The U.K.’s embattled Metro Bank has launched talks to sell a third of its mortgage book in an urgent attempt to shore up its balance sheet.
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LONDON — The U.K.’s Metro Bank will likely struggle to raise fresh capital to shore up its balance sheet, according to analysts, who outlined bleak prospects for the beleaguered bank.
A number of ratings agencies and investment banks have downgraded the bank’s stock following a turbulent 24 hours in which its shares were briefly suspended from trading twice after plunging more than 29% from Wednesday’s close.
Metro Bank reversed its losses Friday and was trading up around 34% at 12:55 p.m. London time.
The turmoil came amid reports that the embattled bank was seeking to raise up to £250 million ($305 million) in equity funding and £350 million of debt. Metro Bank confirmed in a statement early Thursday that it was considering “how best to enhance its capital resources.”
Late Thursday, reports emerged that the bank was in talks to sell a third of its mortgage book. Rival banks including HSBC, Lloyds Banking Group and NatWest Group are now being sounded out to buy around a £3 billion chunk of its mortgage book, according to sources who spoke to Sky News and the FT.
Selling the assets would reduce the bank’s earnings but also sharply reduce the amount of capital it is forced to hold.
Metro Bank did not immediately respond to CNBC’s request for comment on the reports; nor did any of the rival banks cited.
However, analysts said the bank’s fund-raising prospects did not look good.
Investment bank Stifel on Friday downgraded the stock from “hold” to “sell,” saying it thinks there are “no easy solutions for the bank and risks to the bonds remain skewed to the downside.” It noted that the bank could be nationalized under the Bank of England’s resolution scheme and then sold on, either as a whole or in parts.
“We think at this point the bank is in a difficult position, with capital needs potentially of up to a billion over the next two years,” the analysts said, adding that the bank is just about breaking even or marginally profitable under “currently benign market condition.”
Barclays Bank also downgraded the stock to underweight on Friday.
Meanwhile, Fitch Ratings on Thursday placed the bank on “ratings watch negative” based on its assessment that “short-term risks to the UK challenger bank’s business model stabilization, capital buffers and funding have risen.”
A challenge to traditional banking
The developments mark the latest phase in an ongoing saga for Metro Bank, which launched in 2010 with a pledge to challenge traditional banking in the wake of the financial crisis.
Last month, the Bank of England’s main regulator, the Prudential Regulation Authority, suggested that it was unlikely to allow the lender to use its own internal risk models for some mortgages.
The bank’s chair Robert Sharpe was called in on Thursday to meet officials from the central bank’s regulatory authority, as well as the Financial Conduct Authority (FCA), according to the FT, which cited people briefed on the situation.
The sources said it was the latest in a series of contacts between regulators and the bank over the past month as its share price almost halved.
When contacted by CNBC, the Bank of England declined to comment on the meeting.
Limited risks of contagion
Shares of Metro Bank have lost around two-thirds of their value since the middle of February. The bank was valued at £87 million as of the Wednesday close, according to Reuters.
Given its relatively low market cap, ratings agency DBRS Morningstar, which holds no rating on the bank, said in a note that Metro Bank’s ability to access external financing will be “highly constrained.”
However, it added that the bank’s difficulties were unlikely to have a broader impact on the U.K.’s financial sector due to its size and idiosyncratic issues.
In 2019, the bank reported a serious miscalculation of its risk-weighted assets, damaging its reputation and resulting in fines of £10 million and £5 million from the FCA and the PRA, respectively.
In the meantime, short sellers have been tapping into the bank’s misfortunes. Investors betting against the bank have gained £4.8 million so far in 2023, and £2.5 million in October alone, according to financial analytics firm Ortex.
“The short interest in Metro is very high,” it said in a note. “ORTEX currently estimates that 9.35% of the freely tradable shares are on loan and most likely shorted.”