Treasury officials met with Bank of England representatives on Thursday evening after Metro Bank shares plummeted by over a quarter in a rush to stabilize its finances.
Treasury sources said that officials were “monitoring” the situation and in touch with Threadneedle Street, as the struggling lender scrambled to raise up £600m for its balance sheet.
Robert Sharpe met with City regulators in the morning of Thursday, as the shares of the London-listed Challenger Bank fell as much as 31% to 35p. This valued the company at approximately £63m.
Metro’s spokesman stated that the meeting was “a long-standing, standard catch up with the [Prudential Regulation Authority )]”.
Gary Greenwood is a Shore Capital banking analyst. He said that the meeting indicated the regulator had “serious doubts about the viability of the company”.
Metro has hired Morgan Stanley, a Wall Street firm, to oversee its capital raising plans. The company hopes to raise approximately £250m equity funding and £350m debt.
Metro made an unexpected announcement on the market about its finances. It said that it was “evaluating a range” of options to raise money, including an equity raise or a debt increase.
Metro has said that no decision had been made about whether or not to pursue any of the options.
In a statement, the company said that it has been profitable for three quarters in a row on a underlying basis and is meeting regulatory capital requirements.
Sky News reported that Metro, as part of its fundraising efforts, was contacting potential buyers of a £3bn portion of its mortgage book. This included NatWest and Lloyds Banking Group.
According to Metro’s most recent half-year results, around 40pc (or about $600 million) of its residential mortgages have only interest. The bank would be able to reduce its capital requirements by selling mortgage assets.
Metro, with 2.7m UK customers and 76 branches, was dealt a blow last month after regulators rejected a plan to reduce the amount of capital required for residential mortgages.
This means that capital requirements won’t be reduced before 2024, at the latest. However, there is no guarantee of approval.
Credit rating agency Fitch placed Metro Bank under “negative” review for possible downgrades on Wednesday.
Fitch stated: “We expect that the group’s earning prospects will be under pressure over the short-term due to the rising costs of funding, which are a result of increased competition for deposits as well as more expensive wholesale funding. Capitalisation is also tight.”
Shore Capital’s Mr Greenwood said the “negative headlines”, referring to Metro Bank’s financial position, “may worry depositors”.
He said: “Even if a large portion of these deposits is likely to be covered under the [Financial Services Compensation System] guarantee, there’s no way that all depositors would want to stay around to see if it works in reality, if a bank fails.”
Deposit protection insurance in the UK is currently at £85,000 – up from £35,000 before the financial crisis.
Metro Bank responded to customers’ concerns via social media platform X (formerly Twitter) by saying: “Metro Bank offers a safe and secure environment for the money and property of our clients.” The bank is well-positioned for future growth.
Metro shares have fallen by almost two-thirds, since the PRA delay was announced in mid-September. The lender has also lost nearly 98pc since floating on the London Stock Exchange last year when it was valued at £1.5bn.
According to FactSet, on Thursday investors traded over 1.6m Metro shares within minutes of the market opening at 8am. On a typical day, less than 100,000 Metro shares are traded every hour.
Metro Bank, the first high-street bank in Britain in over a hundred years, was founded by US entrepreneur Vernon Hill II. The aim of the company was to take on the existing players.
It struggled to recover from a accounting mistake that occurred in 2019. The company revealed it didn’t have enough capital to comply with regulatory standards. Its shares collapsed and its founder and former CEO both resigned.
Metro Bank achieved a profit before tax of £16,1m in the first half 2023. This is the first time since accounting problems were discovered four year ago that the bank has been profitable.
Mr Greenwood stated: “Metro Bank finds itself in a difficult situation… The group must act quickly to strengthen its balance sheet. If it can’t convince the regulator that it will deliver, then it could find things taken out of their hands.
Sources at the PRA claim that the regulator speaks to Treasury “always”.
The Treasury and Bank of England declined comment.