Metro Bank PLC's concentration on the mainstream mortgage market needs to change if it wants to avoid being snapped up by a bigger rival, said analysts at stockbroker Goodbody.
The troubled bank must carry out a strategic overhaul of its operations with less emphasis on mainstream mortgage lending and more focus on higher-yielding assets if it wishes to remain independent, Goodbody said in a research note.
Metro is being probed by regulators, however, and if the outcome of that leads to increased capital requirements then the bank could be forced into sale.
Following the announcement that Chairman Vernon Hill will quit at the end of December, a restructuring specialist should be appointed to carry out the changes, said Goodbody analyst John Cronin.
Metro Bank declined to comment on Goodbody's comments. However, it did say the search for a new chairman is progressing well, but that an interim chairman would be appointed if no candidate was found by the end of the year.
Goodbody said the bank lacks the cost base to compete with bigger mainstream banking rivals in the mortgage market. The likes of HSBC Holdings PLC and Royal Bank of Scotland Group PLC would go after mortgage market share with far greater resources and Metro would struggle to compete, it said.
HSBC U.K. CEO Ian Stuart recently said the bank plans to lend an extra £35 billion to homeowners to boost its market share, for instance. Big U.K. banks, which already dominate the mortgage market, have also seen their coffers boosted by obligatory ring-fencing to separate their retail banking businesses from investment banking.
Tilting away from a dependence on mainstream mortgages might not be as difficult as might at first appear since, though they account for more than 70% of Metro's loan book, they provide a considerably smaller part of its loan interest income, at 58%. Commercial loans account for 27% of its loan book, but 39% of its loan interest income.
The bank has a renewed focus on the business sector, too, after it won £120 million — the largest share — of an EU-mandated fund to boost competition in U.K. business banking earlier this year. On Oct. 10 it announced a number of tie-ups with fintech firms to make distributing the funds more effective.
Goodbody also said the bank does not have enough current accounts, while the price of further debt issuance is likely to be high and the bank's obligation to use a standardized risk model limits its room for maneuver.
Certain risk-weighted assets that Metro miscalculated could be sold, said Goodbody, because of their limited strategic value and the "punitive" high risk-weightings now attached to them. The bank sold £521 million of mortgages to U.S. private equity firm Cerberus in July.
There have been reports that Hill is considering taking the bank private, but, should that not materialize, whoever takes over as chairman will also have to help the bank in its dealings with financial regulators.
Metro is being investigated by both the Financial Conduct Authority and the Bank of England after it miscalculated RWAs in February this year, initially blaming the Bank of England for the error before admitting responsibility.
The FCA warned in August that it was widening the scope of its investigation into Metro's errors, including looking at a period prior to the bank's disclosure of its mistake, when it received questions from analysts on its RWA calculations.
Activist investors, including Elliott Advisors, are reportedly circling the bank with some funds looking for opportunities to acquire parts of the business. Some potential investors have reportedly demanded that CEO Craig Donaldson must quit as a condition of any investment.
The bank had to pull the sale of up to £250 million of senior nonpreferred bonds with a high yield of 7.5% needed to meet incoming regulatory requirements after failing to win orders for more than £175 million.
It tried again a week later, successfully selling £350 million of bonds with a yield of 9.5% in an issue that was oversubscribed.