Metro Bank faces risks relating to volatility in UK real estate
A significant portion of Metro Bank’s revenue is derived from interest and fees paid on its mortgage portfolio. As of 30 June 2019, £10,677 million, or 71 per cent. (31 December 2018, £9,913 million or 69 per cent.; 31
December 2017, £6,448 million or 67 per cent.), of Metro Bank’s loans and advances to customers were retail, with 98 per cent.; 97 per cent.; and 97 per cent., respectively, of that being mortgages. In addition, Metro Bank
Intends to rebalance the mix of its lending to increase the share of mortgages in its portfolio to between approximately 70 per cent. and 75 per cent. by 2023, increasing its dependence on the strength of the UK residential mortgage market. Downturns in the UK economy have had a negative effect on the UK housing market. Generally, a decline in house prices in the UK could lead to a reduction in the recovery value of real estate assets held as collateral in the event of a customer default, and could lead to higher impairment provisions, which could reduce Metro Bank’s capital and its ability to engage in lending and other income-generating activities. Conversely, a significant increase in house prices over a short period of time could also have a negative impact on Metro Bank by reducing the affordability of homes for buyers, which could lead to a reduction in demand for new mortgages. Sustained volatility in house prices could also discourage potential homebuyers from committing to a purchase, thereby limiting Metro Bank’s ability to grow its mortgage portfolio.
Metro Bank’s mortgage portfolio, like its customer base, is concentrated in London and its surrounding areas. 68 per cent. and 82 per cent. of Metro Bank’s retail mortgage portfolio and commercial lending, respectively, was concentrated in Greater London and South East England as of 30 June 2019. Metro Bank has benefited from the fact that in London, prime residential property has been regarded as a preferred outlet for international capital, in part owing to London’s status as a political and financial centre. Although residential property price growth has been largely sustained in recent years, following the June 2016 Brexit referendum, UK house prices, particularly in Greater London and South East England, have in many instances either stagnated or declined. In addition, the buy-to-let market in the UK, which is predominantly dependent upon yields from rental income to support mortgage interest payments and capital gains from capital appreciation, and which has in the past contributed to robust growth in housing prices that is beneficial for Metro Bank’s portfolio, has also slowed (19 per cent. of Metro Bank’s mortgage portfolio was retail buy-to-let as of 30 June 2019). Falling or flat rental rates and decreasing capital values, whether coupled with higher mortgage interest rates or not, could reduce the potential returns from buy-to-let properties. Furthermore, the UK Government introduced new rules in 2017 that have tempered the market for buy-to-let mortgages, including the gradual removal of tax relief on mortgage interest for buy-to-let landlords by 25 percentage points a year, which may result in lower demand for buy-tolet property investments. The UK Government also increased stamp duty payable on second homes and certain buy-to-let homes by 3 per cent. starting in April 2016.
These factors have adversely affected the number of homes sold and, consequently, reduced demand for related mortgages.
Furthermore, the UK Government’s intervention into the housing market may also contribute to volatility in house prices, both directly through buyer assistance schemes and indirectly, until January 2018, through the provision of liquidity to the banking sector under the Bank of England and HM Treasury’s Funding for Lending scheme (“FLS”) and until February 2018, the Bank of England’s Term Funding Scheme (“TFS”). The closure of the FLS and TFS may impact the future availability of mortgage lending and, consequently, house prices.
Similarly, a sudden end to buyer assistance schemes could lead to a decrease in house prices, or conversely, a continuation could lead to inflation in house prices. In addition, the Mortgage Market Review (“MMR”) came into force in April 2014 and amended certain existing rules on mortgage lending, including increased verification of income, assessment of affordability, interest rate stress tests and assessments of future changes of borrowers’ income. These factors may negatively affect mortgage supply and demand. The future impact of these initiatives on the UK housing market and other regulatory changes or UK Government programmes, such as the implementation of the EU Mortgage Credit Directive in 2016, is difficult to predict. Volatility in the UK housing market occurring as a result of these changes, or for any other reason, could have a material adverse effect on Metro Bank’s business, financial condition and results of operations.
Metro Bank is subject to risks resulting from the UK’s planned withdrawal from the European Union (“Brexit”)
In March 2017, the UK gave notice of its intention to leave the EU under Article 50 of the Treaty on EU, and the United Kingdom is still in the process of determining what form that exit will take.
As of the date of this Base Prospectus, there is no certainty that there will be a ratified withdrawal agreement by 31 October 2019, and it remains the default position that the United Kingdom will leave the EU on this date without an agreement in place, unless a further extension is requested by the United Kingdom government and granted by the EU. If the United Kingdom were to leave without an agreement, this could have a significant and immediate impact on the United Kingdom’s day-to-day interactions with Europe, including the flow of funds between the two.
The UK’s planned withdrawal from the EU has also adversely affected the UK’s credit rating, with S&P Global Ratings Europe Limited and Fitch downgrading the UK to an AA rating, and Moody’s Investors Service Limited downgrading the UK to Aa2. If UK economic conditions continue to weaken further, or if financial markets continue to exhibit uncertainty or volatility, including as a result of a downgrade in the credit rating of the UK
Government or the outlook of the UK banking sector, Metro Bank’s ability to continue to grow its business could be adversely impacted.
In particular, worsening economic and market conditions in the UK could result in reduced demand for Metro Bank’s products from its customers, a reduction in their deposits with Metro Bank and an increase in arrears, impairment provisions and defaults. In addition, a significant proportion of the legal and regulatory regime applicable to Metro Bank in the UK, as well as anticipated regulatory reform, is derived from EU directives and regulations. The outcome of Brexit negotiations and the way in which such laws and regulations are adopted in the UK could therefore materially change the legal and regulatory framework applicable to Metro Bank’s operations, including in relation to its regulatory capital requirements. For example, in the event of a hard Brexit, and in the absence of PRA (as defined herein) relief, the EU Capital Requirements Regulation (the “CRR”) could be on-shored into domestic UK regulation, which could have a significant impact on the UK banking industry, including an increase in the risk-weighting which UK banks assign to exposures to EU Member States. These or any other Brexit-related factors could have a material adverse effect on Metro Bank’s business, financial condition and result of operations.
Metro Bank’s business is subject to inherent risks arising from macroeconomic conditions in the UK, the eurozone and globally, both generally and as they specifically affect financial institutions As Metro Bank’s revenue is derived almost entirely from customers based in the UK, Metro Bank is particularly exposed to the condition of the UK economy. In addition, as a “high street” bank, Metro Bank’s business performance is influenced in particular by the economic condition of its customers. The GfK SE index reported that UK consumer confidence was -13 in June 2019, having fallen from -9 in June 2018. Although unemployment modestly declined in 2018, weak economic conditions in the UK could lead to an increase, which has historically resulted in a decrease in new mortgage borrowing and reduced or deferred levels of spending, as well as an increase in arrears, impairment provisions and defaults. Deterioration in economic conditions in the eurozone and globally, including instability in financial markets, may pose a risk to Metro Bank’s business, despite the fact that Metro Bank has no direct financial exposure outside of the UK and only minimal credit risk exposure outside of the UK. The UK financial markets, as well as the UK housing market, could be negatively impacted, as they have been in the past, by a number of global macroeconomic events, including ongoing concerns surrounding, for example a weakening of the Chinese economy and a decline in global commodity prices such as crude oil. The effects of these events have been felt in the UK economy and by UK financial institutions in particular, and have placed strains on funding markets at times when many financial institutions had material funding needs. Furthermore, given the interdependence between financial institutions, Metro Bank is and will continue to be subject to the risk of deterioration or perceived deterioration of the commercial and financial soundness of other financial services institutions, both in the UK and beyond. Within the financial services industry, the default of any institution could lead to defaults, liquidity problems and losses by other institutions including Metro Bank, which could have a material adverse effect on Metro Bank’s business, financial condition and results of operations.
Metro Bank faces risks associated with interest rate levels and volatility
Interest rates, which are impacted by factors outside of Metro Bank’s control, including the fiscal and monetary policies of governments and central banks, as well as UK and international political and economic conditions, affect Metro Bank’s results, profitability and consequential return on capital in three principal areas: cost and availability of funding, margins and revenues, and impairment levels.
The UK continues to experience interest rates at historically low levels. However, if the Bank of England were to begin to raise interest rates, this could also adversely affect Metro Bank. As of 30 June 2019, 31 per cent. (31 December 2018, 30 per cent.; 31 December 2017, 32 per cent.) of Metro Bank’s deposits from customers were demand current accounts, and in an increasing interest rate environment, Metro Bank may be more exposed to re-pricing of its liabilities than competitors with higher levels of term deposits. In the event of sudden large or frequent increases in interest rates, Metro Bank also may not be able to re-price its floating rate assets and liabilities at the same time, giving rise to re-pricing gaps in the short-term, which, in turn, can negatively affect its NIM (as defined herein) and revenue.
Changes in interest rates also impact Metro Bank’s loan impairment levels and customer affordability. As of 30 June 2019, 31.3 per cent. (31 December 2018, 34.0 per cent.; 31 December 2017, 40.9 per cent.) of Metro Bank’s loans and advances to customers were variable rate. As a result, a rise in interest rates, without sufficient improvement in customer earnings or employment levels, could, for example, lead to an increase in default rates among customers with variable rate loans who can no longer afford their repayments, in turn leading to increased impairment charges and lower profitability for Metro Bank. A high interest rate environment also reduces demand for loan products generally, as individuals are less likely or less able to borrow when interest rates are high, thereby reducing Metro Bank’s revenue. In addition, given that a considerable proportion of
Metro Bank’s loans and advances to customers are variable rate and repayable without penalty, there is a risk that a sudden rise in interest rates, or an expectation thereof, could encourage significant demand for fixed rate products. High levels of movement between products in a concentrated time period could put considerable strain on Metro Bank’s business and operational capability, and Metro Bank may not be willing or able to price its fixed rate products as competitively as others in the market. This could lead to high levels of customer attrition and, consequently, a negative impact on Metro Bank’s capacity to lend and therefore its profitability.
In addition, changes in interest rates can affect Metro Bank’s net interest income and margins. In August 2018, the Bank of England raised its base rate to 0.75 per cent. from the 0.50 per cent. rate that had prevailed since November 2017 (which in turn represented an increase from the 0.25 per cent. rate that prevailed until August 2016). This low interest rate environment has put pressure on NIMs throughout the UK banking industry. The sustained period of low interest rates has resulted in relatively low spreads being realised by Metro Bank between the rate it pays on customer deposits and the rate received on the loans and investments, reducing
Metro Bank’s net interest income and NIM. Metro Bank’s business and financial performance and net interest income and NIM may continue to be adversely affected by a continued low interest rate environment, particularly if, as a result of Brexit or otherwise, interest rates do not increase or are reduced further.
Any of the foregoing could have a material adverse effect on Metro Bank’s business, financial condition and results of operations.
Risks relating to the Operation of Metro Bank’s Business
Claims, investigations and litigation, and in particular recent on-going regulatory investigations by the PRA and the FCA into the circumstances surrounding Metro Bank’s adjustment of its RiskWeighted Assets (“RWAs”), could adversely affect Metro Bank’s brand, reputation and earnings
Metro Bank is subject to the risk of claims, litigation and regulatory proceedings in the course of its business.
These risks may arise for a number of reasons, including that (i) Metro Bank’s business may not be, or may not have been, conducted in accordance with applicable laws or regulations, (ii) contractual obligations may either not be enforceable as intended or may be enforced in a way that is adverse to Metro Bank or (iii) liability for damages may be incurred to third parties harmed by the conduct of Metro Bank’s business. There can be no assurance that Metro Bank will prevail in any future litigation or regulatory proceedings.
In particular, in February 2019, Metro Bank received notice that the FCA and the PRA had independently appointed investigators to review the circumstances and events that led to Metro Bank’s adjustment of its RWAs in the amount of £900 million (which resulted in a reduction of Metro Bank’s Tier 1 capital surplus by £95 million, based on a Tier 1 minimum regulatory capital requirement of 10.6 per cent. of RWAs) (the “RWA Matter”), which was announced in January 2019. In August 2019, Metro Bank received a further notice that the FCA was extending the scope of its investigation into the RWA Matter to include certain senior members of management and to cover the period from 1 June 2017 through Metro Bank’s Q4 2018 trading update on 26 February 2019. These investigations relate to Metro Bank’s regulatory reporting; the systems, controls and governance in place to ensure Metro Bank’s compliance with its reporting and disclosure obligations; and the timing and content of announcements related to the RWA Matter and the advanced internal ratings-based (“AIRB”) approach announced as part of Metro Bank’s Q4 2018 trading update in February 2019. Metro Bank may incur significant expense in connection with the resolution of these matters. Furthermore, the investigations may lead to a public censure, financial penalties or compensation payments, a variation or suspension of Metro Bank’s regulatory permissions and possible criminal and/or civil liability for Metro Bank. In addition, these matters could negatively impact Metro Bank’s brand, reputation and share price, as well as the secondary market pricing of its listed debt securities (including the Notes), and could lead to further adverse consequences, including civil litigation. At this stage, the timing and outcome of these matters cannot be predicted. Metro
Bank is working closely with the FCA and PRA and will update the market on the outcome of the investigations in due course.
The Issuer is also subject to other ongoing claims, investigations and litigation including a civil litigation with Arkeyo LLC, sanction related matters and a putative securities class action. For further details, please see the section entitled “Information of the Issuer - Litigation and Arbitration Proceedings”.
Any litigation, claims, investigations or other proceedings, whether or not determined in Metro Bank’s favour or settled by Metro Bank, could be costly and may divert the efforts and attention of Metro Bank’s management and other personnel from normal business operations. In addition, any related proceedings could adversely affect Metro Bank’s reputation and the market’s perception of Metro Bank and the products and services that it offers, as well as customer demand for those products and services, which could have a material adverse effect on Metro Bank’s business, financial condition and results of operations.
Metro Bank is reliant on the success of its brand, and it is subject to reputational harm that could damage its brand
Metro Bank’s success relies significantly on the strength of its brand. The Metro Bank brand is relatively new, and there can be no assurance that Metro Bank will be able to continue to successfully develop its brand’s reach to grow market share. This is particularly the case as Metro Bank’s strategy has been, and is expected to continue to be, reliant on its direct distribution channels in the communities it serves (comprising its highly visible stores, mobile and internet offerings, and local contact centres, together with its unique customer service proposition) to increase its brand awareness and foster deposit growth, rather than the more conventional (and costly) approach of media advertising and sponsorships adopted by other market participants.
In addition, Metro Bank believes that its brand is closely associated with its values, which emphasise customer service. Metro Bank’s values could be compromised due to competitive pressures, and Metro Bank’s brand could be damaged by reputational harm, which could arise by failing to address, or appearing to fail to address, a variety of issues, such as:
• poor customer service;
• technology failures;
• cybersecurity breaches and fraud;
• breaching, or facing allegations of having breached, legal and regulatory requirements, including in
relation to the RWA Matter;
• committing, or facing allegations of having committed, or being associated with those who have or are accused of committing, unethical practices, including with regard to sales and trading practices by the FCA and PRA;
• litigation claims;
• failing to maintain appropriate standards of customer privacy and record keeping;
• failing to maintain appropriate standards of corporate governance;
• the failure of intermediaries and other third parties on whom Metro Bank relies, such as clearing banks, third party mortgage servicing agents or partners, to provide necessary services;
• related party transactions; and
• poor business performance.
As a result, damage to Metro Bank’s brand or reputation could cause the Group to lose existing customers or fail to gain new customers, which could result in rapid and material negative operational and financial effects, including the loss of significant amounts of customer deposits.
Although Metro Bank has acquired the trade mark “Metrobank” in the UK, the “Metro” name is widely used by a variety of businesses in the UK, including other FCA-authorised businesses, and in the rest of Europe.
Consequently, there is a risk that Metro Bank’s trade mark registration for the word “Metrobank” and the wider use of the “Metro Bank” name (for which Metro Bank does not hold a trade mark) might be challenged by the owner of another similar trade mark. In the event that a challenge were to be successful, Metro Bank could be forced to re-brand under a new name at considerable cost and disruption to the business. In addition, the use of the “Metrobank” name by a bank which is not part of Metro Bank outside of the UK may confuse customers, and any damage to the reputation of banks operating with similar trade names could also be detrimental to Metro Bank.
An inability to manage risks relating to its brand for any reason could have a material adverse effect on Metro Bank’s business, financial condition and results of operations.
Metro Bank faces risks associated with the implementation of its strategy
Metro Bank has experienced an increasingly competitive environment that put pressure on its profitability and constrained its NIM. This pressure can be attributed largely to trapped liquidity of UK competitors subject to ring-fencing, macroeconomic uncertainty, continued low interest rates, increasing regulatory requirements (such as minimum requirement for own funds and eligible liabilities (“MREL”) debt requirements) and accounting changes (such as IFRS 16). Metro Bank intends to use the net proceeds of future issuances of Notes to meet its MREL requirements. The net proceeds of its May 2019 £375 million placing of ordinary shares (the “Placing”), together with future issuances of Notes, will be used to support continued growth in lending and RWAs, while investing in the expansion of stores and new technologies. This evolved growth strategy is based on the following four key pillars: (i) balancing controlled growth, profitability and capital efficiency through an integrated customer experience, (ii) improving cost efficiencies, (iii) expanding its range of services to create new sources of income and (iv) rebalancing its lending mix to optimise capital allocation and returns.
The implementation of the evolved growth strategy is subject to a number of risks, including operational, financial, macroeconomic, market, pricing and technological challenges, and there can be no guarantee that
Metro Bank will be able to achieve these goals within the timescale envisaged, or that these goals will have their desired operational effect. For example, Metro Bank had previously targeted opening approximately 100 stores by the end of 2020. Metro Bank had 68 stores as of the date of this Base Prospectus and is targeting the opening of approximately eight stores per year until 2023 (down from a previous target of approximately 20 stores per year from 2020). Metro Bank also intends to open a further 30 stores (two of which are expected to be opened in 2019) in the North of England, the staffing of which will be funded in part by Metro Bank’s grant from the C&I Fund (as defined herein). Metro Bank has committed to the BCR (as defined herein) to open these 30 stores by 2025 at the latest, although it is targeting their opening by the end of 2022. Metro Bank may also consider modifying its store layout, design and size to better fit future community and customer requirements.
However, there can be no assurance that Metro Bank store strategy will result in its existing stores increasing their contribution to Metro Bank’s profitability, and Metro Bank could further reduce its current expansion plans in light of operational, macroeconomic or other factors post having concluded the C&I investments and commitments.
The success of Metro Bank’s strategy is also dependent on it significantly increasing the number of new customer accounts, either through new customer acquisition or existing customers opening new accounts. Metro
Bank’s strategy envisages growing deposits by approximately 20 per cent. per year over the medium-term, with an emphasis on relationship current accounts and variable deposit accounts. However, there can be no guarantee that Metro Bank will be successful in gaining the number or type of deposit accounts that it seeks, which could limit its funding base and its profitability. For example, while Metro Bank targets maintaining an LTD Ratio of 85 per cent. to 90 per cent., its LTD Ratio was 104 per cent. as of 31 August 2019 (91 per cent. as of 31 December 2018).
In relation to its lending business, Metro Bank will seek to shift the mix of its loan portfolio, increasing the share of lower-risk mortgages and reducing the proportion of 100 per cent. risk weighted loans relating to commercial property. However, implementing this strategy will require management to make complex judgements, including identifying suitable borrowers for the expansion of its residential mortgage book, and structuring and pricing its products competitively. In addition, Metro Bank intends to grow its unsecured lending and credit card business (at approximately 75 per cent. RWAs) for both personal and business customers, which will increase its exposure to a higher risk asset class, albeit at higher yield and lower RWAs than commercial real estate.
Metro Bank also intends to expand income through new value-added services, particularly for small and medium-sized enterprises (“SMEs”). For example, it may broaden its online business account offerings and expand its payments and cash management offerings, including launching digital tax, accounting and other feepaying services for SMEs. However, there can be no assurance that Metro Bank will be able to price competitively, design or implement these offerings, or that its customers will take up these new services as targeted.
Metro Bank’s strategy also depends on its ability to increase cost efficiencies across its business. As part of its updated strategy, Metro Bank is targeting a reduction of its underlying cost-to-income ratio to between 55 per cent. and 60 per cent. by 2023 (compared to levels of approximately 85 per cent. to 92 per cent. in recent periods). To achieve this, Metro Bank will need to reduce expenditures for both its back and front office functions, as well as on its stores. There can be no guarantee that any of Metro Bank’s cost-saving initiatives, such as digitisation and automation programmes, will be implemented in a timely manner, or that they will produce the targeted efficiencies.
Metro Bank will also need to maintain a strong capital position to support its strategic goals. In order to meet its transitional MREL by 1 January 2020, Metro Bank intends to issue MREL-eligible debt (including the Notes) in 2019. To support balance sheet growth and to meet its end-state MREL requirement by 1 January 2022, Metro Bank also expects to issue further MREL-eligible debt ahead of 1 January 2022. There can be no guarantee, however, that Metro Bank will be able to raise MREL-eligible debt at economic pricing levels.
In addition to the Placing, Metro Bank may also pursue an additional equity capital raise in the medium-term to support its controlled growth plans. There can be no guarantee, however, that Metro Bank will be able to meet its equity fundraising targets at attractive pricing levels. If it is unable to do so, Metro Bank may be required to significantly curtail its growth plans until such time as it is able to support its growth organically, and/or through the securitisation or sale of certain assets.
The inability of Metro Bank to implement its strategy for any of the reasons noted above would require it to reevaluate its strategic plans, which could have a material adverse effect on its business, financial condition and results of operations.
Metro Bank’s business is subject to risks relating to the cost and availability of liquidity and funding
The availability of retail and commercial deposits, Metro Bank’s primary source of funding, may be impacted by increased competition from other deposit-takers, regulatory or reputational concerns, or factors that constrain the volume of liquidity in the market. For example, Metro Bank’s average deposit growth per store, per month has fluctuated each quarter between 2016 and 30 June 2019, turning negative for the first time in the first halfof 2019. See the Unaudited Interim Report 2019 for more information on relevant deposit outflows and deposit growth.
In addition, the TFS was closed to further drawdowns in February 2018. Metro Bank has TFS drawdowns that will mature in 2020, 2021 and 2022 in the amounts of £543 million, £2,778 million and £480 million, respectively, and will have to replace those funds from other sources at what may be a higher cost. Metro Bank’s ability to access retail and commercial funding sources on satisfactory economic terms is also subject to a variety of factors, a number of which are outside its control, including interest rates, liquidity constraints, general market conditions, increased competition, regulatory requirements and a loss of confidence in the UK banking system, as well as specific concerns regarding Metro Bank’s financial condition. In addition, because
Metro Bank operates a “savings promise” on retail variable products that existing customers will have access to Metro Bank’s “best rate available” for each personal variable savings account, and that new customers will not receive a more favourable rate than existing customers, the cost of Metro Bank’s deposit funding may be higher than that of its competitors. A loss in customer confidence in Metro Bank could also significantly increase deposit withdrawals.
Liquidity constraints may impair Metro Bank’s ability to meet regulatory liquidity requirements or financial and lending commitments. Failure to manage these or any other risks relating to the cost and availability of liquidity and funding may have a material adverse effect on Metro Bank’s business, financial condition and results of operations.
Metro Bank faces risks from competition
The market for financial services in the UK is highly competitive, and competition may intensify in response to consumer demand, technological changes, the impact of market consolidation and new market entrants, regulatory actions and other factors. The financial services markets in which Metro Bank operates are mature, and growth by any bank typically requires obtaining market share from competitors. Competition has placed pressure on Metro Bank’s NIM in recent years, particularly in 2018, when residential mortgages spreads tightened significantly, and Metro Bank’s NIM decreased by 12 basis points (“bps”) in 2018. While other UK banks faced similar NIM pressures in 2018, larger UK banks generally were relatively more insulated from these declines compared to smaller banks such as Metro Bank.
Metro Bank faces competition from established providers of financial services, including banks and building societies, some of which have substantially greater scale and financial resources, broader product offerings and more extensive distribution networks than Metro Bank. In addition, Metro Bank applies the “standardised” approach to credit risk, which can overestimate the capital required for certain lending portfolios, leading to higher RWAs. Certain competitors use the internal ratings-based approach, which allows them to hold less capital against their lending than the standardised approach, thus freeing up additional capital to support additional lending to customers. Metro Bank continues to progress its AIRB application and is continuing to engage with the PRA on this iterative and detailed project. While Metro Bank previously anticipated the migration to occur in the second half of 2019 with respect to its residential mortgage portfolio, based on the use and experience requirements, Metro Bank believes it is unlikely to receive PRA approval before 2021, at the earliest, and there can be no assurance that Metro Bank’s application will result in approval being granted.
Historically, Metro Bank has not incurred material traditional marketing expenditure on its products and services to raise its profile in the UK banking market. However, there can be no assurance that it will not have to do so in the future to compete more effectively and support expansion into new geographies, which could lead to increased costs associated with acquiring new customers. Also, due to their scale, many of Metro Bank’s established competitors are able to cross-subsidise their product offerings more efficiently than Metro Bank, as profits in certain businesses allow them to absorb losses for longer periods to develop other business lines. For example, more established competitors may have greater resources to devote to expanding their digital offerings than Metro Bank, which may put Metro Bank at a competitive disadvantage in attracting or retaining customers.
In addition, as a result of their large established deposit and asset base, more mature, as well as international banks are often better positioned to offer cash incentives to attract new customers, as well as higher temporary “teaser” interest rates for deposits or lower temporary rates for loans to attract new customers. Metro Bank makes very sparing use of such measures as customer acquisition tools, focusing instead on its superior service offering.
Metro Bank also faces potential competition from new banks in the UK, banking businesses developed by large non-financial companies, from other “challenger bank” entrants, and fundamentally new entrants into the UK banking sector, such as peer-to-peer lending platforms and internet-only banks.
Furthermore, Metro Bank faces competitive pressure in relation to the payment systems it uses in connection with its debit and credit cards from both established and non-traditional payments processors. Metro Bank relies on certain competitors to provide important payment clearing services, and these competitors could impose significant fees or restrictions on Metro Bank to access these systems. In addition, companies that promote disintermediation in payment systems, such as PayPal and Apple Pay, are increasingly used by customers to process merchant transactions, and these companies may capture an increased share of payment transaction revenue that would otherwise be earned by Metro Bank.
Any failure to manage the competitive dynamics to which Metro Bank is exposed could have a material adverse effect on its business, financial condition and results of operations.
Metro Bank is exposed to risks relating to relationships with intermediaries
Metro Bank relies on its network of intermediaries, such as mortgage brokers, to originate a large portion of loans for its mortgage, invoice and asset finance portfolios. If intermediaries violate applicable regulations or standards when selling Metro Bank’s products, Metro Bank’s reputation could be harmed. In addition, Metro
Bank may fail to develop products that are attractive to intermediaries or otherwise not succeed in developing relationships with intermediaries. Furthermore, Metro Bank could lose the services of intermediaries with whom it does business; for example, as a result of market conditions causing their closure or intermediaries switching to Metro Bank’s competitors due to higher commissions or other incentives. The loss or deterioration of Metro Bank’s relationships with its intermediaries could have a material adverse effect on Metro Bank’s business, financial condition and results of operations.
Metro Bank is subject to risks concerning customer and counterparty credit quality
Metro Bank has exposures to counterparties and obligors whose credit quality can have a significant adverse impact on Metro Bank’s earnings and the value of assets on Metro Bank’s balance sheet. As part of the ordinary course of its operations, Metro Bank estimates and establishes provisions for credit risks and the potential credit losses inherent in these exposures. This process, which is critical to Metro Bank’s results and financial condition, requires expert judgements, including forecasts of how changing macroeconomic conditions might impair the ability of customers to repay their loans. Metro Bank may fail adequately to identify the relevant factors or accurately estimate the impact and/or magnitude of identified factors. In respect of Metro Bank’s interest-only mortgage book, these assessments may be incomplete. For example, Metro Bank lacks information on customer repayment vehicles for certain of its interest-only mortgage holders. As a result, Metro Bank has reduced visibility of future repayment issues in respect of its interest-only mortgages, which limits Metro
Bank’s ability to estimate and establish reserves to cover exposures resulting from when customers are unable to repay interest-only loans at their maturity. Furthermore, there is a risk that customers will be unable to meet their commitments as they fall due as a result of customer-specific circumstances, macroeconomic disruptions or other external factors. The failure of customers to meet their commitments as they fall due may result in higher impairment. Further, the impairment requirements under IFRS 9 “Financial Instruments”, which Metro Bank began to apply from 1 January 2018, increased the complexity of Metro Bank’s impairment modelling and result in earlier recognition of credit losses than under previous standards. Such measurements involve increased complexity and judgement and impairment charges may become more volatile and could have a material adverse effect on Metro Bank’s business, financial condition and results of operations. Similarly, deterioration in customer credit quality and a resulting increase in impairments could have a material adverse effect on Metro Bank’s business, financial condition and results of operations.
Concentration of credit risk could increase Metro Bank’s potential for losses
Substantially all of Metro Bank’s business relates to customers in the UK and, more specifically, predominantly those in London and the South East of England. 68 per cent. and 82 per cent. of Metro Bank’s retail mortgage portfolio and commercial lending, respectively, was concentrated in Greater London and South East England as of 30 June 2019. If a disruption to the credit markets or an adverse change in economic or political conditions were to have a disproportionate effect on London and the South East of England, Metro Bank could be exposed to greater potential losses than some of its competitors, which could have a material adverse effect on its business, financial condition and results of operations
Metro Bank’s risk management framework and policies may not be effective
Metro Bank is exposed to operational risks in the event of a failure of its information technology (“IT”) systems, and Metro Bank relies on third parties for significant elements of its IT and other middle and back office processes
Metro Bank must comply with data protection and privacy laws and may be targeted by cybercriminals Metro Bank’s operations
Metro Bank may suffer loss as a result of fraud, theft or cybercrime
Metro Bank is subject to risks associated with its hedging, treasury operations and investment securities portfolio, including potential negative fair value adjustments
Metro Bank could fail to attract or retain senior management or other key colleagues
Metro Bank’s business model requires the lease or purchase of suitable premises for stores
Metro Bank does not control certain internet domain names similar to its own
Metro Bank is subject to changes in taxation laws
Regulatory Risks - Metro Bank operates in a highly regulated industry that has come under increased regulatory scrutiny in recent years
Metro Bank is subject to prudential regulatory capital and liquidity requirements
Due to its expected growth, Metro Bank’s capital requirements are likely to increase. If Metro Bank fails to meet its minimum regulatory capital or liquidity requirements, it may be subject to administrative actions or sanctions. In addition, a shortage of capital or liquidity could affect Metro Bank’s ability to pay liabilities as they fall due, pay future dividends and distributions, and could affect the implementation of its business strategy, impacting future growth potential.
As of 1 January 2018, Metro Bank implemented IFRS 9 “Financial Instruments”. IFRS 9 led to a one-off increase in impairment allowances for certain financial assets in Metro Bank’s balance sheet at the time of adoption, such as an increase for the provision for loan losses from £14 million as of 31 December 2017 to £37 million at 1 January 2018. However, the European Commission has implemented transitional arrangements to mitigate the full impact of IFRS 9 on expected credit losses on regulatory capital over a five-year transition period, commencing 1 January 2018. IFRS 9 could, however, lead to a negative impact on Metro Bank’s regulatory capital as the transition period expires. In addition, as of 1 January 2019, Metro Bank implemented IFRS 16 “Leases”, which requires lessees to recognise assets and liability for all leases with a term of more than 12 months, unless the underlying asset is of low value. As a result of these accounting changes, Metro Bank’s RWAs have increased by approximately £313 million.
Any inability of Metro Bank to maintain its regulatory capital or liquidity requirements, or any legislative or accounting changes that limit Metro Bank’s ability to manage its capital effectively may have a material adverse effect on Metro Bank’s business, financial condition and results of operations.
Metro Bank is subject to rules relating to resolution planning and regulatory action which may be taken in the event of a bank failure
Metro Bank must comply with anti-money laundering, anti-bribery and sanctions regulations
Metro Bank is subject to rules on deposit guarantee schemes
Metro Bank is subject to regulatory changes in relation to payment services