How Metro Bank’s challenging week unfolded

When Robert Sharpe met UK financial regulators at the Bank of England on Thursday morning, he was in familiar territory.

In the four years since he had been installed as chair of Metro Bank — the high street lender once feted as the darling of Britain’s challenger banks — his diary had been filled with regular catch-ups with officials at the Financial Conduct Authority and BoE’s Prudential Regulation Authority.

For Sharpe and his chief executive, Dan Frumkin, those meetings took place against the backdrop of a calamitous accounting error made in 2019, which caused Metro’s share price to collapse, prompted a £350mn cash call and led to their predecessors being ousted.

More recently, the pair had been trying in vain to get regulators to sign off on measures that would allow the bank to shore up its capital position and boost its profitability.

But by the time Sharpe spoke to the PRA on Thursday, the conversation was of a much more pressing nature: the bank’s shares had tumbled 30 per cent that morning and news had leaked that it was sounding out investors for a £600mn capital injection.

In just five years, Metro — with 2.8mn customers in the UK, £21.7bn of assets and 4,000 staff — has gone from being heralded as a potential challenger to the UK’s big four lenders worth as much as £3.5bn, to a market capitalisation of just £78mn.

“It’s terribly sad it’s come to this,” said Anthony Thomson, Metro’s co-founder, who stepped down as chair in 2012. “Who wants to buy a subscale branch-based bank, even one with a fantastic customer franchise?”

Metro became the first new high street bank in the UK for a century when it opened its flagship branch in Holborn, in central London, in 2010.

Co-founded by Vernon Hill, an American golf buddy of former US president Donald Trump, the bank followed the playbook of a similar customer-focused venture of Hill’s in New Jersey.

Billed as offering a “revolutionary” approach to banking and providing “unparalleled service and convenience”, Metro had branches — or what it described as “stores” — that were open seven days a week at a time when other lenders were retrenching from the high street. They came complete with “magic money machine” commission-free coin-counters and free treats for customers’ dogs.

But following the discovery of a major miscalculation relating to part of its loan book, the company was in 2019 forced to adjust its long-term growth plans and prepare a £350mn share issue, while the FCA and PRA both began investigations into the affair. The bank was later fined a total of £15mn by both regulators and its then-CEO and finance boss were personally censured.

Within a year, both Hill as chair and Craig Donaldson as chief executive were gone as pressure mounted from shareholders, and customers pulled deposits. Donaldson was replaced by Frumkin, a restructuring specialist, while Sharpe, a banker with a history of dealmaking, took over as chair.

Metro’s latest problems began last month when it revealed an indefinite delay to UK regulatory approvals to use the kind of internal models used by larger lenders to calculate the risk of mortgages, which would have allowed it to improve its capital position and boost its profitability.

Just weeks earlier, on the bank’s second-quarter earnings call, Frumkin predicted those permissions would “unleash the beast, so to speak” of Metro’s potential, enabling it to lend more, draw in more deposits and generate higher returns.

Now, he had to admit that the push for capital relief might never win approval from regulators, and certainly would not come through by the end of 2023.

Metro was not alone in bemoaning the regulator’s foot-dragging — other smaller banks have also complained — but the issue assumed outsized importance given the company’s relatively tight capital base and its need to refinance a big chunk of debt next year.

As shares fell more than 50 per cent in the weeks following the announcement, the bank briefed regulators on plans to raise capital.

As well as allowing the bank to continue mortgage lending under its current capital regime, the fundraisings would also help edge Metro out of its regulatory buffers. While the group was above regulatory minimum capital levels, it had eaten into some of the extra capital banks have to hold to manage the ups and downs of their businesses. The PRA told executives it wanted those buffers restored to their full levels by mid 2024.

By Wednesday, the bank had hired Morgan Stanley as it sought to raise up to £600mn to bolster its balance sheet. Talks with investors had begun, with the bank under pressure to refinance £350mn of senior bonds by next October.

The bank’s investors had also spotted the danger.

Its shareholders are an eclectic mix.

The biggest, holding 10 per cent, is the investment vehicle of Colombian billionaire Jaime Gilinski Bacal, whose daughter Dorita sits on the board. Other big investors include a Cornish-based hedge fund and Michael Bloomberg’s family office, Willett Advisors.

At one point, hedge fund manager Steve Cohen was the bank’s biggest shareholder through his two private investment vehicles. He sold out in 2020 after the shares lost 90 per cent of their value in one year.

But in this case, it was a group of bondholders, marshalled by boutique investment bank PJT Partners, that submitted a proposal to Metro’s board on Monday offering up to £600mn of capital, made up of £350mn debt and £250mn equity.

Regulators, led by the PRA, have been in close contact with the bank, including a call between Frumkin and the PRA on Wednesday evening and the meeting with Sharpe on Thursday morning. A person close to the bank said conversations with regulators had been about business as usual activities and erroneous media coverage.

As news of the discussions seeped out — and following credit rating agency Fitch putting the bank on negative watch, citing increased risks to its business model, capital position and funding of the company — Metro shares hit an all-time low of 35p on Thursday afternoon, a 99 per cent drop from its 2018 high.

Bankers working on behalf of Metro began sounding out larger peers — including Lloyds Banking Group, NatWest and HSBC — to gauge interest in buying part of the lender’s £7.5bn mortgage book. The bank sold 20 per cent of its loan book to NatWest in 2020 to top up its capital.

By this point, officials at the Treasury were also monitoring the situation at Metro and receiving regular updates from the BoE.

Regulators enhanced monitoring of Metro’s liquidity and operations, but by late Friday morning had not seen anything concerning, in terms of ATM withdrawals or footfall or the bank’s level of liquid assets.

“The problem is this is a bank built on customer service — the bulk of its depositors are there I would imagine because of the customer services,” said Gary Greenwood, an analyst at Shore Capital. “The branches come with huge costs — it’s part of the reason they make very little money.”

The bank said this week it “continues to be well positioned for future growth”, pointing to its underlying profits for the past three quarters.

At Friday lunchtime, at the bank’s Holborn branch underneath its headquarters, there was little sense of the high-level discussions going on about the group’s future.

It was business as usual, as a handful of customers waited in line to be served by cashiers and TV screens throughout the branch displayed ‘we are hiring’ signs.

Additional reporting by Akila Quinio, Stephen Morris, Robert Smith and Euan Healy