Hey guys, it's sasha monzo have just published their annual report and they are in real serious trouble. Monzo is a popular challenger bank in the uk that has grown incredibly fast in recent years, but financially things are really not looking good. As i'm recording this video. I haven't seen anybody else report on this and i don't think monzo have made any public announcements.

I am on a press distribution list. However, i looked up module report on google and went to their website and just changed 2020 to 2021 and hey presto. It was all there i am guessing. This will be announced pretty soon.

I am showing you the numbers in this report, but first, let's look at their public statements. These are important. According to the website, everything has been great. Look.

Their website says that the growth has been phenomenal. In their words, they have five million over five million customers, which is awesome, and the deposits have increased by more than a factor of two there's a load of other stats. If you scroll down the number of pots created and spend on cards, etc, etc, but there's no mention of whether the bank is making a profit, hmm interesting. Luckily, at the bottom there is a little button to download the actual report.

So here is what it says in the report. I read through the whole thing: it is pretty long um, so there's a load of mumbo jumbo in it feel free to go and look at it if you want to yourself, but i'm going to jump straight to the most critical parts. First, let's look at monzo's p, l monzo made 62.2 million pounds in operating income in the last financial year to february 2021 and they spend 192.2 million pounds on costs, which means the bank lost 130 million pounds. That is huge.

Their loss is more than twice the total revenue. Their costs are more than three times their revenue. This is really not particularly good. The revenues have actually increased from last year, so that is good and i'm going to cover that in just a second, because it's not as good as it might seem, but so have the cost.

The costs have also gone up. The costs in fact, have gone up by over 40 million pounds by more than the revenues have. The company is spending money like no tomorrow, and the losses are really beginning to add up and here's a really important bit look at their interest. Income line they've actually made less in interest income in the last financial year than they did in the previous one in 2020..

That is really really bad, because this is where their money should be coming from. In fact, their total income across the whole business of 62.2 million pounds is only about 12 pounds per customer. That's income, not profit. That is incredibly low and lending is how financial companies, such as banks, make their money, and unfortunately, it looks like monzo haven't figured out how to actually do lending profitably, because in the last year their revenue from lending has actually dropped.

So they are not doing as much, and certainly the performance is not there. Now they have a few months ago changed their loans to look more like the typical high street bank in terms of structure and pricing, and i am sure that there's been a lot of pausing of people's loans during the past year etc. But still, despite all this, it is not looking good, but they are pricing loans under seven thousand pounds at twenty two point: two percent apr and loans over seven thousand pounds at seven point: two percent: those are pretty expensive terms and i'm not convinced that this will Be the solution that helps them turn a profit. In fact, their own auditors are really not convinced.

Last year the auditors raised some concerns that i covered at the time this year. It is much much worse. Let me tell you how much worse it is here is what the monzo directors themselves say about their views on this. On page 99 of the report, i'm gon na quote our directors have assessed our ability to continue as a growing concern and are satisfied that we have the resources to continue for the foreseeable future.

But there is a risk. We won't be able to execute our business plan which could impact your ability to generate a profit or raise enough capital to meet future regulatory capital requirements. Because of these obstacles, the directors recognize there continue to be material uncertainties which may challenge our ability to continue as a going concern, but the directors do remain confident in our ability to achieve our business plan and raise capital if necessary. For those reasons, we've continued to prepare the financial statements on a going concerned basis see the director's report for more detail, so the directors legally have to disclose that they think there are issues they are playing it down, though they are saying that they are material uncertainties Which may challenge monza's ability to continue to operate, but they reckon that they can continue raising money from investors to fund the business.

So it's not that big a deal, and they have done very well with funding for sure they have been raising huge amounts of money. In recent funding rounds and recently revolute had a huge funding round, so there's plenty of money flowing into fintech. Anyway, let's look at what the auditors had to say because their report is in here as well. By the way, those auditors got paid 2.4 million pounds for doing the audit.

It's it's in the report. That's four percent of the total annual revenue for monzo, that's pretty expensive right anyway. So here's what the auditors say on page 77., we draw attention to the basis of preparation in note one in the financial statements which indicates that the ability of the group to continue as a growing concern is subject to material uncertainty. I'm quoting here the group is expected to continue to be loss making over 12 months from the date addition to the financial statements and will not be able to meet its regulatory capital requirements without raising additional capital as undertaken in prior years.

This is critical. They have to raise funds just to be able to operate and meet their basic financial requirements. Let's continue reading, as stated in note 1. These conditions indicate that a material uncertainty exists that may cast significant doubt on the group's ability to continue as a going concern for a period of 12 months from when the financial statements are authorized for issue.

Our opinion is not modified in respect to this matter, so the auditors are saying that they think there is a material uncertainty which may cast significant doubt on the group's ability to continue as a going concern for a period of 12 months. The audiences are saying that they think there is a significant risk that monzo will fail, not just fail at any moment, but in the next 12 months in monsoo's own annual report. The auditors actually said the exact same thing last year and that's what i think the media gon na pick up on the saying nothing's changed, but there are two really crucial differences which i notice, which i think the others might not. Last year's report did not have the 12 months, including in this included in the statement.

The auditor said that they have concerns and the wording was the same except for that bit at the end about the 12 months. It did not state a time frame this year. They have said their concerns are for the next year. This is extremely serious, and the second point is that last year the statement was made, and that was that then they moved on to the other part of the auditor's statement this year.

The auditors then spent a whole page after this statement explaining why they agreed that they chose to agree with the directors that the business is a going concern. There's a lot of stuff in here, which basically sounds like the auditors are just trying to protect themselves. If monso does go insolvent, they're saying we think there's a huge risk, but we do agree with the directors that the business is still viable by agreeing that the business is going, concern they're saying that they still think it is solvent. But then they have a whole page of reasons.

Why, based on what the directors have told them, and at the end of all that, they then say our responsibilities and the responsibilities. The directors with respect to going concern are described in the relevant sections of this report. However, because not all future events, conditions can be predicted. This statement is not a guarantee as to the group's ability to continue as a going concern.

So basically they are saying: okay, we'll say you're a solvent just because you're paying us a load of money because we agree with you. You know nothing to do with the money, but don't come blaming us if it turns out that monzo is actually not solvent. We've put it all down on paper here, not our fault, it's difficult to see where monster can actually make a profit they're. Looking in the numbers, their lending business is clearly not working.

It's not been working for a few years now and there are issues based on the numbers uh with their ability to actually make proper profit from that they're. Putting on a brave face and they're saying that their bank accounts, the paid bank accounts are doing really. Well. That's where they're gon na be making a lot of money and on the website.

If you look on the big html thing, they say that their annual run rate and revenue grew to 105 million pounds by december 2020. So they're saying that you know the revenue is growing and eventually it's going to be all good and dandy. But here are the questions that i don't see an answer to here. The run rate of 105 million pounds is still 100 million short of just breaking.

Even for the business so that, even if that was the run rate for the whole year, that would still be an extremely poor result and given the annual report runs to the end of february, why did they choose specifically to exclude january and february on that graph? Why does it cut off in december, given this as an annual report that runs to the end of february, and it is published only in july, what stopped them from being able to publish those two last numbers? Why did it happen that monza don't want to show what happened in january and february for those numbers? The graph also doesn't have any scale, it's impossible to tell whether it's even real numbers or just a graphic again very, very odd, to include it and show it like that, because it kind of sounds like they don't want to be telling you what is actually happening In that graph, and if we look on page 102 of the report out of the 42 million pounds in revenue that came from fees and commission, which is the big growth story in this report, out of that, only 11.4 million came from banking services income. The paid products, i presume because 40 million came from interchange, which is the fees paid by customers using their cards and shops and the rest came from partnerships, basically selling customers, third-party products by other people and getting paid the commission for it. But look the cost of the banking services is 9.3 million pounds, so all of these paid products that they make such a big deal out of only made two million pounds for them last year before the operational cost. That's just in essentially gross profit.

That's about one percent of the total cost of operating the bank, one percent on their front page they're, probably displaying that 25 percent of the revenue is from these new products. That's all dandy, it all sounds good, but unfortunately, revenue and profit are entirely different things and the numbers are showing a much more bleak story. So the only thing that is really growing for monzo at the moment is interchange customers using their cars in shops and a small fraction of those transactions going to monzo as a fee, and at the moment interchange is earning them 37 million pounds a year in gross Profit before taking account the rest of the bank operating costs, but that's with over 5 million customers already. So how much further can it realistically grow and presumably, if more, customers join and existing customers maybe even spend more the operating cost? The cost of running the business will also increase, but monzo have to increase that interchange by 350 percent just to break even and that's quite unlikely to happen anytime soon.

Certainly, the interchange is not growing at that sort of rate over the last 12 months and the likelihood is going to take them years before it reaches those sort of levels. If everything goes well, so the likelihood is that monza will go and collect more funding soon. They're going to have to raise more funds in order to make it through it looks like there is plenty of investor money floating around. The question is whether those investors want to continue investing in the bank that are showing no signs of trying to make any money and given monzo have already had a huge number of funding rounds.

How much equity is there to go around and to spread and how much do existing shareholders want to dilute to go and raise funds? Some people think that monza might do an ipo. There's been a few articles about it recently, but that has trouble all over it. Imagine a company going public when their own auditors are saying that there is a significant risk that that company might fail in the next 12 months. We'll have to see what happens, but it certainly is not looking good for monzo.

They need to figure out how to make revenue and lending is the most likely way out for them. That's how most language services companies make money, that's how banks make money, but they don't seem to actually know how to grow. That side of the business they're. Certainly not showing it over the last couple of years.

I really really sincerely hope that monzo do figure it out. We need new thinking. We need new challenge banks like monzo to disrupt the high street banks. They are doing really good stuff on the marketing front.

They're doing really good stuff on some of the product side of things, but disruption has to be commercially viable and at the moment monzo just does not look at all commercially viable.