Metro Bank’s Potential Capital Boost: Exploring Options for Raising Hundreds of Millions from Investors

Metro Bank Considering Raising Hundreds of Millions from Investors

Metro Bank, the high street lender, is exploring the possibility of raising hundreds of millions of pounds from investors. This comes shortly after the bank failed to convince regulators that it could hold less cash against its mortgage risks. The bank had applied to use its own internal models to assess the risks of its mortgages, but the request was denied in early September, causing a significant decline in the bank’s share price.

If Metro Bank’s plan had been approved, it would have substantially reduced the bank’s capital burden. However, with the plan rejected, Metro Bank is now focused on shoring up its balance sheet ahead of £350 million worth of debt refinancing due in October 2024. One option being considered is raising money through the sale of shares, and the bank has enlisted the help of bankers from Morgan Stanley to assist in this fundraising effort. It is speculated that investors could be tapped for upwards of £100 million.

Stock Market Reaction and Investor Scepticism

The decline in Metro Bank’s share price, which has fallen by more than 50% in the past month, reflects investors‘ skepticism surrounding the bank’s future. While the bank returned to profitability in the first half of the year, the market reaction to the Bank of England’s decision indicates lingering doubts about Metro Bank’s overall financial standing. This skepticism could make it more challenging and expensive for the bank to raise debt and convince investors to contribute funds through shares.

Investors are currently on high alert for any potential instability in the banking sector, considering the mini-crisis in March that saw the unexpected collapse of three regional US lenders, including Silicon Valley Bank, followed by the failure of Switzerland’s largest lender, Credit Suisse, a few weeks later. Moreover, concerns remain regarding the UK economy, which may still face a recession as businesses and consumers grapple with high inflation and interest rates.

Reviving Reputation and Past Scandals

Metro Bank has been working diligently to rebuild its reputation since the accounting scandal it faced in 2019. The scandal resulted in a significant drop in the bank’s share price and triggered panic among its customers, leading to a mini bank run. Metro Bank misreported the assets used to calculate its required capital holdings, which caused the largest single-day collapse in a UK bank’s share price since the 2008 financial crisis. Consequently, the bank’s CEO, Craig Donaldson, resigned a few months later.

The Financial Conduct Authority (FCA) eventually fined Metro Bank and two former executives, including Donaldson, over £10 million for misleading investors. The bank’s regulatory arm, the Prudential Regulation Authority (PRA), has refrained from commenting on the recent developments.

Future Outlook and Financial Growth

Fitch, a leading rating agency, anticipates that Metro Bank’s earnings prospects will face short-term pressure due to rising funding costs. This will result from higher competition for deposits and potentially more expensive access to wholesale funding. Additionally, the tight capitalization of the bank poses execution risk and limits its ability to expand its business and strengthen profitability.

Metro Bank stated, “As previously stated, Metro Bank continues to consider how best to optimize its capital resources to allow it to take advantage of the deposit and asset origination platform that has been built.”

In conclusion, Metro Bank’s consideration of raising funds from investors comes in the aftermath of its recent regulatory setback and declining share price. The bank’s reputation has suffered due to past scandals, but it remains focused on rebuilding and improving its financial standing. However, uncertainty in the banking sector, concerns about the UK economy, and investor skepticism may pose challenges in the pursuit of capital investment. Metro Bank must carefully evaluate its options and timing to secure the necessary funds for its future growth and stability.