Metro Bank has revealed a major blunder in how it classifies its loan book, sending its share price crashing by 30% and wiping £600m off the value of the company.
The bank, which has been opening new branches as established rivals cut back, revealed that hundreds of millions of pounds worth of commercial property loans and loans to commercial buy-to-let operators had been wrongly classified in risk terms, and should have been among its “risk weighted assets”.
After the blunder emerged, Metro’s shares plummeted from £22 to about £15 as analysts feared the bank may have to raise fresh capital, just six months after tapping shareholders for £300m to finance its rapid expansion plans. When a bank has higher risk weighted assets (RWAs) regulators require higher amounts of capital to be set aside.
Metro launched in 2010 and has opened new banking halls in city centres across the south of England. It floated on the stock market in March 2016 at £20 a share and spiked to more than £40 a share in March last year, but has since been falling.
Metro Bank chief executive, Craig Donaldson, said that “credit quality has remained robust” and that “notwithstanding the RWAs, the bank continues to do well”.
It said it had called in a “big four” accountancy firm to audit the loan classification, and had immediately reported the issue to the Prudential Regulatory Authority.
About one-third of the £14.2bn lent by Metro has gone into commercial property or commercial buy to let. Only 50% of the commercial loans and 35% of the buy-to-let loans were placed in the “risk weighted” bucket. They were all moved into the RWA band after a reassessment.
The bank also revealed that tougher trading conditions meant underlying profits for 2018 were £50m, significantly below expectations of £59m but 136% up on a year earlier.
Mortgage margins have been hit by harsher competition in the sector and general uncertainty in the property market over Brexit, it said.
Metro insisted its growth plans remained on track, with Donaldson saying the market “should not assume” that the bank would be seeking extra capital. Its total capital ratio fell from 19.1% to 15.8% after the loans reclassification, but Metro said it remained comfortably above the 12.6% regulatory minimum.
It said that in the fourth quarter it opened 100,000 new customer accounts. Six new branches took its total to 66 and further expansion in the West Midlands was planned for 2019.
Donaldson said: “Metro Bank remains well positioned to support our growth strategy as we navigate an uncertain period for the UK.”