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 — According to analysts, the U.K.’s Metro Bank will face challenges in raising fresh capital to strengthen its balance sheet. The bank’s stock has been downgraded by ratings agencies and investment banks after its shares experienced significant volatility, including two temporary suspensions from trading. Metro Bank’s share price fell more than 29% from Wednesday’s close.
Metro Bank managed to recover some of its losses and saw an increase of around 34% in its stock price at 12:55 p.m. London time on Friday.
The upheaval occurred amid reports that the troubled bank was looking to raise £250 million ($305 million) in equity funding and £350 million of debt. Metro Bank confirmed on Thursday that it was exploring options to enhance its capital resources.
Later on Thursday, it was revealed that the bank was in discussions to sell a third of its mortgage book. Rival banks, including HSBC, Lloyds Banking Group, and NatWest Group, are being approached to potentially acquire a £3 billion portion of Metro Bank’s mortgage book, as reported by sources from Sky News and the FT.
Although selling the assets would decrease the bank’s earnings, it would also significantly reduce the amount of capital it is required to hold.
Metro Bank has not responded to CNBC’s request for comment on the reports, nor have the cited rival banks.
However, analysts have expressed skepticism about the bank’s prospects for fundraising.
Stifel, an investment bank, downgraded the stock from “hold” to “sell,” noting that it sees no easy solutions for the bank and that risks to the bonds remain skewed to the downside. Stifel also mentioned the possibility of the bank being nationalized under the Bank of England’s resolution scheme and then sold as a whole or in parts.
Barclays Bank also downgraded the stock to underweight.
In addition, Fitch Ratings has placed the bank on “ratings watch negative,” expressing concerns about short-term risks to the bank’s stabilization, capital buffers, and funding.
A challenge to traditional banking
Metro Bank launched in 2010 with the aim of challenging traditional banking in the aftermath of the financial crisis. However, it has faced ongoing difficulties.
Last month, the Bank of England’s Prudential Regulation Authority indicated that it would unlikely allow the bank to use its own internal risk models for certain mortgages.
On Thursday, the bank’s chair, Robert Sharpe, met with officials from the central bank’s regulatory authority and the Financial Conduct Authority. This meeting was part of a series of contacts between regulators and the bank over the past month as its share price nearly halved.
The Bank of England declined to comment on the meeting when contacted by CNBC.
Limited risks of contagion
Metro Bank’s shares have lost about two-thirds of their value since mid-February. As a result, ratings agency DBRS Morningstar, which does not currently rate the bank, stated that Metro Bank’s ability to access external financing will be severely limited.
However, it also stated that the bank’s difficulties are unlikely to have a broad impact on the U.K.’s financial sector due to its size and unique issues.
In 2019, the bank faced a significant miscalculation of its risk-weighted assets, leading to fines from the FCA and the PRA.
Meanwhile, short sellers have capitalized on the bank’s misfortunes. According to financial analytics firm Ortex, investors betting against the bank have gained £4.8 million so far in 2023, with £2.5 million gained in October alone.
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