Metro Bank shares: where next after the rescue deal?

Metro Bank (LON: MTRO) shares fell to as low as 34p a few days ago, down from an IPO price of 2,000p and a record 4,855p in March 2018. The challenger bank has now recovered slightly to 50p per share as a result of a hastily put together rescue package — but where next?

Metro Bank rescue

In brief, Metro agreed a deal on Sunday that includes a £325 million capital raise, significantly diluting shareholders, and also £600 million in debt refinancing. For context, the bank currently has a market capitalization of circa £86 million.

This £325 million capital raise includes £150 million of new equity and £175 million of new MREL issuance, with the bank arguing that the entire capital package ‘significantly strengthens CET1 ratio, takes Metro Bank out of the CRD IV Combined Buffer and is expected to support Metro Bank's delivery of RoTE in excess of 9% in 2025 and low double-digit to mid-teens thereafter over the medium term.’

As part of the plan, the company is benefitting from an equity raise led by Colombian billionaire Jaime Gilinski Bacal’s vehicle Spaldy Investments. Metro’s largest shareholder is contributing £102 million — which will see Spaldy increase its shareholding from 9% to 53% of shares in issue.

CEO David Frumkin thinks that ‘today's announcement marks a new chapter for Metro Bank, facilitating the delivery of continued profitable growth over the coming years… we will continue to develop the Metro Bank offer to provide the digital and physical banking services our customers expect.’

Where next for Metro Bank shares?

The bank argues that the new funding package will provide an ‘opportunity to grow assets significantly over the coming years, via a gradual shift in asset side growth towards specialist mortgages and commercial lending to optimise risk adjusted returns; supported by continued success in raising deposits and driving current account growth.’

Specifically, Metro is already in discussions to improve its CET1 ratio by selling up to £3 billion of residential mortgages — and it also notes that Q3 2023 trading has continued to be positive. The bank has made a statutory profit after tax, and there is continued momentum in Personal and Business Current Account growth and customer acquisition.

For investors getting flashbacks of 2008, or even the more recent Silicon Valley bank/Credit Suisse crises, it’s worth noting that problems at Metro date back to 2019. At the time, the bank revealed it had miscalculated the risk weighting on some of its mortgages, essentially leaving it without sufficient capital to back the loans.

This ended with significant fines, the exit of the then CEO and CFO — and four years later the regulator still hasn’t approved Metro’s internal model to calculate its regulatory capital requirements.

This was the key problem requiring the capital raise, and essentially, means Metro’s problems are unique to the bank and unlikely to be part of any systemic issue. Metro was operating at the extremes of its capital requirements, and any delay to increased funding would have meant pausing lending, harming future growth.

However, the bank still has 4,000 employees who together contribute to circa 45% of its total costs — and as Metro has agreed to cut £30 million of costs a year from 2025, Shore Capital analyst Gary Greenwood ‘would be surprised if some of the cost cutting doesn’t involve employee impact.’

Several analysts consider that Metro retains several problems, including its expensive branch model, but the bank thinks that shifting into higher margin lending such as the aforementioned commercial loans and specialist mortgages could offset the expense.

For context, Frumkin is putting £2 million into the rescue deal — £700,000 more than his £1.3 million pay package in 2022. In a call on Monday, the CEO argued that ‘there is nothing wrong with the Metro business model. This bank is profitable, will be profitable and its profitability will grow…we just need to be bigger, and we now have the capital to do that.’

The market will be the judge.

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