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Metro Bank under fire over capital buffers as it awaits regulator's review

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Metro Bank under fire over capital buffers as it awaits regulator's review

Regulators are expected to tell Metro Bank PLC to further shore up its capital buffers even after its successful capital raising, as its share price fell again, said analysts.

The bank's shares have lost two-thirds of their value after it admitted in January that it had miscalculated the riskiness of commercial and professional buy-to-let property operators' loans. The mistake added £900 million to its risk-weighted assets and forced it to undertake a £375 million capital raising in May. The bank is currently being investigated by the Bank of England's Prudential Regulation Authority and by the Financial Conduct Authority over the issue.

Now, analysts at Goodbody have said the bank is undercapitalized in a key measure of financial strength, and they expect the PRA to push the bank to increase its Pillar 2 capital at its twice-yearly review.

"Metro's mistakes over classifying its loans does imply a failure of risk management. I think the Bank of England will have a different view on the risk presented by the institution to what their view was before that January 23 statement," John Cronin, analyst at Goodbody, told S&P Global Market Intelligence.

The amount of capital a bank is required to hold is divided into three parts or pillars. Pillar 1 is the basic minimum amount based on how much lending the bank has done and to whom and how risky it is deemed. Pillar 2 is the regulators' assessment of bank-specific risk based on the bank's size, maturity and operating history. Pillar 3 is designed to facilitate market discipline through prescribed public disclosures.

Metro's Pillar 2 capital ratio stood at 1.52% at its year-end, about half of which must be met with common equity Tier 1 capital, said Goodbody.

The analysts compared the bank's Pillar 2 capital to other banks such as Banco de Sabadell SA-owned TSB, for instance, which was beset with problems last year following an IT crisis in which millions of customers lost access to their accounts. TSB's Pillar 2A capital requirement is 6.5%, with 3.6% to be met with common equity Tier 1 capital, the highest grade of bank capital.

"We think applying a 2% uplift in the CET1 component of P2A is a perfectly reasonable assumption from a Metro perspective — and pretty optimistic at that," said Cronin. The analysts said they expected the PRA to insist that Metro boost its Pillar 2 buffer. The bank declined to comment on its capital buffers.

Shares down again

Meanwhile, Metro's share price fell 10% on the morning of May 30 before recovering to trade at just under 5% in late afternoon trading. Reports linked the fall to U.S. law firms, the New York-based Pomerantz and Levi & Korsinsky, which each said they were "investigating" claims on behalf of investors over whether the bank's bosses took part in securities violations. They join Los Angeles-based law firms Glancy Prongay & Murray and The Schall Law Firm in such action.

Metro is regulated by regulators in the U.K., not the U.S., and it does not submit any SEC filings. The bank said it had "engaged heavily with investors over the last few months and their strong support for the business was recently demonstrated in the successful £375 million capital raise."

Metro is the U.K.'s first new high street bank in a century and now has 66 branches — or stores, as its U.S. founder and chairman, Vernon Hill, prefers to call them. He calls the bank's customers "fans."

Hill has come under fire as institutional investors Royal London Asset Management and Legal & General Investment Management publicly opposed his reelection to the board at the bank's annual general meeting on May 21. More than 12% of investors voted against Hill's reelection, while more than 28% of investors voted against the reelection of other independent nonexecutive directors on the grounds they were not sufficiently independent. More than 28% of investors voted against accepting the remuneration report.