Robert Sharp is in familiar territory when he meets with Britain’s financial regulators at the Bank of England on Thursday morning.
In the four years since he became chairman of Metropolitan Bank, a merchant bank once hailed as the darling of Britain’s challenger banks, his diary is filled with regular exchanges with officials from the Financial Conduct Authority and the Bank of England’s prudential supervisory unit. authority.
For Sharp and his chief executive Dan Frumkin, the meetings come against the backdrop of a catastrophic accounting error in 2019 that sent Metro’s share price tumbling, triggered a £350m cash call and led to their The predecessor was ousted.
The pair have recently been trying in vain to get regulators to approve measures that would allow banks to shore up their capital positions and boost profitability.
But when Sharp spoke to PRA on Thursday, the nature of the conversation was more urgent: the bank’s share price had plunged 30% that morning and news emerged that the bank was seeking a £600m capital injection from investors.
In just five years Metro, which has 2.8 million customers, £21.7 billion in assets and 4,000 employees in the UK, has gone from being seen as a potential challenger to the UK’s big four banks, worth up to £3.5 billion, to a market capitalization of only for £78 million.
Metro co-founder Anthony Thomson, who stepped down as chairman in 2012, said: “It’s really sad that things have come to this. Who would want to acquire a smaller branch bank, even if it’s What about a bank with a great customer franchise?”
In 2010, Metro opened its flagship branch in Holborn, central London, becoming the UK’s first new high street bank in a century.
The bank, co-founded by Vernon Hill, an American golfing friend of former U.S. President Donald Trump, follows Hill’s strategy of similar customer-focused ventures in New Jersey.
Metro claims to offer a “revolutionary” way to bank and offer “unparalleled service and convenience” and its branches (or “stores” as it calls them) are open seven days a week at a time when other banks are retrenching. street. They come equipped with a “magical money-making machine” with commission-free coin counters and free treats for customers’ dogs.
But the company was forced to revise its long-term growth plans and prepare for a £350m share issue in 2019 after discovering major miscalculations related to part of its loan book, while both the FCA and PRA began investigations into the matter. The bank was later fined a total of £15m by regulators and its then chief executive and finance chief were personally reprimanded.
Within a year, Chairman Hill and Chief Executive Craig Donaldson both left the company as shareholder pressure mounted and customers withdrew their deposits. Donaldson was replaced by Frumkin, a restructuring expert, while Sharp, a banker with a history of dealmaking, took over as chairman.
Metro’s latest problems began last month when it revealed that UK regulators had indefinitely delayed approval of the use of an internal model used by large lenders to calculate mortgage risk, which would have allowed it to improve its capital position and boost profitability.
Just a few weeks ago, during the bank’s second-quarter earnings call, Frumkin expected Arguably, these licenses will “unleash” Metro’s potential, allowing it to lend more, take in more deposits and generate higher returns.
Now he has to admit that the push for capital relief may never get regulatory approval, and certainly not before the end of 2023.
Metro isn’t the only bank to complain about regulators dragging their feet – other smaller lenders have also complained – but the issue is unusual given the company’s relatively tight capital base and the need to refinance a large amount of debt next year important.
The bank notified regulators of its plans to raise capital as its share price fell more than 50% in the weeks following the news.
In addition to allowing the bank to continue mortgage lending under the current capital regime, the financing will help Metro emerge from its regulatory buffer. Although the group is above regulatory minimum capital levels, it has eaten into some of the extra capital banks must hold to manage the ups and downs of their businesses. The PRA told senior executives it hopes these buffers will be restored to full levels by mid-2024.
As of Wednesday, the bank had hired Morgan Stanley to seek to raise up to 600 million pounds to improve its balance sheet. Talks with investors have begun and the bank is under pressure to refinance 350 million pounds of senior bonds by October next year.
The bank’s investors also see danger.
Its shareholders are an eclectic mix.
The largest investment vehicle is that of Colombian billionaire Jaime Gilinski Bacal, with a 10% stake and whose daughter Dorita is a board member. Other large investors include a Cornish hedge fund and Michael Bloomberg’s family office Willett Advisors.
Hedge fund manager Steve Cohen was once the bank’s largest shareholder through his two private investment vehicles. In 2020, the company’s stock price fell 90% in one year, and he sold it.
But in this case, a group of bondholders convened by boutique investment bank PJT Partners submitted a proposal to Metro’s board on Monday to provide up to 600 million pounds of capital, including 350 million pounds of debt and 250 million pounds of Equity.
Regulators, led by the Prudential Regulation Authority (PRA), have been in close contact with the bank, including Frumkin’s call with the PRA on Wednesday evening and a meeting with Sharpe on Thursday morning. A person close to the bank said conversations with regulators mainly involved business as usual and erroneous media reports.
As news of the discussions broke, and after credit rating agency Fitch put the bank on its ratings list negative observationMetro shares fell to a record low of 35p on Thursday afternoon, down 99% from their 2018 highs.
Bankers working on behalf of Metro have begun sounding out larger peers, including Lloyds Banking Group, NatWest and HSBC, in a bid to assess a £7.5bn bid for the bank Interest in the funds that is part of the mortgage book. In 2020, the bank sold 20% of its loan book to NatWest to replenish capital.
At this time, Treasury officials are also monitoring the situation at Metro and receiving regular updates from the Bank of England.
Regulators have stepped up monitoring of Metro’s liquidity and operations but as of late Friday morning had not identified anything worrisome in terms of ATM withdrawals or customer traffic or the bank’s liquid asset levels.
“The problem is that this is a bank based on customer service – I think most of its depositors are there because of customer service,” said Gary Greenwood, an analyst at Shore Capital. “It’s a huge cost to set up a branch. — which is part of the reason they make so little money.”
The bank said this week it “continues to position itself for future growth” and pointed to underlying profits over the past three quarters.
There was little in the way of top-level discussions about the group’s future at the bank’s Holborn branch below its headquarters on Friday lunchtime.
It was business as usual, with a handful of customers queuing to be served by cashiers and “We’re hiring” signs displayed on TV screens throughout the branch.
Additional reporting by Akila Quinio, Stephen Morris, Robert Smith and Euan Healy
Svlook
