Metro Bank chair meets UK financial watchdogs as shares plummet

Metro Bank’s chair met the UK’s top financial watchdogs on Thursday as the bank seeks to raise up to £600 million (€693m) and sell about a third of its mortgage book in an effort to shore up its balance sheet.

Metro, the first of a crop of challenger banks that promised to ignite competition on the UK high street in the wake of the financial crisis, is sounding out investors about raising as much as £250 million in equity funding and £350 million of debt, the Financial Times reported on Wednesday.

News of a capital raise – whose equity component is close to three times Metro’s market value before the capital raising became public – triggered a fall of 29 per cent in the bank’s shares to 36.1p at market close. The price of a £350 million bond due in 2025 fell 12.6p to a record low of 57.4p.

Metro is also considering a sale of about £2.3 billion of its £7.5 billion mortgage book to raise funds and reduce its capital requirements, three people with the matter said. It has approached larger peers to gauge interest including Lloyds Banking Group, NatWest and HSBC, two of the people added. Sky News first reported Metro’s approach to bidders.

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“They are attractive prime assets so it will just come down to price,” said one of the people familiar with the offer.

Metro’s chair Robert Sharpe was asked to meet officials from the Bank of England’s prudential regulation authority (PRA) and financial conduct authority (FCA) on Thursday, according to two people familiar with the situation.

Two of the people said the meeting was the latest in a series of contacts between regulators and the bank over the past month as its shares have almost halved in value. The sharp decline followed an announcement by the bank on September 12th that the PRA had delayed approving a plan that would have allowed Metro to run its mortgage business at a lower cost.

The bank’s “chair attended a long-standing, pre-diarised meeting with the PRA this morning”, Metro said on Thursday. It would not clarify when the meeting was scheduled or what was discussed.

The FCA and the PRA declined to comment on their dealings with the bank, which has 76 branches, 2.8 million customers.

Metro said on Thursday it was “evaluating the merits of a range of options, including a combination of equity issuance, debt issuance and/or refinancing and asset sales. No decision has been made on whether to proceed with any of these options.”

An analyst, who asked not to be named, noted that the proposed capital equity raise “would be horrifically dilutive” for shareholders and that raising more funding from existing investors could create “its own problem in the wider public sphere in terms of messaging”.

Metro’s top shareholder is Colombian billionaire Jaime Gilinski, through his Spaldy Investments vehicle. He did not respond to requests seeking comment.

Ratings agency Morningstar said it did not “expect the difficulties being experienced by Metro Bank to have a broader impact on the UK financial sector given its relatively small size and the specific issues the bank has experienced”.

Metro was at the centre of a misreporting scandal in 2019, when it was found to have materially underreported the risk of its book. The episode led to the swift exit of its chair and chief executive. The FCA later fined the bank and censured the former chief executive and finance boss.

Ratings agency Fitch put Metro on negative watch on Wednesday, citing increased risks to its business model, capital position and funding. S&P Global Market Intelligence data indicates that 6.77 per cent of the company’s shares were on loan on Wednesday, double from just one month ago.

Metro spent five years seeking permission from regulators at the Bank of England to use its own models to estimate the riskiness of its mortgage book, measures that would have boosted the bank’s profitability. The bank’s CEO, Dan Frumkin, told the FT in August that it remained the issue that “comes up in the majority of conversations with debt and equity investors”.

The bank was cofounded by Vernon Hill, an American who promised to revolutionise UK banking by improving customer service and introducing longer opening hours at branches.

The bank said on Thursday that it “continues to be well positioned for future growth”, pointing to its underlying profits for the past three quarters. – Copyright The Financial Times Limited 2023