Forget Flashy Branches. People Want a Bank They Can Trust

(Bloomberg Opinion) -- Vernon Hill’s Metro Bank Plc became the first lender in more than a century to take on Britain’s high-street banking giants, going against the digital tide to open branches with high ceilings and shiny stone floors. Nine years later, the bank is finding investors and clients still value trust more than banking in glittery outlets.

Metro Bank, backed by investors  including hedge-fund billionaire Steven Cohen, has gone from stock-market darling to pariah. The trigger? Revealing in January that in effect it had failed to set aside enough capital for some loans, now the subject of a regulatory investigation. The stock has dropped 90% this year and the company is now worth 290 million pounds ($358 million) – less than what it raised from shareholders in May.

Earlier this week, it was the turn of bond investors to look the other way. They shunned a sale that was crucial to the lender’s efforts to meet regulatory capital requirements by January. Not even a yield double the size of similar offerings could lure buyers.

That the company was unable to raise the necessary funds even at distressed pricing is bad enough. But even if it were to pull off a bond sale, the exorbitant coupons will eat into profit. For each percentage point increase in the cost of 200 million pounds of debt the bank would see a 10% drop in statutory pre-tax profit this year, Barclays Plc analysts have estimated.

And unless the Bank of England gives Metro Bank more time, the lender could be forced into a sale of assets, such as part of its mortgage book, also eroding profit.

To be sure, more time to tap investors could give Metro Bank the room it needs to bolster capital at less onerous terms. Selling risky bank bonds into Brexit jitters is anything but ideal.  

The trouble is that no one else but Metro Bank can restore the loss of confidence in its business and managers that they have suffered since announcing the accounting blunder in January. In the meantime, it’s becoming more expensive to fund growth. Without expansion, Metro Bank’s pledge to improve profitability is undermined, not least given the U.K. mortgage battle that’s crippling prices.

Clients, which Hill famously dubs fans, have shown to be anything but steady. Lingering concerns about the severity of the accounting error and unsubstantiated speculation on social media in June about the bank’s health prompted clients to pull more than 2 billion pounds in deposits in the first half – that’s a 13% decline. Metro Bank said in July deposits had returned to net growth.

Under pressure to distance himself from the business he co-founded, Hill in July finally agreed to step down as chairman. Investors have been concerned about managements’ role in the loan debacle. Controversy isn’t new for Hill, a U.S.-born serial entrepreneur. In 2007, he departed as chairman and chief executive office of Commerce Bancorp Inc., in the wake of demands by U.S. regulators that the lender he founded three decades earlier stop doing business with firms controlled by his family. He sold it months later.

At Metro Bank the bad news has kept coming.  It said in its bond offer document that the Financial Conduct Authority was extending the scope of its investigation to include senior managers. The regulator is reviewing whether Metro Bank disclosed the accounting mistake in a timely fashion. Separately, the FCA and the Bank of England’s bank supervisor are also still assessing what led Metro Bank to assign risk-weightings to the loans that were far too low. 

For Metro Bank, selling out to a rival may end up being the best option. But until there’s more clarity on the probes there will be a cap on the price. The bank is trading at about 20% of tangible book value. The trust has gone and regaining it could be painfully slow. 

Willett Advisors LLC,the investment arm for the personal and philanthropic assets of Michael Bloomberg, founder and majority owner of Bloomberg Opinion parent Bloomberg LP, held shares in Metro Bank as of July 2018 that are now worth 1.5% of the company.

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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