Cascade Commentary

Metro Bank seeks partial sale of loan book following accounting error

May 2019

Metro Bank has announced plans to sell part of its loan book following an accounting error earlier this year that saw its share price plunge after a miscalculation of its risk-weighted assets. Chief Executive Craig Donaldson stated that a partial sale of outstanding customer loans will allow for the bank to improve its financial position and address a fall in Return on Equity through readdressing the risk-weightings of its credit book. The loans in question amount to circa 10% of Metro Bank's overall credit portfolio and while no final decision has been made, Donaldson has revealed that discussions have been held with investors. 

Metro Bank plc is a retail bank operating in the United Kingdom, founded by Anthony Thomson and Vernon Hill, that acquired its banking licence in 2010, the first to do so in over 150 years. The bank has moved against the trend operating from a branch-based structure with over 67 stores across London and the South-East. The preference for physical stores has been in contrast to much of the market that has sought instead to close physical branches in favour of a digital distribution, but Metro Bank have long campaigned for a continued need for its stores, differentiating itself by opening for longer and more convenient hours for customers. 

In January 2019, Metro Bank discovered an accounting error had miscalculated the bank's assets through the misclassification of a large number of its commercial loans. In discovering the error, it was revealed that the bank consequently held insufficient capital that led to a £350m share issue in February 2019 and a reduction of future growth plans for the challenger bank. 

Since the announcement, both the Prudential Regulation Authority and the Financial Conduct Authority have been investigating how this could have occurred and whether a "false market" for the bank's shares was created as a result. Capital requirements as a result of risk-weighted assets are fairly easy to calculate however there are a variety of specifications used in the market, with some banks preferring internal-ratings based models that can often lead to discrepancies in the calculations of the riskiness of loans over time. 

Metro Bank have not announced when a decision will be made regarding the partial sale of its loan book but plans for the £350m equity raise are believed to be at an advanced stage. 

The bank's shares closed this week at 533.5p, significantly down from its January level of 2216p, representing a 75% fall overall. Customer deposits with Metro Bank are protected under the Financial Services Compensation Scheme (FSCS) and bank chiefs have indicated they remain safe despite the share price volatility. For more information on the FSCS, please visit the official site by clicking here

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