Metro Bank profits from higher interest rates, cost control and profit returns

Metro Bank, a high street rival bank, has announced its first half-year profits since the 2019 scandal that saw investors misled about a key measure of risk. Higher interest rates have boosted its turnaround effort.

The lender reported a underlying profit of £16.1mn for the six-month period ending June 30, up from a £48mn loss the year before and above the consensus estimate of £6mn. Cost efficiencies and increasing interest rates boosted the lender’s earnings.

The first-half revenue rose by 20 per cent on an annual basis to £286.4mn. However, it fell short of analyst expectations of £308mn.

Chief executive Daniel Frumkin said, “We are proving that we have a bank with a solid strategy and a stable foundation.” “We continue to believe that 2023 will be a year of transition for Metro.”

Metro was the first high-street bank to launch in over 100 years in 2010. However, it has been struggling since 2019, when it published a wrong figure for its risk weighted assets. This is a metric that banks use to calculate how much equity they need to have.

The bank’s shares fell by 39 percent following the admission of the £900mn mistake, for which the bank has paid over £15mn regulatory fines. The shares are down more than 95% from their 2018 peak.

Frumkin stated that despite macroeconomic headwinds the overall arrears are low. However, customers’ prepayment rates for unsecured personal loans such as credit cards have slowed.

He said that while people may be hoarding a little cash to keep themselves safe, he did not see any other underlying problems.

In spite of inflation, the total operating costs for the first half year dropped by 3% to £258,2mn. This was due to cost-saving measures, including increased automation.

The bank’s net margin, the difference between the interest rates it charges on loans and the depositors, grew by 41 basis points, or a full percentage point, year-on-year, from 2.14 to 5.0%.

The higher costs of deposits offset the benefit, but lenders are under pressure from politicians to improve their offerings. The Financial Conduct Authority (FCA) told banks that offer the lowest rates on Monday to explain by August why their products comply with its new “consumer duties” which mandates fair outcomes. Frumkin confirmed that Metro was not one of those lenders.

In an era of digital banking, the bank continues to expand its branch networks. In 2024 and 2025, 11 new stores will be opened in the north of England.

Metro Bank has not updated its guidance for this year. This includes a return of tangible equity (a measure of profitability) of the mid-single figures by 2024.

John Cronin is an analyst with Goodbody. He said that some investors might be disappointed by the slow pace at which profitability has been built and the decision of management to maintain rather than increase FY24 ROTE guidance.

Early trading saw the shares rise by about 3 percent, giving a market capitalization of £209mn.

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