British digital bank OakNorth Bank Ltd. is eyeing a further £1 billion of lending in 2018 after having turned its first-ever profit in 2017, according to CEO Rishi Khosla.
OakNorth, founded in 2015, posted a profit of £10.6 million for the 2017 full year, compared with a loss of £2.4 million in 2016. The bank is the first of a cohort of U.K. digital-only banks launched since 2014 to make a profit. Monzo Bank Ltd., launched the same year as OakNorth, is still loss-making, as are Atom Bank PLC and Starling Bank, which hit the market in 2014.
Gross lending at OakNorth, which focuses on small and medium-sized businesses, crossed the £1 billion mark in 2017, up from around £300 million in 2016, Khosla said in an interview.
"We want to lend another billion in the next year, and we are very much on track with that," he said.
Khosla credited OakNorth's "pretty frugal mentality" for helping it to hit profitability ahead of its peers, and he said it was important that the bank established a solid business model before trying to scale aggressively.
"What a lot of people do is to try to scale a new business unprofitably, and then they think they can flick a switch and make money. Losing a lot of money with the hope of one day getting a good business model is not the most disciplined way to run a business," he said.
Putting the bank's core IT systems in the cloud rather than building out its own infrastructure is one way the bank has kept costs down, Khosla said, adding that the decision to adopt cloud computing was motivated by the need for "flexibility and scalability" as well as cost discipline.
OakNorth is now in a position to pursue growth, and it will not let Brexit derail its ambitions, Khosla said. Although it is difficult to assess the U.K.'s macroeconomic health, the bank will continue to evaluate borrowers on a case-by-case basis, he added.
OakNorth targets "fast growth" U.K. businesses as well as established property developers, with loan sizes of between £500,000 and £30 million. The bank counts property developers Galliard, Frogmore and The Collective among its clients, plus restaurant chains LEON, Brasserie Bar Co. and Padella.
Restaurant chains such as Jamie's Italian, Byron and Strada have all faced financial difficulties in 2018, with industry observers blaming overly aggressive expansion and intense competition in the casual dining market. Asked whether OakNorth's restaurant exposures posed any risks given the recent wave of closures and restructurings, a spokesperson said this was "not a worry" because the bank ensures that it is not overexposed to any given sector.
"We have also lent to care homes, nurseries, private equity firms, fintech businesses, media companies, art galleries, property developers/investors, hotels, and security businesses. So we have a very diversified group of borrowers," the spokesperson said in an email.