Reports earlier today suggested that the firm was seeking £600m capital raise after the regulator delayed approval to allow it to use its internal risk model for residential mortgages.
Metro Bank’s share price currently sits at 35.0p as of 16:15pm, down nearly 31 per cent since the start of the day.
In an update from DBRS Morningstar, the firm said that it would “not expect the difficulties” being experienced by Metro Bank to have a “broader impact on the UK financial sector” given its “relatively small size”.
It continued that Metro Bank had “specific issues” going back to 2019 when it had reported a “serious miscalculation” of risk weighted assets (RWA).
“This event led to a negative impact on its reputation and fines from the Financial Conduct Authority and the Prudential Regulatory Authority of £10m and £5m respectively,” DBRS Morningstar said.
The company said that Metro Bank had also reported “weak profitability” since it was founded including a weak cost-income ratio of 90 per cent in the first half of the year and 106 per cent in 2022.
“Whilst we note that its loan book appears to be performing in line with peers, Metro Bank has been facing a number of structural issues including an elevated cost base, which has led to the bank reporting net losses since 2019,” it explained.
DBRS Morningstar said that Metro Bank had continued to invest in expanding in its physical branch network, whereas other banks had been reducing their high street presence.
It continued that the higher interest rate environment had been a positive for the firms revenue but this had not fed though into an improvement in net interest margin, which came to 2.14 per cent in the first half of this year and 1.92 per cent in 2022.
DBRS Morningstar attributed this to “lower margin lending and higher funding costs, particularly due to expensive wholesale funding”.
“Whilst the bank has made some progress in reducing operating costs since 2021, the bank has a very high cost base which reflects high investments in its branch network and in IT which has been exacerbated recently with the high level of inflation,” it said.
Regarding the funding, DBRS Morningstar said that the bank had built up a large deposit base and its loan to deposit ratio stood at 82 per cent.
It added that it had a large proposition of commercial and SME deposits, making up over half of total customer deposits, that were “ potentially less-sticky than retail deposits”.
However, the firms said the lender had “paid high rates for its retail deposits as well as high rates on its wholesale funding”. This included £350m of 9.5 per cent senior non-preferred bonds with a call date of 8 October 2024 and final maturity of October 2025 that will need refinancing.
“Customer deposits have also declined since 2021, driven by increasing competition and also reflecting that households and SMEs are using the significant liquidity buffers built up during the pandemic to face the more challenging economic environment of high interest rates and inflation,” it said.
DBRS Morningstar said the bank was “facing a number of serious capital challenges after several years of operating losses”.
“It was still rebuilding its credibility following the miscalculation of RWAs in 2019, and has not yet been able to get the regulatory approval for its AIRB application for residential mortgages which would lower its capital needs.
“It currently has very narrow capital buffers, reporting a Tier 1 ratio of 10.4 per cent compared to its regulatory requirement of 9.8 per cent and its total regulatory capital plus MREL (minimum requirement for own funds and eligible liabilities) of 18.1 per cent is below its minimum requirement including buffers of 20.2 per cent,” it concluded.
