Metro Bank needs to win back City’s trust after loans blunder

Metro Bank sees itself as an industry agitator, having burst on to the UK banking scene in 2010 with an eccentric American founder, dog-friendly branches and a flamboyant celebration of high street expansion that distinguished the lender from cost-cutting rivals.

The bank – which calls its customers “fans”– has steadily expanded its network of “stores” and rallied enthusiasm for new openings with street parties and staff conga lines that have fostered a reputation for having a cult-like workforce.

It has also dodged shareholder rebellions over multimillion pound payments to the architecture business of Shirley Hill, the wife of founder turned chairman Vernon Hill, and brushed off concerns about the circumstances of his departure from the US lender Commerce Bancorp.

But 10 years on from its founding, the bank is steeling itself for a grilling over an accounting blunder.

Metro Bank revealed last month that hundreds of millions of pounds of commercial property loans and loans to commercial buy-to-let operators had been wrongly classified in risk terms, and should have been among its “risk-weighted assets” (RWAs). While the bank originally suggested that it had discovered the issue itself, it later emerged that the error was caught by the UK regulator.

The debacle sent its shares plunging 50%, falling from around £22 per share to a record low of £10.87 within days of the disclosure on 23 January. The price has since risen above £14 – further helped by news on Friday that it had clinched the biggest award to date from a £775m scheme meant to boost competition in the banking sector following Royal Bank of Scotland’s state bailout in 2008. But investors are still jittery.

The chairman, who has golfed with Donald Trump and often has his Yorkshire Terrier in tow, and the chief executive, Craig Donaldson, are understood to have spoken privately with shareholders following the accounting blunder.

But this Wednesday will mark the first opportunity for investors, analysts and media to question Metro Bank’s leadership openly about the gaffe. It is likely to overshadow a full-year earnings report that is expected to show profits surging from £15.9m to £39m, according to consensus estimates collected by Reuters.

Laith Khalaf, a senior analyst at Hargreaves Lansdown, said: “It looks like the initial mistake was genuine, but it still clearly raises questions about Metro’s capabilities, and the profitability of the loans it’s been making under the wrong assumptions. The mischaracterisation of the way the error was uncovered, though, compounded the issue, and further erodes trust in the bank.”

John Cronin, a financial analyst at the stockbroker Goodbody, admitted that he was “nervous” heading into this week’s earnings results, which could signal a further slowdown in growth and prompt a further share sell-off.

“There will be a major focus on what levers the management team is planning to pull to minimise capital raising needs, as well as get the business back on track to deliver double-digit returns for shareholders, in line with their stated targets – which have been called into question now,” he said.

But the bank has been riding high in recents weeks. As well as Friday’s award of £120m to help to develop its business banking proposition, a customer survey by the Competition and Markets Authority showed that Metro Bank ranking highest for personal account services.

Khalaf said the City’s eroded confidence in the bank is “unlikely to spill out of the square mile into the UK high street and Metro’s customers, but if Metro wants to raise fresh capital in future, it’s the City it needs to turn to.”