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Metro Bank investors advised not to back Vernon Hill's re-election or pay report

Shareholder advisory groups have urged investors in Metro Bank PLC to oppose the bank's remuneration report and not to support the re-election of chairman Vernon Hill at the bank's annual general meeting on May 21.

One of the groups, Pensions & Investment Research Consultants, warned investors to oppose the remuneration report because of concerns about the appropriateness of the £288,000 bonus paid to the bank's CFO David Arden, whose total remuneration in 2018 was £1.09 million.

In a January trading statement Metro revealed it had mistakenly classified hundreds of millions of commercial property loans and loans to professional buy-to-let operators as less risky than they were. As a result, it had to reclassify them, adding £900 million to it risk-weighted assets in the process and making it necessary to boost its capital buffer. This has led to plans for a £350 million equity raising, which it aims to complete in the first half of 2019.

Metro initially claimed to have realized the error itself before admitting that, in fact, the Bank of England's Prudential Regulation Authority had done so. The bank's share price has plummeted as a result and has fallen 75% since January.

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"Given the company's decline in value and resulting losses to shareholders', best practice would have seen the remuneration committee apply downward discretion in order to prevent a bonus from being paid," said Pirc.

The shareholder advisory group also said the one-off award of £160,000 paid to Arden in recognition of the loss of payments from his former employer was "not appropriate."

Metro's CEO Craig Donaldson voluntarily gave up his right to a bonus in light of the error.

'Inappropriate'

Pirc also recommends that investors vote against the re-election of Vernon Hill, the chairman and founder of Metro Bank on the grounds that he is not independent. Pirc also noted that the bank paid £4.6 million to InterArch, a firm owned by Hill's wife, Shirley Hill, for architectural services last year. The bank has paid InterArch about £26 million since it launched. Pirc said such payments are "inappropriate."

Pirc joins another leading shareholder advisory group ISS in advising investors to vote against the remuneration report while ISS advises voters to abstain in votes on the re-election of Vernon Hill, Donaldson, and Directors Stuart Bernau and Eugene Lockhart. Pirc, however, is in favor of Donaldson's re-election.

Pirc also advised investors to oppose the re-appointment of PricewaterhouseCoopers LLP as auditors. It said PwCs non-audit fees represented 4.11% during 2018 and 38.11% on a three-year aggregate basis which Pirc said raised concerns about its independence as an auditor. ISS advised investors to abstain on the vote to re-appoint PwC as auditors.

Metro declined to comment on the notes.

Metro Bank's share price has fallen 75% since its admission of error over its loan classification while the amount of its shares held by short-sellers, who aim to profit if the share price drops, has nearly doubled since January to 11.5%, according to the Financial Conduct Authority The bank's shares fell again on Monday, May 13, after social media reports over the weekend suggesting the bank was in trouble led to queues at some London branches.

However, the bank's shares were sharply up in midday trading on May 15, rising more than 6% off the opening price to 538.8p per share amid speculation that the bank was on the brink of announcing a plan to shore up its finances.

The bank could also draw some comfort from an analysts' note from Joh. Berenberg Gossler & Co. KG which said the bank's decision to rein in expansion while it builds up its capital buffers was beneficial.

"First, the strategy reduces the bank's reliance on external capital. Second, the strategy enables Metro to demonstrate that its model can deliver acceptable returns," said Berenberg.

Metro is the U.K.'s first new high street bank for more than a century and launched in 2010. Its business model runs counter to the prevailing trend in banking since its growth is based on opening high street branches open for long hours, seven days a week rather than on enhanced digitization.