As is often easy to forget, humanity never really progresses in a straight line. From unpredictable conflict to unexpected technological advancement, the road of history is far fuller with roundabouts and U-turns than we often feel in the modern day. That is why when the Financial Services Authority granted Metro Bank its license just over 9 years ago, some degree of apprehension would be appropriate regarding its future growth path. This would prove to be well-placed, as just a few months ago Metro was embroiled in an accounting scandal that rocked the firm to its very foundations.
The issue arose in Metro’s miscategorisation of some loans in its commercial loan portfolio. Many commercial property loans and loans to buy-to-letters were deemed as less risky than they actually were, when they should have been among the bank’s risk weighted assets. Around 10% of Metro’s loan book was affected. The significance of this cannot be understated; it implies that Metro had far lower capital ratios than initially thought, and so the firm was more prone to default risk. Even at the end of March, the company’s tier 1 capital ratio sat at 12.1%, only a tenth of a percentage point above the company’s self-imposed guidelines. The events triggered a 75% decrease in share price within a few months of the announcement of the miscategorisation. Metro’s share price currently sits at around £6.30 a share, having dropped to lows of £4.75.
The question, now, is what will become of the challenger bank, now that the dust of the cataclysm that befell them is somewhat settling on the horizon. Metro did indeed raise £375m in equity finance in the span of three hours to help them meet regulatory requirements, however to say the company has been unaffected would be a gross understatement. Deposits at the firm fell by 4% in the first quarter of 2019 to £15,095,000,000, and for a business in an industry that is so reliant on customer sentiment, that spells worrying news indeed. Although the raising of capital may assuage some of this fund outflow, it may take quite a while before the firm can recapture the confidence (and thus, the funds) of the public in the way in which it once did. Whether it is able to do this is soon to be seen, and if it does (as we can see from when its next quarterly results come out) we may be more confident of a turnaround.
Moreso, although a pioneering entrepreneur in his own right, Vernon Hill (the co-founder of Metro) does not exactly have a squeaky clean resumé. He has often been criticised for using Metro Bank funds to pay family members, and the recent fiasco will help convince no-one of his abilities to manage shareholder capital. Having already just recently survived a shareholder revolt, the 73-year-old is not the most popular man in any room. How he navigates this personal mini-crisis of investor confidence and whether he can convince existing shareholders that he is the man to lead the company into the future is a key issue to be wary of before investing in the firm. It should be noted that only 12% of shareholders opposed his re-election as chairman, indicating that this issue may not be as significant a factor to consider as the one that preceded it. However, in the event of another gaffe this would again come into the limelight, almost definitely with far more severity.
Finally, an existential issue to bring up relates to Metro’s customer service. The bank was set up to challenge existing paradigms of how retail banking “should” be in the UK. For an organisation like this you’d expect it to have pretty good customer service (at least in comparison to its rivals). This makes it all the more surprising that Metro Bank, along with Barclays, ranked lowest of all lenders on customer service and the propositions they offer. This issue is so serious because it fundamentally challenges the notion that Metro are executing their disruptive business model with any degree of success. Vernon Hill would be the first to tell you that acquiring fans is more important than making profits in the short run, however it’d be hard for him to be able to do either when customer service threatens both acquisition and retention of depositors. This is a key indicator of whether the bank can reverse its fortunes in the future; its customer service ratings will be a key barometer of whether it can successfully execute its business model in the long-term.
Overall, then, the loan misclassification fiasco at arguably the UK’s most prominent challenger bank has damaged its credibility with shareholders and depositors alike. The three factors described above, namely total deposit numbers, Vernon Hill, and customer service ratings are in my opinion the three biggest issues to consider when debating investment in the firm. At this critical juncture in Metro Bank’s history, all is to play for, however that can be as much a curse as a blessing.