Metro Bank’s chairman met with the UK’s leading financial watchdogs Thursday. The bank is looking to raise up £600mn by selling a third or its mortgage book to improve its balance sheet.
Metro, one of a new crop of challengers banks in the UK that promised to spark competition in the high street after the financial crisis is contacting investors in order to raise up £250mn equity funding and £350mn debt.
The news of a proposed capital raise, whose equity component was close to Metro’s current market value prior to the announcement of the capital raise, caused a 29 per cent drop in Metro’s share price to 36.11p at the close of the market. The price of the £350mn 2025 bond fell by 12.6p, to a new record low of 57.3p.
Metro also considers selling about £2.3bn from its £7.5bn loan book in order to raise capital and reduce its requirements for capital, according to three sources familiar with the situation. Two people said that Metro has contacted larger competitors to gauge interest, including Lloyds Banking Group and NatWest. Sky News was the first to report Metro’s approach.
One of those familiar with the deal said, “They are prime assets and it will come down to the price.”
Two people with knowledge of the situation say that Metro’s chairman Robert Sharpe has been asked to meet officials of the Bank of England Prudential Regulation Authority (PRA) and Financial Conduct Authority, on Thursday.
The meeting, according to two people, was just the latest of a series between the regulators and Metro Bank over the last month. Since then the value of its shares has almost halved. The steep decline came after the bank announced on September 12th that the PRA delayed approval of a plan which would have allowed Metro’s mortgage business to be run at a cheaper cost.
Metro reported on Thursday that the bank’s chair “attended a long-standing, prediarised” meeting with PRA. Metro refused to say when or what the meeting was about.
The FCA and PRA declined comment on their dealings the bank. According to the most recent financial statements, the bank has 76 branches and 2.8mn clients, with assets worth £21.7mn.
Metro announced on Thursday that it was “evaluating a range options, including a mixture of equity issuances, debt issuances and/or refinancing, and asset sales.” Metro has not yet decided whether or not to pursue any of these options.
A non-named analyst noted that the capital equity raise would “be horribly dilutive” to shareholders, and that raising additional funding from existing investors might create “its own problems in the public sphere, in terms of messages”.
Jaime Gilinski is the Colombian billionaire who owns Metro through his company Spaldy Investments. He has not responded to any requests for comment.
Morningstar, a rating agency, said that it “did not expect the difficulties Metro Bank is experiencing to have a wider impact on the UK Financial Sector given its relative small size and specific issues experienced by the bank”.
Metro was the subject of a scandal in 2019 when it was discovered that the book’s risk had been materially underestimated. This led to Metro’s chair and chief executive being fired quickly. Later, the FCA fined the bank and censured its former chief executive and finance manager.
Fitch, the rating agency, placed Metro under negative watch on Thursday, citing increased risk to its business model and capital position. S&P Global Market Intelligence shows that 6,77% of the company shares were on loans on Wednesday. This is double what it was just one month earlier. Metro spent five years seeking permission from regulators at the BoE 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, in August that it remained the issue that “comes up in the majority of conversations with debt and equity investors”.
Vernon Hill was the co-founder of the bank. An American, he promised to revolutionise UK Banking by improving customer service. He also introduced longer opening hours for branches.
The bank stated on Thursday that they “continue to be well-positioned for future growth” pointing out their underlying profits from the last three quarters.