Metro hitting the buffers
Metro Bank was one of those great ideas and its founder- chairman Vernon Hill a real original.
Its cleverness was spotting a great hole in post-financial crisis British banking as High Street lenders cut back services, drove customers online and shuttered branches.
By creating attractive outlets, opening around the clock and offering premium service to walk-in-customers, including onthespot replacement of lost and stolen credit cards, it aimed to change the face of British banking.
Hill did it in the US with the foundation of Commerce Bancorp (eventually sold for $8.5bn) and aimed to do the same in the UK. Because of his track record in the US, there was a willingness to ignore appalling governance lapses – notably payments to his wife Shirley Hill’s firm Interarch for architectural services.
there is a fundamental flaw in the Metro Bank model. US customers are used to paying commission for banking services, including use of AtMs. Premium charges in a period of low interest rates, when endowment returns from current account deposits are low, allowed Commerce to build profits.
to build income and growth in the UK
meant chasing loans, and then compounding the mistake by categorising them wrongly in the accounts.
Metro’s device for self-correcting was to announce in advance that it would be doing a £350m rights issue to boost capital without revealing the terms.
this was the equivalent of writing a blank cheque to the short-sellers.
In the same way as hedge funds spotted the weaknesses of the consumer banks in the run-up to, and during, the financial crisis, so Metro’s capital raising is having the same negative effect.
Metro shares are more than 85pc off their peaks of early last year, and industry reports indicate that a falling share price may be triggering an outflow of deposits. With a stock market value of £522m, it is going to be an uphill struggle to attract the equity and the debt funding to support future lending ambitions.
the stress Metro is suffering can be seen in bond markets.
the bank’s £250m subordinated debt is currently yielding 10.6pc against the 4pc yield when it was issued last year.
the cost of borrowing for banks is blended and includes very cheap retail balances and more expensive wholesale funding. But it will be hugely difficult for any financial group to make a decent margin when riskaverse investors have such a jaundiced view of a bank’s debt.
We know from the discovery of Metro’s accounting error that the Financial Conduct Authority and the Bank of england are keeping close tabs on Hill’s bank. But with the share price so weakened and debt costs surging, there are beginning to be real questions as to how viable Metro Bank can be, even if American backers show willing to support a rights issue.
Metro’s vision of a new kind of full service bank looks in jeopardy.
Doorstep choice
tHere is something wholly shaming about the sight of City advisers knocking seven bells out of each other over the future ownership structure of Non-Standard Finance and Provident Financial.
Both of these companies fill a useful gap in the market by making loans to the poorest sections of society – albeit overpriced ones.
It is deeply uncomfortable watching both sides shelling out millions of pounds in advisers’ fees in an effort to damage each other’s reputation.
In the course of the exchange we have learned that NSF has played fast and loose with company law, which prohibits dividends being paid out of reserves.
In the latest round of barbs, it is revealed that Provvy boss Malcolm Le May was paid a £573,000 bonus last year for helping the lender dig itself out of a regulatory ditch in which it should never have been in the first place. What makes this worse is that NSF is seeking to push ahead with the deal as if a review by the Competition & Mergers Authority is of no consequence.
But removing a major player from the marketplace can only reduce choices for borrowers and may encourage more unscrupulous groups to move into the space.
It is hard to believe that the CMA chairman Andrew tyrie, who played a big role in uncovering the scandals behind the financial crisis, will find the proposed tie up, driven purely for shareholder returns, anything but abhorrent.