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Metro Bank Bond Raise Failure

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#1

Metro Bank failed to raise £200m-£250m yesterday despite offering 7.5% interest in this low interest rate environment. They pulled the offer ultimately.

I’ve had my doubts about just how much real challenge there is from challenger banks and for me all the signs show that their challenge is stalling.

It wouldn’t surprise me if they don’t end up being absorbed into traditional banks just as the ‘Supermarket Mortgage’ seems destined to be.


#2

Eadwig,

I agree. One also fears for many of these “challenger banks” if UK sees a longer recession. A good number may seriously struggle to survive. This below from FT.com a few months ago. It’s sobering reading. Of note, the fundamental flaws of Metro Bank were again highlighted. - Regards. Edit: typo.

https://www.ft.com/content/9482944c-8e8e-11e9-a24d-b42f641eca37

"Bank of England finds UK challenger banks cut corners. Regulator says new lenders are ‘overly optimistic’ in risk management.

Caroline Binham and Nicholas Megaw in London JUNE 14, 2019:

"The Bank of England has found widespread weaknesses among the UK’s challenger banks in stress tests that showed new lenders cutting corners in an aggressive pursuit of growth.

A senior regulator at the central bank wrote to chief executives this week, ordering them to tighten standards and correct “overly optimistic” risk modelling.

In what was for some of them a damning assessment, the BoE found that many new lenders displayed an “inability to explain assumptions” in their stress-test models and an “aggressive” focus on growth, even though they tend to make riskier loans.

The intervention shows that regulators are concerned about the behaviour of the challenger banks, whose rise has been encouraged in a bid to loosen the dominance of the big five high street lenders.

It comes after a scandal at Metro Bank, which had to slash growth plans and turn to investors for a £375m emergency share issue after admitting it had misclassified loans and did not hold sufficient capital.

John Cronin, an analyst at Goodbody & Co, said the PRA’s findings would “serve to reconfirm negative biases towards challenger banks in the case of some market participants”.

The confidential BoE stress test reviewed 20 fast-growing, new UK banks and other deposit takers. It found that the banks were underestimating potential loan losses in a downturn, lulled by the “relatively benign credit conditions” that have existed since they were created.

“Most fast-growing firms were overly optimistic about the potential impact of a stress scenario on their business,” wrote Melanie Beaman, the BoE’s senior supervisor, in the letter. “We expect all firms to demonstrate effective engagement and challenge by senior management and boards, with stress testing integrated into the business.”

Since the financial crisis, politicians, policymakers and regulators have tried to break the monopoly of high street banks as part of efforts to boost competition and avoid having institutions that are “too big to fail”.

The PRA has given banking licences to more than a dozen new lenders in recent years in an effort to encourage competition. However, these challengers have struggled to break the stranglehold of the big five — HSBC, Lloyds, Royal Bank of Scotland, Barclays and Santander.

From a more general review conducted at the same time, the BoE observed that challengers tended to have high risk appetites but with modelling that did not necessarily reflect this. Some have particularly weak underwriting standards for commercial loans.

The PRA did not name which 20 challengers it reviewed, although all had a balance sheet of at least £750m, a growth rate of at least 10 per cent since 2010, or since they were created, or a focus on commercial lending.

The test used the same doomsday scenario as for the BoE’s published annual stress test of high street banks — a 4.7 per cent drop in UK gross domestic product, with a 40 per cent drop in commercial property prices and a 33 per cent fall in residential property.

The PRA said that given some challenger banks were so new, weaknesses were “not unexpected”.


#3

Going back a few years, many posters on here, was telling us not so clever posters that the challenger banks will be giving the top 4 Banks a real challenge in the future ?

Funny that

I must admit I bought 500 Metro shares at 392p, I must of been drunk at the time, If I am honest


#4

Not me! Not that I remember anyway.

With the right financial backing you would think a challenger bank should do well in the UK because all the traditional incumbents such as LLOY, BARC, HSBA and RBS must all have massive pension obligations which, like all other long-standing businesses, have been calculated using bad actuary data.

All else being equal, that should give a new bank with some marketing flare the edge. It seems to in every other sector that I can immediately think of.

Not housebuilders of course … they use contract labour to avoid such long-term risks.


#5

Not sure that the problem here is about “Challenger Banks” more about “good banks” & “bad banks” from a financial operational perspective.From the customer reviews Metro Bank seems to be quite well regarded(perhaps it is easy to borrow here!); but I think behind the counter in the back office it is a shambles.
They don’t seem to know who to lend to,what the credit risk is,how to price it etc.
As a value investor I should be tempted by Metro as I think at around £2 the shares are selling at around 20 to 25% of book asset value but I fear the quality of the loan book is dire and impairments & perhaps new share issues to keep it afloat will dilute NAV and its high overheads will further reduce prospects for shareholders.


#6

I own a small slug of the 5.5% June 2028, which are down to day, but now as much as the equity. I’m not sure I’d want to want the equity, but in a portfolio of 40+ fixed interest holding I was happy to have punt.
I agree with much of what you say, poor risk management and poor execution. If their target was £200m, and they’d got £175m commitment then maybe they’ll come back pretty soon to the table.
They might have bulked at the 7,75% coupon, but I’ve certainly got other “financials” paying higher coupons with much better records on execution. In fact, I’d say much better businesses.

DL


#7

Maybe Lloyd’s Anitiono can buy us out

Give me 2000 Lloyd’s shares for my 500 metro shares any day


#8

A takeover is a real possibility by one of the big 5 UK banks but at what price?

It´s a heavily shorted stock thus it could get seriously volatile. What you want to happen might be the exact opposite to what actually happens this is the danger there may well be short term market maker spoofing (artificially causing the price to go lower) this is what you have to be careful of with such shorted stocks. The quality of the loan book will only be known 2/3 years down the line

Not forgetting what is happening in the U.S. repo markets at the moment, with the odd story focussing on JP Morgan having liquidity problems. Didn´t one Irish bank last week warn how hard the credit markets were becoming?


#9

I’ve had my doubts about just how much real challenge there is from challenger banks and for me all the signs show that their challenge is stalling.

So what about all the troubles in the U.S. repo market doesn´t this signal real trouble in world credit markets? $100bn a night, we´ve nearly seen $0-5 trillion QE printed in a week alone! Bank of Ireland warning last week how tough the credit markets had become. What you fail to ignore (doesn´t surprise me) is a bond bubble in general that has become grossly over inflated. If 7.5% is not enough to justify risk how many more bonds are out there that run the real risk of default? When bond defaults start to occour it could be absolute carnage. Earnings have started to fall in U.S. markets no wonder the repo markets have started to go into panic mode. This is 2007-08 again exept this time it´s probably more over inflated junk bonds that are being bundled together.

All QE has done is inflate a bond bubble & where the notion of risk is absolutely lossed. Once you turn on the QE taps it´s impossible to turn off.