January 23, 2019 / 7:27 AM / a year ago

Metro Bank shares crash as risky mortgage bets raise cash call fears

LONDON (Reuters) - Metro Bank (MTRO.L) shares lost a third of their value on Wednesday after the British lender announced a sharp rise in exposure to higher-risk mortgages and said profits would be hit by slowing growth, raising fears of a shareholder cash call.

Metro, set up to challenge the dominance of Britain’s big lenders after the financial crisis, reported a hefty adjustment in its risk-weighted assets (RWAs) following a review of its commercial property exposures and specialist buy-to-let loans.

It said its RWAs had risen by around 900 million pounds, ramping up pressure on its core capital ratio - a widely-tracked measure of bank strength - which now stood at 15.8 percent, down from 19.1 percent in the third quarter.

Metro Bank’s shares were trading 31 percent lower at 1,512 pence at 1250 GMT, on course for their worst day on record. Wednesday’s fall took the company’s market valuation down to less than 1.5 billion pounds.

Analysts pointed to a knock-on effect on Metro and fellow so-called challenger banks from the broader weakness in the mortgage market, but laid the blame for the share price fall on the changes to how exposed it was to risk.

“The previous fund raising via share placing really rocked investor confidence and in relation to the RWAs and how they classify those in accounting systems, that has really undermined investor confidence in the company,” CMC Markets analyst David Madden told Reuters.

Metro Bank raised 303 million pounds last year to replenish funds needed to deliver on targets to more than double its loan book within three years. It had earlier said it might need to raise more cash to support these aims by 2020.

CASH CALLING COMING?

Chief Executive Officer Craig Donaldson declined to comment on whether the bank would need a cash call to reinforce its capital buffers, but told analysts the company “will look at all options to maximize shareholder return”.

“We have a number of levers we can pull to support our capital position and we will look across that,” he added.

Analysts, however, said the cash call could have to be brought forward to this year.

“The pace of capital attrition and the RWA intensity uplift brings the question of the timing of the next capital raise to the fore,” Goodbody analyst John Cronin, said.

Metro compounded the disappointment with a downbeat assessment on margins and competition in the UK mortgage market.

“We are operating in a very competitive environment and we continued to see that come through. We have definitely seen a softening of mortgage margins,” Donaldson told analysts.

Lenders in Britain also expect demand for mortgages and credit card lending to fall by the greatest extent in several years, a Bank of England survey showed, adding to signs of an economic slowdown before Brexit.

FILE PHOTO: A member of Metro Bank's staff poses for a photograph in the vault of their new branch in Slough, southern England May 3, 2013. REUTERS/Eddie Keogh

“In light of macroeconomic risks, the company did see a change in customer behaviour through the fourth quarter,” Donaldson said.

The bank’s full-year underlying pretax profit more than doubled to 50 million pounds. However, that represented a 9 million pound miss against forecasts.

Deposits came in at 15.7 billion pounds versus a 16.3 billion pounds forecast, with growth slowing to 6 percent quarter-on-quarter, compared with 7.8 percent at the third quarter stage, analysts at Goodbody said.

Reporting by Noor Zainab Hussain in Bengaluru and additional reporting by Shashwat Awasthi; Editing by Keith Weir

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