April 25, 2018 / 6:48 AM / 6 months ago

Metro Bank shares tumble as dwindling capital takes shine off profits

(Reuters) - Britain’s Metro Bank (MTRO.L) said on Wednesday it expected to issue up to 250 million pounds of new debt this year, stoking concerns it may need to raise even more capital to challenge the country’s biggest banks.

Shares in Metro Bank, which was founded in 2010 to help break up the dominance of Britain’s biggest banks, were trading 11.2 percent lower at 31.24 stg by 0937 GMT after flagging the likely fundraising in its first quarter results.

Keefe, Bruyette & Woods analysts had expected 250 million pounds of 5 percent sub-debt in the first quarter of 2019.

Goodbody analyst John Cronin said institutional shareholders could tire of cash calls, especially because the lender’s share price has remained relatively flat since its last capital raise in July 2017.

Concerns about capital took the shine off much improved results. Underlying pretax profit rose to 10 million pounds ($14 million) in the three months to March 31, compared with 2 million pounds a year earlier, driven by strong lending growth and a rise in customer numbers.

“The money we’ll be raising is purely growth capital,” Metro’s CEO Craig Donaldson told Reuters. “We are profitable, we are investing from our profit. We don’t need to raise any money for that.”

Metro Bank’s common equity tier-one capital ratio (CET1) - a key measure of financial strength - was 13.6 percent.

The CET1 capital ratio for Britain’s banking sector as a whole was 14.9 percent in the final quarter of 2017.

“Despite the company’s efforts to assuage on capital concerns by referencing a Tier 2 debt issuance in FY18 we believe it is without question that more CET1 capital will be needed – and we expect that this could come in July again,” said Cronin.

“The standout negative today is capital – with 170 bps of CET1 capital ratio erosion in 1Q (more than we had expected) ... the timing of an equity capital raise has to be getting closer,” Cronin added.

The company said first quarter lending rose 66 percent to 11 billion pounds, helped in part by the acquisition of a mortgage portfolio. Customer accounts rose by 88,000 to 1,305,000.

Metro Bank also said its bid for a share of Royal Bank of Scotland’s (RBS.L) 835 million pounds remedies package was progressing. The funds, set aside as a condition of RBS’s state aid, will be divided up among smaller lenders to help them compete more effectively with the taxpayer-backed bank.

Reporting by Noor Zainab Hussain in Bengaluru; Editing by Sinead Cruise and Elaine Hardcastle

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