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Metro Bank sounds out rivals about buying part of its mortgage book

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Metro Bank has sounded out rivals about buying a third of its mortgage book to help bolster its balance sheet, as the lender’s chair met financial watchdogs following news of a plan to raise up to £600mn from investors.

Shares in Metro, the first of a crop of UK challenger banks that pledged to ignite competition on the high street after the financial crisis, fell almost 30 per cent on Thursday after media reports it was seeking to raise up to £250mn in equity funding and £350mn of debt.

The bank is also considering selling about £2.3bn of its £7.5bn mortgage book to raise funds and reduce its regulatory capital requirements, according to people familiar with the matter.

Metro has approached larger peers to gauge interest in the book, including Lloyds Banking Group, NatWest and HSBC, added some of the people. Sky News first reported Metro’s approach to potential bidders.

“They are attractive prime assets, so it will just come down to price,” said one person.

Government insiders said the Treasury was “monitoring the situation” at Metro and that officials were being updated by the Bank of England.

However, Treasury officials are not talking directly to Metro, added these people.

Robert Sharpe, Metro’s chair, was called in to meet officials from the BoE’s Prudential Regulation Authority and Financial Conduct Authority on Thursday, according to people briefed on the situation.

They said the meeting was the latest in a series of contacts between regulators and the bank over the past month as its share price almost halved.

Metro revealed three weeks ago that the PRA had delayed approval of a plan to let it run its mortgage business at a lower cost.

Sharpe “attended a longstanding, pre-diarised meeting with the PRA this morning”, said Metro, without clarifying when the meeting was scheduled or what was discussed.

The FCA and the PRA declined to comment on their dealings with Metro, which has 76 branches, 2.8mn customers and assets of £21.7bn, according to its most recent set of financial accounts.

Metro said it was “evaluating the merits of a range of options, including a combination of equity issuance, debt issuance and/or refinancing and asset sales”.

An analyst, who asked not to be named, said an equity raise “would be horrifically dilutive” for shareholders and that securing more funding from existing investors could create “its own problem in the wider public sphere in terms of messaging”.

Line chart of  showing Metro Bank under pressure

Metro’s top shareholder is Colombian billionaire Jaime Gilinski, through his Spaldy Investments vehicle. He did not respond to requests seeking comment.

Rating agency Morningstar said it did 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”.

Metro was at the centre of a misreporting scandal in 2019, when it materially under-reported the risk of its loan book.

The episode led to the swift exit of its chair and chief executive. The FCA later fined the bank and censured the former chief executive and finance boss.

Credit rating agency Fitch put Metro on negative watch on Wednesday, citing increased risks to its business model, capital position and funding.

Metro spent five years seeking permission from regulators to use its own models to estimate the riskiness of its mortgage book, which would have boosted its profitability.

Dan Frumkin, Metro’s chief executive, told the Financial Times in August that it remained the issue that “comes up in the majority of conversations with debt and equity investors”.

Metro’s market value hit a low of £64mn on Thursday after its share price fell 14.40p to 36.10p, compared with an all-time high of about £3.5bn five years ago.

The price of a £350mn Metro bond due in 2025 also dropped 12.6p to a record low of 57.4p.

Metro said on Thursday it “continues to be well positioned for future growth”, pointing to its underlying profits for the past three quarters.

This article has been amended since first publication to reflect that only Metro Bank’s chair met regulators, not its chief executive, and to include the bank’s statement that the meeting was pre-arranged. The value of the company’s assets has been corrected.

Additional reporting by Costas Mourselas in London

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