Metro Bank, one of the United Kingdom’s challenger banks, has secured a much-needed capital injection in an eleventh-hour deal that highlights the difficulties faced by new entrants in the market. Despite being the first new high street bank in the UK in over 150 years, Metro Bank, along with other challengers such as Monzo and Starling Bank, has struggled to challenge the dominance of the “Big Four” banks – Lloyds, NatWest, HSBC, and Barclays.
The refinancing package, although diluting the bank’s shareholders and resulting in losses for some bondholders, has been welcomed by markets. Metro Bank’s shares rose 11% on Monday and continued to climb on Tuesday. John Cronin, a banking analyst at Goodbody, described the deal as “the least worst outcome now and a bitter pill that needs to be necked.”
The deal is also supported by creditors, with just under the required 75% threshold of support secured as of Monday. Bondholders involved include Caius Capital, Kite Lake, and Varde Partners. Metro Bank’s biggest shareholder, Colombian billionaire Jaime Gilinski, will take a controlling stake in the bank through a £102 million injection, giving him a 53% stake. Gilinski, who has a fortune of US$5 billion, plans to acquire further UK banking assets and is monitoring other opportunities to expand his influence in the sector.
Challenger banks in the UK have faced challenges in taking on the bigger banks, mainly due to their struggle to achieve the necessary scale. While some have managed to gain market share in current accounts, mortgage lending, a key market, remains largely dominated by the established players. The UK’s 10 largest mortgage lenders still accounted for 83% of the market in 2022. Monzo, one of the digital lenders, declined to comment, while Starling Bank claimed it was making inroads into the big banks’ market dominance, reporting profits of £195 million for the year to the end of March 2023.
Critics of the UK’s capital rules argue that they hinder competition and have called for a level playing field. As a result, the Bank of England has pledged to introduce a “strong and simple” capital regime for smaller banks, although the reform has yet to be implemented. Metro Bank has faced problems in recent years, particularly due to capital rules, leading to its decision to enlist the help of Morgan Stanley and prompting the Bank of England to seek potential buyers for the bank in case refinancing talks failed.
The challenges faced by challenger banks highlight the difficulties in breaking the dominance of the “Big Four” banks in the UK. While the recent capital injection is a positive step for Metro Bank, it remains to be seen whether this will lead to long-term success in challenging the established players in the industry.
More detail via The Star here… ( Image via The Star )