One of the so-called challenger banks in the UK is currently reaching its credit limits, which might spark a mini meltdown in the MSM if it goes bust. Even if Metro Bank does collapse, it’s unlikely to cause financial contagion however, as most western governments are now far more willing to bail out any company, or even individuals – as the Covid furlough scheme proved.
The most likely scenario is that the Bank of England extends temporary credit to Metro, or another major bank acts a guarantor while Metro shifts strategy and closes all but 20 of its physical branches. It currently has about 65 branches but the costs in staff, security, rent, rates etc for that network is arguably the biggest immediate headache for the brand.
Anyone with a deposit box should probably get the contents out before any restructure plan is announced, or a temporary freezing of account access is confirmed.
Here’s some comment from DBRS;
DBRS Morningstar commented that Metro Bank (unrated by DBRS Morningstar) is facing a number of serious stresses in relation to costs, funding and capital.
• The small UK retail and commercial challenger bank, with total assets of GBP 21.7 billion at end June 2023, has publicly noted that it is evaluating a number of options including a combination of equity issuance, debt issuance and/ or refinancing and asset sales, however we consider its ability to access external financing to be highly constrained given its very low market cap. Nevertheless, DBRS Morningstar would not expect the difficulties being experienced by Metro Bank to have a broader impact on the UK financial sector given its relatively small size and the specific issues the bank has experienced dating back to 2019 when it reported a serious miscalculation of RWAs.
This event led to a negative impact on its reputation and fines from the Financial Conduct Authority and the Prudential Regulatory Authority of GBP 10 million and GBP 5 million respectively.
• Metro Bank, which was established in 2010, has reported weak profitability since set-up and reported a very weak cost-income ratio of 90% in H1 2023 and 106% in FY2022. Whilst we note that its loan book appears to be performing in line with peers, Metro Bank has been facing a number of structural issues including an elevated cost base, which has led to the bank reporting net losses since 2019.
PHYSICAL BRANCH MODEL MIGHT NOT WORK
Metro Bank has marketed itself on being a physical branch bank, although it offers online accounts of course. Despite many people saying they value branches, few are willing to travel into city centres to use those facilities it seems. Here’s more comment from DBRS;
Moreover, the bank has continued to invest in expanding its physical branch network whilst its larger rivals have been decreasing theirs. The higher interest rate environment has benefitted the bank’s revenues since 2022 as assets have repriced, however, it has not seen its Net Interest Margin (2.14% in H1 2023 and 1.92% in FY2022) increase to the same extent as larger rivals due to its lower margin lending and higher funding costs, particularly due to expensive wholesale funding. Whilst the bank has made some progress in reducing operating costs since 2021, the bank has a very high cost base which reflects high investments in its branch network and in IT which has been exacerbated recently with the high level of inflation.
• On the funding side, although the bank has built up a large deposit base with a loan to deposit ratio of 82%, it has a large proportion of commercial and SME deposits (52% of total customer deposits) that are potentially less-sticky than retail deposits and the bank has also paid high rates for its retail deposits as well as high rates on its wholesale funding, including GBP 350 million of 9.5% senior non-preferred bonds with a call date of 8 October 2024 and final maturity of October 2025 which will require refinancing. Customer deposits have also declined since 2021, driven by increasing competition and also reflecting that households and SMEs are using the significant liquidity buffers built up during the pandemic to face the more challenging economic environment of high interest rates and inflation.
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