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A leading Metro Bank investor will oppose re-election of chairman Vernon Hill

Metro Bank PLC shareholder Legal and General Investment Management has taken the unusual step of announcing ahead of the annual general meeting that it will vote against the re-election of the bank's chairman Vernon Hill.

The investment fund said it would vote against Hill, against certain members of the Audit Committee, and against directors with whom it has concerns over their independence at the bank's AGM on May 21.

LGIM said it was taking the "rare" step of announcing its voting to highlight its concerns.

"As a long-term investor of our clients' assets, we hope that in sharing our voting intentions early, and that following the results of the AGM, this will help encourage Metro Bank to strengthen their governance structures," said Sacha Sadan, director of corporate governance at LGIM.

The investment fund also criticized Metro's poor board gender diversity, pay practices and its failure to manage conflicts of interests. In its annual report for 2018, the bank revealed that it had paid InterArch, a design firm that outfits its bank branches owned by Hill's wife, Shirley Hill, £4.6 million for services, adding up to about £26 million since the bank launched.

Vernon Hill founded Metro in 2010 as the U.K.'s first new high street bank in more than a century. He had previously founded Commerce Bancorp in the U.S. but resigned after regulators stopped the bank doing business with firms under the control of his family. The bank was sold for $8.5 billion.

LGIM, which holds a 1.79% stake in Metro worth $12 million, said that at the previous AGM in 2018 it also voted against the re-election of the bank's chairman and the remuneration report.

Capital boost after RWA error

Metro, which said it would not comment on shareholder voting, released a trading statement in January where it admitted that it had miss-classified a large number of commercial and professional buy-to-let operator loans as less risky than they actually were. This resulted in it adding about £900 million to its risk-weighted assets, forcing it to boost its capital buffers by raising £375 million on May 16.

The Bank of England's Prudential Regulation Authority and the Financial Conduct Authority are investigating the bank for the errors.

LGIM is the first big investor in the bank to announce that it will not support the re-election of Hill but leading shareholder advisory groups have also expressed concerns and advised investors not to back his re-election.

Pensions & Investment Research Consultants advised investors to vote against Hill while Institutional Shareholder Services, another shareholder advisory group, said investors should vote against the remuneration report and abstain on the re-election of Hill.

Institutional Shareholder Services Inc.The bank raised £375 million in an equity raising on May 16, more than the £350 million that was expected and it said the raising was "significantly oversubscribed."

It is not yet clear how much of the cash came from existing investors, though banking sources suggested there were about $1 billion of orders for the new stock. The bank's share price rose around 28% in afternoon trading on May 17 following the equity raising.

Mixed reactions

The Bank of England welcomed the move, which comes after a weekend when social media rumors that the lender was in trouble led to queues at some London branches of the bank as customers withdrew the contents of safety deposit boxes.

"Metro Bank is profitable and continues to have adequate capital and liquidity to serve its current customer base," said the PRA.

Analysts at Goodbody Stockbrokers welcomed the equity raise, though still raised fundamental doubts about the bank's business model. Metro, which now has 66 branches, has expanded rapidly on the high street with branches that are open long hours, seven days a week, and focuses on personal customer service rather than enhanced digitization.

"We think absolutely nothing has changed with respect to the fundamental investment case. Fundamentally, while Metro does have a good deposit franchise, while some recent damage has been inflicted, stability should bring benefit, we don't believe its strategy of relying on physical expansion, with associated high costs, will present the scale or operating efficiencies needed to compete against the majors in U.K. mortgages," said analysts at Goodbody.

In a bizarre twist to the equity raising, a Bank of America Corp. executive, Craig Coben, accidentally broadcast on Periscope on February 18 a private conversation he was having with a friend about Metro revealing it had decided to raise at least £300 million. Metro had initial discussions with Bank of America about its plans. Bank of America said: "We are undertaking an investigation to verify the facts and will take appropriate action."