After Shares Collapse, Mini Bank-Run Begins as UK Lender Counts Cost of Broken Trust

This time it’s about the safe deposit boxes at Metro Bank.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Shares in Metro Bank, until recently the UK’s fastest growing high street lender, slumped 11% on Monday to £4.75, the lowest level since the bank went public back in 2016. Metro’s shares have lost almost three-quarters of their value since January, when the lender first revealed it was seeking to raise fresh capital following a very costly accounting blunder. They have now collapsed by 84% from March last year.

The latest rout comes on the heels of news over the weekend that hundreds of customers asked to withdraw money and items from safe deposit boxes after a series of warnings on Whatsapp. On Saturday, queues formed at a number of Metro Bank branches in London, photographs of which were duly posted and shared on social media, sparking fears that a mini bank run was under way.

“We’re aware there were increased queries in some stores about safe deposit boxes following false rumours about Metro Bank on social media & messaging apps,” Metro Bank said in a statement. “There is no truth to these rumours and we want to reassure our customers that there is no reason to be concerned… We’re a profitable bank, rated no.1 for personal current account service by the CMA and committed to serving our 1.7 million customer accounts.”

To allay customer fears, Metro said that the contents of safety deposit boxes, including cash and jewelry, are the customer’s sole property and as such cannot be confiscated. As for customers with a current account at the bank, up to £85,000 are insured under the Financial Services Compensation Scheme. The vast majority of people were reassured, the bank says, and did not remove their case.

But the same cannot not be said of some important business clients, whose funds would not be fully insured if the bank went bankrupt. After Metro was caught assigning the wrong risk weighting to a huge chunk of property loans, the bank has lost key clients. The “error” left a gaping £900 million hole on the bank’s balance sheet which, when disclosed in late January, prompted the bank’s shares to cascade almost 40% in just one day’s trading — the worst one-day fall suffered by any British lender since the financial crisis.

Metro faces a shareholder lawsuit over the accounting error and is under investigation by the Prudential Regulation Authority (PRA), the institution that first flagged up Metro Bank’s accountancy error, and the Financial Conduct Authority (FCA). It is also preparing a £350 million rights issue, after already raising £303 million from investors last July.

But investors — led perhaps by well-connected investors — have been smelling a rat since March 2018, as we pointed out, because that’s when the shares started to spiral down, from around £40 in March 2018, having now lost about 84% of their value in a little over a year.

Following the latest rout, Metro is worth just £462 million, down from £4 billion a year and a half ago. It is also the most shorted company on the UK stock exchange, with 13% of its shares out on loan to short selling funds. On Friday, Metro Bank’s biggest shareholder, Fidelity, slashed its stake from 7.6% to 5.4% after the bank had reported a 50% slump in first-quarter profits, as well as the exit of some of its biggest corporate clients.

Metro Bank is one of a handful of so-called “Challenger Banks” — small retail lenders created after the crisis to provide a little more banking competition in a country where the five biggest lenders control a staggering 85% of the market. After opening for business nine years ago, becoming Britain’s first new high street bank in over 100 years, Metro proved adept at luring disillusioned customers from the bigger banks.

Part of its appeal is its focus on physical branches — or “stores” as the company calls them — while most large banks are frantically closing theirs. Metro, like its U.S. forerunner Commerce Bancorp, is also open seven days a week, and has longer working hours than other high street banks. Drawn by the promise of more personalized customer service, over 100,000 new customers switched to the lender in the fourth quarter of 2018 alone.

But since January the tide has turned as the bank counts the cost of breaking the hard-earned trust of customers and investors. In the first quarter of 2019, Metro Bank lost 4% of its deposit base following the closure of a number of big corporate accounts. Now, doubts are emerging as to whether or not it will be able to come up with the £350 million of fresh capital it needs to cover its newfound risks.

The bank says the new funding will be in place by the end of June. A consortium of banks has already agreed to underwrite the deal, it claims. But with the share price crumbling to ever lower lows, fears are growing that any new capital will have to be raised at a huge discount that would severely dilute the holdings of existing shareholders, whose shares already lost 84% of their value in the last 12 months. Banking is all about trust. Once the bank breaks that trust, it can get costly in a hurry. By Don Quijones.

696 views