Metro Bank PLC (LON:MTRO) had a poor first-half, but things could have been worse. Statutory profit for the first six months slumped to £3.4 million from £20.8 million, but the sharp drop was partially because of transformation costs and expenses relating to the accounting error that occurred earlier this year.
Underlying profit, which strips out once-off costs, only declined by 43%. Reputational damage prompted deposit withdrawals of £2 billion, and that was largely due to a limited number of commercial clients. Net interest margin slipped to 1.62% from 1.85%, and this is worrying, but at least it common to the banking sector as a whole.
On an annual basis, the loan book grew by 25%, and fee and other income grew by 61%. According to the Competition and Markets Authority survey, Metro is the top bank in terms of service, so the group is at least doing some things right. The client base is still growing, albeit at a slightly slower pace than last year.
The search to replace Vernon Hill as chairman has started, and Mr Hill will stay on until his successor is found. Mr Hill is synonymous with the accounting incident, and drafting in some new blood should help to restore some customer confidence. The bank’s common equity tier ratio improved to 15.8%, from 13.1% in December, and it is encouraging to see the capital raisings are being put to good use.
Earlier in the week, Metro Bank announced it was selling off £521 million worth of mortgages to Cerberus Capital. The move comes after the struggling group raised £375 million a few months ago in order to beef up its balance sheet. The bank’s financial position suffered as a result of an accounting error that underestimated its loan book exposure. The fact Metro Bank is still selling off assets in order to raise capital suggests it is not out of the woods yet.
The accounting error not only rocked investor confidence, it also damaged client confidence as a ‘small number of large commercial and partnership customers’ ended their relationship with the bank. In the post credit crisis environment, the perception of financial stability is crucial, and the need to raise capital dented the firm’s reputation.
In May, Metro Bank confirmed it got off to a poor start to the new financial year as first-quarter profit before tax halved to £4.3 million, and net interest margin was 1.64%, and that compares with the 1.76% in the final-quarter of 2018. The drop off in client base due to the accounting scandal, prompted a 4% drop in the number of clients on a quarterly basis. In the grand scheme of things, the bank has enjoyed massive growth since it was founded in 2010, and in the last financial year, the revenue jumped by 51%, and the loan book increased by 64%.
Metro Bank are the new kid on the block and its aim is to take on the established banks, but given the political upheaval in relation to Brexit, interest rates are likely to remain low, and that will should make it harder for banks to make money from lending due to the flattening of the yield curve, and that is likely to hit Metro hard has it has a relatively small client base.
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