Metro Bank fallout is another reason for regulators to stay wary
Even as the industry pleads its solidity, accidents keep happening.
Metro Bank being in trouble is nothing new. In 2018, the UK challenger bank’s share price fell about 53%, and the following year an accounting scandal saw it fall another 95%. So far in 2023 it is down more than 70%: it plummeted by about 30% on Thursday October 5 alone, after reports emerged that the bank might be seeking fresh capital and debt financing.
Even before the latest fall, Metro’s market capitalization was a fraction of its equity book value.
Large UK banks, meanwhile, look extraordinarily solid after numerous shocks and in the face of what will surely be greater pain to come in the mortgage book. That is partly thanks to having relatively little high-risk exposure to commercial real estate nowadays – most of that risk has gone into the funds sector.
But Metro’s troubles bring into focus simmering concerns about UK challenger banks, whose weaker deposit franchises mean that they are more at risk from rising competition for those deposits and more exposed to higher wholesale funding costs.
To that extent, they share some of the troubles of US regional banks.
Given the rate environment, refinancing is getting more expensive even for the best of names – and Metro does not look like a good name now
Fitch cited both these factors to justify putting Metro on negative watch on Wednesday, shortly before news leaked of the possible capital raising. A recent decision by the Prudential Regulation Authority (PRA) to refuse – for the moment – the bank’s application to move to internal risk-weighting standards was another reason, as it closed the door on any imminent capital relief.
Metro is also facing refinancing pressure on its debt. It has a £250 million tier-2 issue outstanding, the interest rate on which stepped up from 5.5% to 9.139% in June when the bank did not call the bonds.
It also has a 9.5% £350 million senior non-preferred issue that does not mature until October 2025 but which – as analysts at CreditSights pointed out in a note on October 5 – will drop out of the bank’s minimum requirement for own funds and eligible liabilities (MREL) bucket one year before that date if it is also not called.
Given the rate environment, refinancing is getting more expensive even for the best of names – and Metro does not look like a good name now. The precipitous slide in its share price will only make it harder to enlist support. Many bank capital investors deliberately stick to top-tier national champions precisely because they’re so much more important than the likes of Metro.
Previously, concern about the impact of higher interest rates on UK challenger banks was more theoretical than real. That is no longer the case, and yet the impact of higher interest rates on credit quality is nowhere near being fully seen. Challenger banks, moreover, are more exposed at the riskier end of the loan market – largely because of their higher deposit and capital costs.
Metro's recent troubles will only add to those costs, risking a negative spiral.
After this year’s collapse of Silicon Valley Bank in the US and the rescue of Credit Suisse, Metro’s troubles will be more reason for financial supervisors like the PRA to keep a close watch on the sector and not to let their guard down, including on capital requirements.