Metro Bank accounting blunder prompts early 350 million pound cash call

(Reuters) - Britain’s Metro Bank plans to raise 350 million pounds in a shareholder cash call, it said on Tuesday, a month after an accounting error wiped hundreds of millions of pounds off its market value.

FILE PHOTO: Staff serve customers at the first branch of Metro Bank in Holborn in central London July 29, 2010. REUTERS/Toby Melville/File Photo

The lender also disclosed that regulators at both the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) had notified it that they intended to investigate the circumstances around the blunder.

Metro, founded in 2010 to help to break up the dominance of Britain’s biggest banks, also told investors it would slow its expansion plans to adapt to “challenging” market conditions, despite more than doubling annual profits.

“We’ve learned significantly from this chastening experience,” CEO Craig Donaldson said on an analyst call.

“We did not deliver the standards in this area that we and others should expect of us, and the buck stops with me, and I am sorry about that.”

The bank said the equity raise was expected to be launched in the first half of 2019 after consultation with shareholders but gave no detail on pricing.

Metro said it had a standby underwriting agreement with RBC Capital Markets, Jefferies and KBW for the cash call, meaning the investment banks will have to plug any shortfall if the funds cannot be raised from investors.

The company’s market value nearly halved in the days after the January disclosure of its accounting mistake, falling from 2.1 billion pounds to as low as 1.1 billion pounds.

The shares have recovered since then but fell again on Tuesday, closing nearly 16 percent down at 13 pounds, valuing the lender at 1.5 billion pounds.

The accounting mistake resulted in a sharp rise in exposure to higher-risk mortgages after a review of the bank’s risk-weighted assets (RWAs) in January.

The bank’s RWAs increased by about 900 million pounds, piling pressure on its capital buffer and raising market expectations that a capital increase would be needed.

Metro later admitted that the PRA had first identified the mistake, not the bank’s management.


In 2018 results announced after the market close on Tuesday, Metro’s pretax profit more than doubled to 40.6 million pounds, up from 18.7 million pounds in 2017.

However the bank’s net interest margin - a closely-watched measure of underlying profitability - fell to 1.81 percent, down from 1.93 percent the previous year.

Metro’s core capital ratio - a key measure of lender resilience - fell to 13.1 percent, down from 15.3 percent.

In a further blow, the bank said its negotiations with the PRA to use its own risk models for its mortgage portfolio to help boost its capital buffer would take longer than expected and not complete before 2021.

Deposits and lending were up strongly, both rising by more than a third to 15.7 billion pounds and 14.2 billion pounds respectively.

The lender said it intended to slow its growth plans and would now open eight branches a year and reduce deposit growth to 20 percent a year.

The bank has previously had to go to investors for an earlier than expected equity raise as it struggled to self-fund ambitious expansion plans, pushing it into a 303 million pounds capital increase last year.

Metro compounded investor disappointment last month by warning of pressure on its profit amid competition in the UK mortgage market.

However, it was boosted by better news last week after winning the largest grant, worth 120 million pounds, from a fund designed to boost competition in business banking.

(Graphic: Britain's challenger banks face uncertain economic outlook link:

Additional reporting by Clara Denina in London; Editing by David Evans and David Goodman