Transforming Metro Bank: From Shiny Branches to Struggling Shares
As Metro Bank’s first London branch opened its doors in 2010, it seemed like an unlikely combination of shiny marble, chrome, and free lollipops. However, fast forward a few years, and the bank’s investors have been left with a bitter taste over its shares. Since its 2016 listing, Metro Bank’s shares have plummeted by a staggering 98%. With mounting concerns and a failed business case, Metro Bank has recently announced its plans to raise £600 million in capital.
The Illusion of Cheap Financing
Metro Bank aimed to leverage its network of 76 retail branches to gain access to relatively cheap deposit financing, which it would then deploy across its loan portfolio. However, this business model has failed to deliver the expected results. In fact, the bank has openly acknowledged this failure. With a high cost-to-income ratio of 90% for a UK retail bank (compared to Lloyds Bank’s ratio of 51%), Metro Bank urgently needs to reduce its overhead.
Another major challenge faced by Metro Bank is the precarious nature of its deposits. Around 92% of its deposits reside in checking accounts and demand deposits, which can quickly disappear. This lack of stability further exacerbates the bank’s need for additional capital.
The Distribution Dilemma
Metro Bank’s difficulties in distributing its funds have also compounded its financial struggles. The majority of the bank’s assets are held at the Bank of England or in high-quality bonds, resulting in limited loan growth. In June, Metro Bank’s Common Equity Tier 1 capital ratio stood at 10.4%, approximately 3 percentage points below the industry average. In order to meet its capital requirements, Metro Bank is considering raising capital and selling part of its mortgage portfolio. However, this approach contradicts the bank’s need for growth, as pointed out by Gary Greenwood of Shore Capital.
An Unattractive Acquisition
The struggles faced by Metro Bank are reflected in its share price, which currently trades at a mere tenth of its book value. Even acquiring the bank for a nominal price of £1 would trigger fair valuation accounting under IFRS 3, revealing the need for additional capital. Furthermore, potential buyers would also have to contend with overvalued properties, long leases, negative appreciations in both the mortgage and securities portfolios, and the need to cover estimated valuation losses of £1.3 billion. These obstacles make Metro Bank an unattractive acquisition prospect.
Strength in Balance Sheet
Recognizing the urgency of the situation, Metro Bank is now focused on strengthening its balance sheet. However, investors considering recapitalizing the company face the risk of wasting their money if the bank were to go bankrupt. Therefore, it is pivotal to address the flaws in Metro Bank’s business model in order to ensure the bank’s long-term viability.
Going Beyond Lollipops
Metro Bank’s struggle to transform lollipops into long-term success underscores the challenges faced by both established players and newcomers in the banking industry. Building a sustainable and profitable business in the retail banking sector requires careful navigation of various factors, including cost-to-income ratios, deposit stability, loan growth, and capital requirements.
Conclusion
The case of Metro Bank highlights the risks associated with relying on a business model that prioritizes retail branches and cheap deposit financing. As Metro Bank grapples with its financial woes, both investors and industry observers are left questioning the bank’s ability to recover and chart a new course towards sustainable growth. Only time will tell if Metro Bank can learn from its past mistakes and evolve into a stronger player in the retail banking landscape.
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Metro Bank’s first London branch opened with an unlikely combination of shiny marble, chrome and free lollipops in 2010. Since then investors have been left with a bitter taste over its shares, down 98% since the 2016 listing.
The bank has built a network of 76 retail branches to gain access to relatively cheap deposit financing to redeploy across a loan portfolio. But its business case failed. Metro said so this week wants to raise £600m in the capital.
Meter requires more scale to reduce overhead. An expensive branch network results in a high cost-to-income ratio of 90% for a UK retail bank. By comparison, the ratio for Lloyds Bank is 51%. Furthermore, around 92% of its deposits reside in checking accounts and demand deposits which can quickly disappear.
It also faces difficulties in distributing its funds. Most of Metro’s assets are held at the Bank of England or in high-quality bonds. Insufficient capital buffers have limited loan growth. Its Common Equity Tier 1 capital ratio was 10.4% in June, around 3 percentage points below the average of its UK peers. This explains why Metro is talking about raising capital and selling part of its mortgage portfolio to reduce capital requirements. This goes against their need for growth, points out Gary Greenwood of Shore Capital.
Why didn’t any banks buy Metro? It trades at a tenth of its book value. Even paying £1 for all this would trigger fair valuation accounting under IFRS 3, Autonomous says, revealing the need for more capital. An overvalued property, with very long leases, plus negative appreciations in its mortgage and securities portfolios could force a buyer to shell out £1.3 billion to cover valuation losses.
Metro is now looking to strengthen its balance sheet. But investors who recapitalize the company risk wasting money after bankruptcy. The business model behind its attempt to turn lollipops into lots of lollipops is deeply flawed.
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