Royal London Asset Management has called for a new chairman to be appointed at Metro Bank PLC after a significant number of shareholders voted against re-electing the bank's directors, including existing Chairman Vernon Hill.
In a highly unusual move for an institutional investor, Royal London's head of responsible investment Ashley Hamilton Claxton said the results of the bank's annual general meeting indicated it was time for a change.
"The high number of votes against directors at Metro Bank's [annual general meeting] should send a strong and clear signal that many of the company's shareholders want to see decisive governance reform," said Hamilton Claxton.
Push for more changes
While Royal London welcomed the move by Metro ahead of the AGM to sever ties with InterArch, the design firm run by Vernon Hill's wife and to which the bank has paid more than £26 million since 2010 for services, Hamilton Claxton said further reforms were needed.
"We support the move by the board to review the contract with InterArch, the company run by the chairman's wife," he said.
"However, we still strongly believe that the appointment of a new independent chairman to lead governance reforms would go some way towards strengthening oversight, and restoring investor and customer confidence in the bank."
Vernon Hill launched Metro, the U.K.'s first new high street bank in a century, in 2010, and it now has 66 branches decked out in its distinctive blue and red livery. It has made a virtue of offering long opening hours and seven-day-a-week operations, which has led to concerns that it will be left behind in the sector's move toward digitization.
Royal London said it had communicated its views to the company and would continue to engage with the board over the coming months. It holds 0.39% of Metro's shares, a stake worth £3.1 million.
At the bank's AGM on May 21, more than 12% of investors who voted opposed the re-election of Hill to the board, while more than 10% opposed CEO Craig Donaldson and more than 11% opposed CFO David Arden.
The rebellion against the independent nonexecutive directors was even more considerable: Stuart Bernau and Eugene Lockhart were each opposed by more 28% of investors while Anna Melis was opposed by more than 20%, for example. More than 20% of investors opposed the remuneration report.
Loan risk mis-classification
Metro Bank ran into trouble in January, when it admitted it had mis-classified the risk of large numbers of commercial and professional buy-to-let property operators' loans, which meant it had to add £900 million to its risk-weighted assets.
It initially claimed to have discovered the mistake itself, before admitting it had been alerted to it by the Bank of England. It had to raise capital to boost its capital buffers as a result, and last week successfully completed a £375 million equity raising. It is being investigated by the Bank of England's Prudential Regulation Authority and the Financial Conduct Authority following the debacle.
Royal London joined Legal and General Investment Management in publicly revealing ahead of the AGM that it would oppose the election of Hill on the grounds that he was not independent. Investor advisory groups had also recommended investors oppose or abstain over Hill's re-election and the remuneration report.
Metro Bank declined to comment on Royal London's comments.
Share price volatility
The bank saw its share price shoot up by more than 50% between May 16, the day before the equity raising, and May 22, although it is still sharply down for the year to date. As of 4:17 p.m. London time on May 23 its share price was 777.0 pence, down by 4.4% for the day.
More than 10.9% of Metro's shares were held by short-sellers on May 22, down from a high of 12.49% on May 7. Analysts at Goodbody Stockbrokers said the rise in share price was partly down to short sellers of the stock closing out their position by buying the stock back.
But Goodbody also said the strength of the share price "speaks of irrational exuberance" and warned that the bank still faced fundamental problems.
"We see the share price divorced from fundamental value and we would warn you that there are some major risks in the short-term," it said.
Goodbody said risks related to the capital uplift, the possibility that there were material deposit outflows recently — the bank saw queues at some London branches after false rumors on social media on May 19 that it was raiding customers' deposit boxes — as well as questions over the whether its management could remain in place when the results of the regulators' probes are known.
"We firmly do not believe that Metro's operating model and recalibrated strategy is conducive to generating returns close to the cost of equity," it said.