Shares in the small UK financial group, Metro Bank were suspended a number of times on Thursday after media reports that it was in desperate need of a massive new capital raising of around 600 million pounds.
Metro has about 2.7 million customers and 76 branches across Britain, and holds about 15.5 billion pounds of UK customer deposits, so not a giant, but a worry nevertheless for investors.
The adverse market reaction to the news in the Financial Times raised questions about whether the small banking group can now survive with its share price down 28% on the day and more than 71% year to date as investors wonder how a bank with a market value of 63 million pounds can survive when it needs hundreds of millions in new capital and debt.
Launched in 2010 by American billionaire Vernon Hill and other investors, it grew and by 2018 it was the talk of The City, valued at 3.5 billion pounds and about to do down the bigger, slower banks like Barclays, Nat West, Santander, HSBC and Lloyds.
By 2019 it was in trouble with a loans misclassification scandal that saw founder Hill depart and the bank forced to raise fresh debt to survive.
Now it will be a big ask to save the bank with a big capital raising because existing shareholders will be wiped out in such a massive recapitalisation while a bailout by a rival would also wipe out existing shareholders.
This is not a bank crisis on its hands like the GFC or a year ago when former PM Liz Truss almost broke the Bank of England with huge tax cut proposals and no idea of their impact on interest rates or the value of the pound.
Nor is it like the US regional bank crisis and runs earlier this year – the problem is that Metro doesn’t have enough money to convince investors it can survive.
The Financial Times reported Thursday that Metro bank needs at least 600 million pounds in new capital to survive.
The eruption of this latest crisis comes weeks after the bank failed to convince regulators it could be trusted to hold less cash against its home mortgage risks (which is what the 2019 scandal was all about).
Metro Bank had applied to use its own internal models to assess the risks of its mortgages (as global giants like Barclays can do, and in Australia, the big four banks are allowed to do by APRA, the regulator).
Metro wanted the same rules as the giants of UK banking to reduce the amount of capital it has to hold on its balance sheet to support its loans. That would have slashed the amount of capital it has to hold against these loans.
That request was denied in early September by the Bank of England which triggered a sell-off in Metro shares which fell 50% last month.
The Bank of England and the Prudential Regulation Authority said Metro was too small and its finances were not solid enough to use the same capital rules used by Barclays and others giant banks.
Metro has the pressing problem that 350 million pounds of debt comes up for refinancing in October 2024 and it doesn’t have the readies to meet that demand.
Metro Bank has hired Morgan Stanley to work on the fundraising but as Bloomberg pointed out overnight Thursday 'Metro Bank’s woes are its own problems’.
Rating agency Fitch said on Wednesday that it expected the bank’s earnings prospects “to come under pressure in the short term due to rising funding costs, resulting from higher competition for deposits and given likely more expensive access to wholesale funding.
“In addition, capitalisation is tight. This increases execution risk and curtails the bank’s ability to grow its business and strengthen its profitability.”
Metro has form though with UK regulators and investors. In that 2019 scandal, it was involved in an accounting scandal, when it underreported how much capital it needed to hold against its risks (which is what the current slump in the value of the shares is all about).
Loans to the value of 900 million pounds were misclassified as being less risky than they actually were.
The scandal prompted the biggest single-day collapse in a UK bank’s share price since the GFC. Over the next few months a whispering campaign on social media about its financial health saw customers pulling funds. The shares fell.
The bank and two former executives were later fined more than 10 million pounds for misleading investors.
The scandal saw founder Vernon Hill depart and the bank managed to raise 350 million pounds in new debt at the then high cost of 9.5%. That loan is now due in a year’s time.
No wonder regulators won’t allow it to self-assess its capital needs.
