When Metro Bank confessed last week that it had put £900m worth of loans into the wrong risk bracket, outsiders were astonished. Getting these things right is meant to be basic stuff for a bank. The effect of the blunder was to clobber Metro’s capital ratios, with the main one falling from 19.1% to 15.8%. The share price plunged by almost 40% as the City speculated that the fast-growing lender would need more capital. There was an obvious question: how was the mistake uncovered?
It was “something we found as we went through our end-of-year reviews”, explained its chief executive, Craig Donaldson. Was he saying that the Prudential Regulation Authority (PRA), the Bank of England’s supervisory body, didn’t play a role? Donaldson was clear: the findings of the review were “discussed” with the PRA, but Metro found the problem itself.
It was not the full story. After the Daily Mail reported that the problem was initially spotted by the PRA, Metro had to come clean. “Ongoing supervision by the PRA helped to identify potential inconsistencies in certain loans which were raised with the bank,” said Thursday’s statement.
One might say Donaldson’s original breezy account doesn’t matter terribly since it doesn’t change the figures. Perhaps Metro should simply stop boasting on its website that it is “a bank that tells you exactly what you’re getting, in language that actually makes sense”.
But there’s a serious issue here. The effect of Donaldson’s original statement was to make the PRA look foolish. The regulator has teams of supervisors policing every bank and they are expected to have a good grasp of the riskiness of the assets. The suggestion that officials were asleep at wheel at Metro – which was one reading on Donaldson’s words – was explosive. Metro isn’t in the banking big league, but it still has 1.5 million customers and ambitions to expand.
Financial regulators tend to take a dim view of misleading statements. Paul Pester did not last long at TSB after the bank was accused by the Financial Conduct Authority of not being “open and transparent” in its communications during the IT meltdown. There were implications for the trust in the whole sector, explained the regulator.
Maybe Donaldson’s airbrushed account will be viewed less seriously, but he’d be unwise to count on it, especially as Nicky Morgan, the chair of the Treasury select committee, is taking an interest.
Nor should he count on much support from shareholders if Metro does intend to seek more capital. They will now have even more questions about management credibility. The share price, down another 11% on Thursday, says as much. Donaldson has talked himself into a deep hole.
If Ofwat is right, customers shouldn’t have to plug the leak at inefficient Thames
Three water companies got top marks from regulator Ofwat for their next five-year business plans and – look at this – they are the only three in the sector that still remain on the stock market: Severn Trent, United Utilities and South West Water, which is owned by Pennon.
Of the others, 10 got a “further work to do” rating, and four laggards, including big firms Thames and Southern, were told to resubmit something credible.
Correlation does not imply causation, obviously, and Ofwat’s David Black noted that United, which operates in the north-west, was at the bottom of the pile when this exercise was run five years ago.
All the same, there’s a useful line of inquiry here. Does the extra public scrutiny that comes with quoted-company status encourage boards to run more efficient businesses? And, while the directors may still pay themselves fortunes, do they have a keener sense of what customers will tolerate on bills? Discuss.
Certainly, Thames – the company whose capers have done more than anything to popularise Labour’s idea of nationalising the entire sector – still seems to be paying the price for a decade of unenlightened ownership under the control of Macquarie.
The unlovely Australian investment bank has departed from Thames’ shareholder register and a new-broom management now preaches a gospel of responsible investment, backed by cuddlier funds that have agreed not to take a dividend for three years. Good plan, but Thames is starting from the back of the pack if Ofwat’s numbers are to believed. The regulator thinks the company could be 25% more efficient and a lot less leaky.
Thames chief executive Steve Robertson protested that Ofwat’s verdict amounted to a demand to reduce much needed investment, and he may have a point. Yet, if Thames really is so inefficient compared with its peers, it’s hard to see why the poor old customers should be asked to cover the difference. That is not how the system works.