Metro Bank launched in 2010 and has been among the most well-known of the so-called challenger banks. When it was launched it was the first UK high street bank to be granted a new banking licence for over 150 years and at a time when many high street lenders were reducing their physical presence.
Going against the status quo, Metro Bank proudly stated its commitment to opening over 200 ‘stores’ (i.e. branches) within 10 years and provide an alternative to traditional UK banking. Its stores were open 7 days a week and provided water bowls, treats and bandanas to anyone wishing to bring their dog along to help them with their banking.
Six years after opening and following a year when it welcomed over 200,000 new customers, doubled lending to £3.5 billion and grew its deposits base to £5 billion, Metro Bank listed on the London Stock Exchange. While the IPO price was slightly below its planned issue price, at £20 it was still sufficient to raise £400 million for the bank and provide it a valuation of £1.6 billion.
The bank continued to grow and by early 2018 the share price hit £40, valuing the company at £3.5 billion.
A year later, following a general downward trend in its share price, the problems started. The bank announced it had made an error in how it classified risk in its loan book where hundreds of millions of pounds of commercial property loans and loans to commercial buy-to-let operators should have been included within its risk-weighted assets. Many of the loans should have carried a risk weighting of 100% but were classified as either 35% or 50%. Overall, around 10% of its £14.5 billion loan book was found to be incorrectly classified.
The market reaction was immediate and strong, the share price plummeting from £22 to close at just over £13, wiping £800 million from the value of the company as fears the Bank would need further capital, coming just six months after getting £300 million from investors to fund its expansion plans.
Later in 2019, the Bank announced it has raised £350 million to bolster its capital position. The six-year maturity debt was priced at a coupon of 9.5% and enabled the company to meet a regulatory requirement for holding sufficient bail-in eligible funds.
By the end of 2019 the bank’s shares were trading at a little over £2 and until recently had generally traded around £1 when earlier this month it was reported the bank was planning another capital raise, this time £600 million in debt and equity. Once again investor retribution was swift, pushing the share price down by a quarter to around 35p to leave the bank valued at £65 million, over 95% less than when it first went public.
A rescue deal has subsequently been announced with one of its investors taking a controlling stake of 53% compared to the 9% previously held, buying shares at 30p, below the company’s lowest ever share price.
Despite the deal, the bank’s troubles are unlikely to be over with Fitch Ratings recently placing the bank on rating watch negative earlier this month, citing among other factors concerns whether it will be able to refinance the £350 million it raised in 2019 which matures next year.
We are only too aware of the risks of lending to banks. Many of our clients are the guardians of public money and so the ‘security’ aspect of our advice covering unsecured bank deposits is of foremost importance in our credit assessment, including our proprietary bail-in analysis. The banking reforms introduced post financial crisis mean that wholesale deposits now rank below retail deposits. Institutional investors should therefore take care when dealing with retail focused financial institutions such as challenger banks.
If you would like to find out more about how our advice can help you manage your bank deposit exposures, please contact the Arlingclose team at email@example.com.