Vernon Hill Has More Than a Lot to Do at Metro

(Bloomberg Opinion) -- It’s been a brutal few weeks for Metro Bank Plc. The nine-year-old British lender founded by the controversial U.S. entrepreneur Vernon Hill has lost more than half of its value after disclosing an accounting blunder.

Behind the latest plunge was news on Tuesday of a U.K. regulatory probe into the accounting fix and plans by the bank to raise 350 million pounds ($466 million) in an underwritten share sale. That fresh money to bolster the balance sheet is effectively in the bag should provide some comfort. But before dipping in investors would be wiser to wait for more clarity – or a cheaper stock.

For all of Chairman Hill’s reassurances on Tuesday that the model is “working great,” and that the company has “done a lot” this year, a price tag of about 85 percent of book value looks expensive given the magnitude of the uncertainties ahead – European banks' median valuation is 70 percent of book value, according to Bloomberg Intelligence. Metro Bank broke new ground when it became the first new name on the U.K. high street in a century. It may be the first to test depositor confidence since the financial crisis.

For starters, it isn’t yet clear who exactly spotted that some assets had been assigned a risk weighting that was too low. Was it the regulators or the bank?  Establishing who knew what when, and the speed of the bank’s response will be critical to gauging how severely the officials could come down on it. Metro on Tuesday revealed that the PRA and Financial Conduct Authority are now investigating its approach to classifying assets. Chief Executive Officer Craig Donaldson told Bloomberg News the board didn’t want him to resign but management changes cannot be ruled out, as well as potential fines.

Then there’s the hit from the accounting fixes on the model itself. The changes led to a one-off increase in risk-weighted assets of about 900 million pounds; risk weights in the mortgage book have increased to an average of about 41 percent from an average of 36 percent, according to Citigroup Inc. analysts.

What’s more, the bank said it won’t get Advanced Internal-Rating Based accreditation for residential mortgages before 2021, two years later than initially expected, which would have reduced the amount of capital Metro would have had to hold against the loans. It’s possible that’s the result of the fresh regulatory concerns.

Metro has sought to expand by adding branches and deposits, boosting its presence in home lending and opening up branches across southeast England, all while Britain’s big four retreat. That plan is now being dialed back.

Willett Advisors LLC, the investment arm for the personal and philanthropic assets of Michael Bloomberg, held a 2.7 percent stake in Metro Bank as of July 2018. Bloomberg is the founder and majority owner of Bloomberg LP, the parent of Bloomberg News.

In three years, Metro Bank deposits have tripled to 15.7 billion pounds. While it boasts of “sticky” funds, more than half of deposits are from small and medium sized companies which tend to be more fickle than retail depositors in hard times. And with good reason – corporate deposits don’t come with a state guarantee, as consumer deposits do. Even the bank’s more moderate projection of 20 percent deposit growth seems hard to achieve in light of the accounting uncertainties and the economic backdrop.

While the bank saw underlying pretax profit soar 140 percent to 50 million pounds in 2018, both the industry and the company-specific challenges cloud the outlook. Net interest margins are coming under pressure and the economic slowdown won’t help.

The emergence of two big new investors in recent weeks – Hound Partners and the manager of the Sequoia Fund – had raised hopes a floor in the stock would be found soon. It’s not out of the woods yet.

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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