a relatively more straightforward process than if it was held via other means in other locations and places.

Second, fscs actually is a very quick process for getting paid. Most customers should expect to get paid within seven days. That's according to the fscs itself and what they actually then say is in cases where there's more information required where the cases are a bit more complex and this may fall under that umbrella. You should expect to wait up to 15 days.

So, in the worst case scenario, if something really bad were to happen, you only have to wait up to two weeks to be able to get access to your money. So if you have a credit card to be able to pay for things in the meantime, you'd probably be okay. So if the worst was to happen, you would have to wait a maximum of about two weeks to get access to your money and in most cases it would be far less than that. So actually, that's not that bad.

A thing if you have any other form of making payments in the meantime like let's say you have a credit card that you can use or something else. It really isn't that much of a deal. I hope you guys found this useful. If you have, please make sure you go and smash that like button for the youtube algorithm, it is incredibly important so that this video can be shown to more people so that my channel can grow and reach more people more quickly.

If you're interested in videos about personal finance about various personal finance products, making more money and making more with the money that you do have make sure you subscribe to this channel, you can get videos on a monday, wednesday and friday. If you subscribe and to make sure you don't miss anything make sure you hit that bell, so you get notifications every single time. One of my videos comes out i'll, see you guys later you.