5th Oct 2023 11:31
(Alliance News) - Metro Bank Holdings PLC shares were sharply lower on Thursday, as investors questioned the bank's fundraising plans, and whether they would support them.
Shares in Metro Bank were down 18% at 41.18 pence in London on Thursday morning, valuing the company's equity at around GBP71 million. Just five years ago, in 2018, the UK retail lender was valued at around GBP3.5 billion.
Victoria Scholar, head of investment at interactive investor said Metro's share price "reflects the major lack of confidence in the business among investors and its balance sheet woes".
On Thursday, the challenger bank with 76 'stores' across the UK responded to a Financial Times report, published Wednesday.
Metro said it is continuing to consider how to best boost its capital resources, particularly in relation to the GBP350 million senior non-preferred notes due October 2025.
"The company is evaluating the merits of a range of options, including a combination of equity issuance, debt issuance and /or refinancing and asset sales. No decision has been made on whether to proceed with any of these options," Metro Bank said on Thursday.
Metro Bank is seeking to raise up to GBP600 million, the Financial Times reported, citing people with knowledge of the plan. The FT said Metro Bank is in talks with investors about raising GBP250 million in equity funding and GBP350 million in debt to shore up its balance sheet.
The talks came after UK regulators last month failed to approve a request from Metro to lower the capital requirements for its mortgage business.
Metro Bank said it won't get approval this year from Bank of England's Prudential Regulation Authority for a reduction in its capital requirement for residential mortgages. It had applied to use an advanced internal ratings based approach to counting the capital it must hold against the residential mortgage lending that it makes, but the PRA said more work is required.
That has left Metro Bank in a tight spot financially.
"Is the age of the challenger bank over?" AJ Bell investment director Russ Mould asked.
"Metro as an individual institution is certainly being pushed into existential territory with the shares now at all-time lows. As ever when something goes wrong in the banking sector, there will be concern about contagion risks but, in truth, Metro Bank has been struggling for years to get on a path to sustained profitability and has made lots of mistakes – notably a big accounting scandal in 2019."
He added: "Winning attention for initiatives like offering water bowls for customers' dogs and other little touches, it seems Metro was rather less adept at the nuts and bolts of banking itself. The key question is will it find enough backers should it conduct a fundraise?
"Existing creditors and investors may feel they have no choice but to participate, though they are unlikely to do so with any great enthusiasm."
Shore Capital analysts Gary Greenwood and Vivek Raja said: "Supporting a further capital raise for this struggling bank would be akin to throwing good money after bad, in our view, as it has already had enough time and opportunity to sort itself out and has been unable to do so. Investors and bondholders may therefore be better served investing their money elsewhere."
The past few years have undoubtedly been tricky for Metro Bank.
Back in 2019, UK regulators found an accounting error in Metro Bank's loan book.
In January of that year, Metro Bank announced it had underestimated the risk on its commercial loans book and needed to raise capital to compensate for the shortfall and, as a result, was forced to issue an update highlighting the increased risk.
Metro Bank was demoted from the FTSE 250 index in September 2019. It has not returned since. The company had listed in London in 2016.
Fitch Ratings on Wednesday put Metro Bank's debt rating on negative watch, citing increased risks to its business model, capital position and funding of the company.
Fitch said: "We expect the group's earnings prospects to come under pressure in the short term due to rising funding costs, resulting from higher competition for deposits and given likely more expensive access to wholesale funding. In addition, capitalisation is tight."
Fitch also called attention to the GBP350 million of senior bonds falling due in two years time.
By Sophie Rose, Alliance News reporter
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