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London’s Metro Bank explores potential capital raise after regulatory pushback

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Metro Bank Holdings Plc, a prominent challenger bank in the UK, has enlisted the help of Morgan Stanley to explore potential capital raising options. This comes after the bank faced resistance from regulators regarding its plan to reduce the amount of capital it is required to hold. In addition to a capital raise, the lender is considering other strategies such as securitization, asset sales, and loan sales to strengthen its balance sheet. It has also ended its relationship with Jefferies Financial Group Inc, one of its corporate brokers.

Metro Bank’s decision to explore capital raising options was prompted by the Prudential Regulation Authority (PRA) informing the bank that it needed to undertake further work before it could use its internal risk models to calculate the necessary capital for mortgage loans. The bank has spent years seeking approval to use the advanced internal rating-based method (AIRB) to calculate its regulatory capital requirements. This approach could potentially reduce risk-weighted assets and subsequently lower the bank’s capital requirements.

The bank, founded in 2010 by Vernon Hill, has gained recognition for its branch network rather than focusing solely on online banking services. Metro Bank emerged as a challenger to established incumbents like Barclays and Lloyds. However, the bank’s market value has significantly declined in recent years, standing at about £87 million compared to £3.2 billion in 2017. It currently has £22 billion in total assets.

According to reports, Metro Bank is in discussions with investors about raising £250 million in equity funding and £350 million in debt. The goal is to strengthen the bank’s balance sheet and pursue opportunities aligned with its customer-centric model. Despite the challenges it faces, Metro Bank remains confident in its approach and the potential for growth, assuming its balance sheet is bolstered.

This is not the first time Metro Bank has considered raising capital due to issues related to the evaluation of its risk-weighted assets. In 2019, the bank admitted to mistakenly applying a low risk weighting to some of its mortgages, necessitating additional capital infusion. Regulators subsequently investigated the misclassification, resulting in fines totaling £15.38 million from the PRA and the Financial Conduct Authority. To address its financial situation, Metro Bank raised £375 million in a share placement.

Metro Bank’s profitability has shown improvement, with a reported underlying profit before tax of £16.1 million in the first half of 2021. However, Fitch Ratings recently placed the bank’s rating on “watch negative,” citing increased risks in refinancing maturing debt and concerns about profitability, asset quality, and funding and liquidity.

It is worth noting that Willett Advisors LLC, the investment arm of Michael Bloomberg, holds shares in Metro Bank as of November 2021, according to a regulatory filing.

Metro Bank’s decision to explore capital raising options and address regulatory concerns is crucial for its future stability and growth. The bank is taking steps to strengthen its balance sheet, potentially through a combination of equity funding and debt, while considering other strategies to shore up its financial position. The outcome of these efforts will determine the bank’s ability to capitalize on its customer-centric model and navigate the challenges of the competitive UK banking landscape.

More detail via The Star here… ( a )

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