Metro Bank

Contrarian Investor Portfolio Review October 16th 2019

Greetings from Shanghai Contrarians! In order to aid transparency in what I write about, here is the first Contrarian Investor Portfolio. I will only cover my larger and more speculative or interesting holdings and put down a few of the stocks I am watching.

Please note I scale in and scale out of a position. Never sell at the top and hopefully never at bottom. Use Spread bets and CFDs., increasingly the former. Don’t use automated stops on small caps because of volatility and accidental stops being triggered on “shakes”. Tend to cut a position after a 20 percent loss.

UK Oil and Gas (UKOG) Average purchase price 1.2p Curret share price 1.10-1.20p

I have followed UKOG for many years and was a large investor during the Broadford Bridge drill in 2017. It was a profitable trade then, but didn’t manage to sell at the top at 7.4p. Broadford Bridge was a real cock up because of drilling issues.

I started buying UKOG again in the last few weeks before Surrey County Council Planning and the arrival of the drilling rig at HH. At around 1p, even with 6 billion shares in issue, it does look very good.

The news from Horse Hill yesterday on the coring samples from the HH-2 well was excellent..

“Preliminary visual analysis of a total of 241.45 ft of core has clearly identified the Portland reservoir's most productive zone or "sweet spot", which will now be the target of the planned circa 1,000 m HH-2z horizontal trajectory, expected to commence next week.

Live oil was observed "bleeding" profusely from core throughout the sweet-spot, the Upper Portland reservoir's most porous, permeable and oil productive interval. Lesser degrees of oil bleed, together with oil shows and oil staining were also observed from porous sandstone intervals lying above and below the sweet-spot. The core is now at a Surrey-based laboratory, where an extensive geological and petrophysical analysis programme is now underway. Results of analyses that directly impact the field's possible increased oil in place and recoverable oil volumes will be reported in due course.”

UKOG looks very undervalued at 1.2p. See

The drilling is HH is going very well. No cementing issues or acid wash problems like at Broadford Bridge. The geology of HH is different and lessons have been learnt. The excitement begins now as the HH-2-z horizontal well is being drilled right now, with the newly identified “sweet spot” as the target. Horse Hill has planning for up to 16 tankers a day initially, is in a calm geo-political environment of Horley Surrey and the site is already producing 250 bopd from the kimmeriddge. Tankers are leaving on a regular basis to Horley.

UKOG is an exciting prospect and I am targeting 2-3p once the Yorkville Associates shares for the Tellurian aqcquisiton (to enable 86% of Horse Hill to be owned by UKOG), further good news should boost things nicely. Don’t forget the new horizontal well will be 1000 metres long and 1000-1500 bopd choked is more than possible, New wells will be drilled in Q1 2020 to allow 3500 bopd. Lessons have been learnt by Steve Sanderson and the team over the last few years and hopefully the perfect drill so far contunues into the end of 2019.

Union Jack Oil (UJO) Average purchase price 0.22p Current share price 0.20-0.21p

I managed to see David Bramhill, Exec. Chairman of Union Jack Oil last Friday and it was a very interesting chat. I have bought in recently and it was great to hear about the forthcoming plans for Wressle, West Newton and Biscathorpe over the coming months.

Link to David Bramhill meeting notes Meeting with Dave Bramhill (Exec Chairman of Union Jack Oil) October 11 2019- exciting times ahead

Just to reiterate, no short term plans for a placing but there will be medium term.

Timings Summary (CI estimates):

West Newton

Extended Well Test November 2019

CPR Jan/Feb 2020

WN B Spud March 2020 (could be earlier or later)


Planing inquiry November 5th - November 9th 2019


New seismic assesmment October - November 2019

Metro Bank (MTRO) Average purchase price 210p Current share price 204p

Even with the Brexit banking bounce Metro Bank hasn’t benefitted, compare with Lloyds bank for example. At 204p, the bank looks very undervalued, even with all the bad news over the last few months. The bank won’t go bust after a succesful bond issue (albeit at 9.5% coupon) and it looks very cheap versus book value. It has come down from 3000p in 2018 and the last placing in May was at 500p. Vernon HIll has been forced to leave to get the MREL related bond issue away and there are rumours that he is trying to take MTRO private. Hedge funds are shorting but upside on any good news looks strong.

See full SWOT analysis on Metro Bank at

It has been a challenging year for Metro Bank, with the lender facing intense speculation over the health of its balance sheet earlier this year due to a £900 million accounting error. However, concerns have been redcued after the bank successfully raised £375 million via a share placing in mid-May which was over subscribed. In September MTRO raised $350 million in a bond issue.

The bank is likely looking to put the first half of 2019 far behind it and instead focus on delivering costs efficiencies and continued growth in capital-light fee income.

The bank is also busily expanding its presence in the North of England in the hopes of empowering growth for SMEs in cities like Manchester, Liverpool and Birmingham. Metro Bank plans to open around 10 new branches in 2019.

Highly capitalised - after ¢350 million bonds fundraise in September and $375 million equity raise in May to meet MREL (Minimum Requirement for Own Funds and Eligible Liabilities) requirements, oversubscribed. See more on MREL, SRB, and BRRD in link: Is the Bank of England behind the Metro Bank Chaos?

  • Deposits of £13,7 billion, net outflows of £2 billion in H1 2019 caused by bad publicity (buy July has seen £700 million in net in-flows)

  • Year on year loan growth of £3 billion to £15 billion

  • Number one bank in UK for quality of service according to latest Competition and Market Authorities Survey. Watchdog BBC calls them the No.1 UK bank for customer service.

  • Customer account growth of 190,000 to over 1.8 million, though rate of growth down from 201,000 in H1 2018.

  • Net book value over £10 per share, compared with £2.10 share price

  • Full banking licence in the UK

  • Increasing number of UK branches

  • Good initiatives with Fin Tech companies to improve service and customer analytics.

The shares have lost more than 85% of their value since the beginning of January, with the Metro Bank’s share price closing at 204p on Tuesday’s session, down from the £17 levels it saw at the start of the year.

The management says 2019 is a ‘year of transition’, with the lender focused on upgrading its cost savings guidance to the upper end of its original range and rebalancing its lending mix.

Q3 earnings are key on October 23rd and watch this space for a replacement for Vernon hill.

Reabold Resoures (RBD) - Average Purchase Price 0.94p Current Shares price 0.9-0.95p

RBD succesdully rasied £24 million at 0.9p this week, only a 12.5 discount to the prevailing market price to develop the West Newton field (17% share for UJO). The fact that the company got away the placing succesfully in this difficult market for AIM oil and gas speaks volumes. Lots of news flow for West Newton, extended well test and Competent Persons report to confirm volumetrics and once flow test completed, reserves.


Other recent trades

Woodford Patient capital investment trust - one week trade at loss (fortunate timing before yesterday’s bad news)

Short S&P 500 - closed, too much good earnings news and Brexit, china deal head wind. Will revisit as S&P hits all time highs of 3000.

British American Tobacco - short trade as shares fell to 2600-2700p range as most earnings in foreign currency and £ rising.


Hurricane Energy, Imperial, BAT, I3E, Petro Matad, VAST.

SWOT analysis for Metro Bank - good punt or too risky

metro logo

Note next quarter financial results October 23 2019.


  • Highly capitalised - after ¢350 million bonds fundraise in September and $375 million equity raise in May to meet MREL (Minimum Requirement for Own Funds and Eligible Liabilities) requirements, oversubscribed. See more on MREL, SRB, and BRRD in link: Is the Bank of England behind the Metro Bank Chaos?

  • Deposits of £13,7 billion, net outflows of £2 billion in H1 2019 caused by bad publicity (buy July has seen £700 million in net in-flows)

  • Year on year loan growth of £3 billion to £15 billion

  • Number one bank in UK for quality of service according to latest Competition and Market Authorities Survey. Watchdog BBC calls them the No.1 UK bank for customer service.

  • Customer account growth of 190,000 to over 1.8 million, though rate of growth down from 201,000 in H1 2018.

  • Net book value over £10 per share, compared with £2.10 share price

  • Full banking licence in the UK

  • Increasing number of UK branches

  • Good initiatives with Fin Tech companies to improve service and customer analytics.

Metro bank financial summary


  • Weak share price - 210p now vs £40 in March 2018.

  • Declining profits, but still profitable, Underlying profit before tax of £13.1 million in H1 2019 (£24.1 million H1 2018), statutory profit before tax of £3.4 million in H1 2019 (H1 2018 £20.8 million)

  • Management issues - but Vernon Hill departing shortly

  • Too reliant on expensive branch network

  • £33 million cost of 9.5% coupon September bond issue, no profit until 2021


Shorts over time Metro Bank
  • High level of shorts. By March 2019, the BBC reported that Metro Bank shares were the second most shorted shares on the UK stock market. Given level of decline from £30-40, I am surprised they have not taken profits as given capitalisation, risk of outright bankruptcy seems low and more downside risk for shorts of good news from bank e.g. appointment of new Chairman, OK third quarter results

  • Larger depositors, worried about the bad publicity caused by the commercial loan classification error, began withdrawing funds. Metro Bank revealed that there had been a 4% drop in its deposits in the first quarter of 2019 because of “adverse sentiment”. Recently the bank has been forced to issue reassurances to worried depositors that it wasn’t going bust.

  • FCA investigation into categorisation of loans which caused financing problems. In January 2019, Metro Bank admitted classifying a portfolio of commercial loans for capital purposes incorrectly, thereby failing to hold sufficient capital to meet regulatory requirements. The error applied to around 10% of its loan book. The miscalculation was identified through a review by the Prudential Regulation Authority (PRA), but Metro Bank erroneously gave the impression that the bank had identified the incorrect classification itself. To correct the error in the capital classification. A regulatory investigation was started by the FCA and PRA causing a share price collapse and they have fallen almost 90 per cent since the start of 2019

  • Hard Brexit - damage to economy and sentiment on chaotic exit from EU - loan impairments etc on bad loans


  • Private buy out by Vernon Hill - very low market cap of £330 million versus assets and recent $350 bond sale

  • Elliott Investors investment

  • Divestment of assets eg. excess loan book

  • Slowing down of branch expansion

  • Cost cutting

Further reading

Metro Bank rebounds as Brexit talks row back from the brink of no deal

metro bank logo

According to the Telegraph:

The EU are said to be prepared to make a major concession on Boris Johnson's Brexit deal by paving the way for the Northern Ireland assembly to leave a new Irish backstop after an unspecified number of years.

Diplomatic sources said the EU would concede unilateral revocation of the withdrawal treaty by Stormont after a period of time, as long as both communities agree to it. The EU are said to be prepared to make a major concession on Boris Johnson's Brexit deal by paving the way for the Northern Ireland assembly to leave a new Irish backstop after an unspecified number of years.

Diplomatic sources said the EU would concede unilateral revocation of the withdrawal treaty by Stormont after a period of time, as long as both communities agree to it, according to The Times.

However Iain Duncan Smith, former Conservative leader, said the offer looked like "tokenism" from the EU. "This looks suspiciously like EU, realising they are about to look like the bad guys, making a tokenistic offer," he said. "This is about shifting blame to Boris Johnson."cording to The Times.

The  Taoiseach, who spoke to Boris Johnson by telephone for about 40 minutes yesterday, warned that both Ireland and the EU would not accept an agreement at "any cost" and cautioned that there were some "fundamental changes" which still needed to be guaranteed.  "I think it is going to be very difficult to secure an agreement by next week, quite frankly," Mr Varadkar told RTE news. 

"Essentially what the United Kingdom has done is repudiate the deal that we negotiated in good faith with Prime Minister (Theresa) May's government over two years and sort of put half of that now back on the table and are saying, 'That's a concession'. And of course it isn't really."

Metro Share price

Metro Bank (MTRO) seems very correlated to Brexit Sentiment as investors wait for the financial resutls in a couple of weeks. Yesterday it looked odds on for a hard Brexit, now the Irish seem to be moving again. My bet is a last minute deal or a small extension to complete the deal. Neither the EU or UK wants a hard Brexit or kicking the can down the road for years with more referendums, prolonged negotiations etc.

The shares in MTRO are up 5% to 207p, after a dire day yesterday. There’s alot of bad news baked into the shares at around 200p. Any hint of good news like a Brexit deal will really move Metro up.

MEtro bank share price oct 9

Further Reading

The next Metro Bank chairman: who might replace flamboyant founder Vernon Hill?  Lucy Burton, banking editor 9 OCTOBER 2019 • 7:00AM

Few bosses in the UK banking sector are as eccentric as American billionaire Vernon Hill, the Metro Bank founder who has compared opening a bank account in London to "having your teeth drilled" and initially made a fortune running Burger King franchises.

A former golfing buddy of Donald Trump who is known as “Vernon the Barbarian” to his rivals in the US, those who know Hill say he once brought Biggin Hill’s annual air show to a standstill so he could fly to Italy in his private jet, refuses to travel anywhere without his Yorkshire terrier, Sir Duffield II, and owns New Jersey's largest mansion (“Hill House”).

At Commerce, the American bank he set up in his 20s, he once stopped a meeting to disassemble an employee’s pen and throw it in the bin because it was branded with a rival’s logo.

But his era at the top of Metro Bank – the UK's first high-street lender for more than a century when it opened in 2010 – is coming to an end after a disastrous year in which a major accounting gaffe left his loyal club of investors nursing huge losses. Last week, he said he would step down as chairman earlier than expected and would leave the board altogether.

With the bank now combing the City for a new chairman, speculation is swirling over who might be approached – and be interested – in the job at a time when regulators are investigating the loans error and huge changes to the structure of the bank are potentially afoot.

Lord Myners, who was City Minister during the financial crisis, has been mentioned as a potential candidate, but friends close to the financier said he has not been approached and has zero interest in the job.

Those close to Jayne-Anne Gadhia, the former boss of Virgin Money who would be a popular pick with shareholders, say she has also not been approached and is focused on her new job running Salesforce UK.

John Cronin, a banks analyst at Goodbody, said it will be challenging to hire someone when a regulatory investigation is ongoing and there could be changes ahead, with sources telling The Telegraph last weekend that Hill hasn't ruled out taking the bank private. "It's not a 'business as usual' chairman role," Cronin said.

Senior bankers agree, with one well-known executive questioning why anyone would want it. "They need a chair who can help them with regulators and lead a sales process, they don't need an operator," the person said.

Here are some candidates that could be in the frame.

Benny Higgins

Senior banking sources think Benny Higgins, the former boss of Tesco Bank who is understood to know Metro chief Craig Donaldson well from his RBS days, is likely to be on an initial list of candidates. Higgins declined to comment on whether he'd been approached for the role.

However, some investors think such a move would do little to help restore shareholder confidence in the troubled bank given that Higgins' time in charge of Tesco Bank courted controversy for his use of expenses.

The colourful Scottish banker, who has been married five times, sparked uproar in 2015 after it emerged that he had claimed more than £18,000 for London taxis during an eight-month spell.

Richard Pym

Richard Pym, the ex-chairman of “bad bank” UK Asset Resolution as well as Co-operative Bank, has spent almost five decades working in financial services and was called "the ultimate safe pair of hands appointment" when he became the boss of Bradford & Bingley during the financial crash.

Known for his conservative management style, he could be viewed as the person able to steady Metro's ship. Clearly unafraid of a challenge, he replaced ex-methodist minister Paul Flowers as chairman of Co-op Bank in 2013 just after disgraced Flowers – who later pleaded guilty to possessing cocaine and crystal meth – stood down amid the discovery of a £1.5bn capital black hole at the bank.

Having been chairman of Allied Irish Bank (AIB) since 2014, 70-year-old Pym may be ready for a fresh challenge

Having been chairman of Allied Irish Bank (AIB) since 2014, the 70-year-old may be ready for a fresh challenge – he told this paper just before the financial crisis that he'd like to work for another 15 years. Spokespeople for AIB did not respond to a request for comment.

Sir Michael Snyder

An internal candidate, one senior City source says the senior independent director and audit committee chair already "sees his name on the chair's door".

The former accountant, who joined Metro's board in 2015 and was the City of London's policy chairman from 2002 to 2008, would be the obvious pick if the lender struggles to find a suitable banker externally.

He would likely compete with Ben Gunn for the top job, given the insurance veteran was promoted to deputy chairman in February following a shake-up of the board. The bank declined to comment.

Liam Coleman

It might be too soon for Co-op Bank's former chief Liam Coleman to take on such a hefty job, given he only stood down from the high-pressure Co-op role last year after just 18 months in charge, but his experience is likely to pique the interest of Metro's board.

Liam Coleman is now chairman of the Great Western Hospitals NHS Foundation Trust

Coleman, who spent almost five years at the bank and is now chairman of the Great Western Hospitals NHS Foundation Trust, led the process to recapitalise Co-op Bank and last year said it was “drawing a line under the past” after its near-collapse and a string of scandals.

The 52-year-old, who has also worked at Nationwide and RBS, did not respond to requests for comment.

Metro Bank update October 9th 2019 - bond price and launch of Business Insights tool

Metro bank bath

Metro Bank bond price

A continued recovery in the METRO BANK 18/28 FLR bond, see below. The increased risk of no deal on Brexit certainly didn’t help the share price yesterday with the Boris Johnson government and the EU seemingly unable to agree a way forward. With the Benn Act, prorogation of parliament starting for a new Queen’s Speech on October 14th, its hard to know what will happen next. The shares dropped 4.5 percent at 197p.

Metro bank 2018 bond
Share price metro October 8th

Business insights launch

Metro Bank launches new game-changing digital insights tool for businesses

Metro Bank has announced the launch of ‘Business Insights’ – its artificial intelligence-led, in-app account insights tool for business customers.

By generating smart tips and alerts for customers who opt-in to the service, Business Insights will enable businesses to make more data-driven decisions and help them manage their cash flow and forthcoming payment obligations better.

Insights include end-of-month cash flow analysis, notifications when latest payments to service providers are higher or lower than normal, and notifications about upcoming scheduled payments. Just the sort of helpful insights SMEs need to better manage their business. A full list of functionality is included in the Notes to Editors below.

The development comes as part of Metro Bank’s efforts to inject much-needed competition into the small business banking market following the £120 million funding it was awarded from the Capability & Innovation Fund. Following an initial beta launch, the service is now available to all Metro Bank business customers.

In partnership with AI fintech, Personetics, Metro Bank first launched Insights for personal customers, in October last year, generating growing levels of engagement and satisfaction from customers using the service. With more than 30 million Insights delivered to personal customers to date, over 85% of the Insights delivered have been rated by customers as highly helpful – earning four or five stars out of five. Insights has also contributed to greater overall satisfaction from the Metro Bank mobile app, which is now rated 4.8 out of 5 in the app store.

Paul Riseborough, Chief Commercial Officer at Metro Bank, says: “Life is busy at the best of times, especially if you’re running your own business. That’s why at Metro Bank we’re setting out to build a range of game-changing digital capabilities to help SMEs thrive.

“Business Insights marks the start of our journey to deliver the Capability & Innovation programme, and we’re well on our way to delivering more digital innovations to SMEs up and down the country. The tool uses AI-powered technology to make banking easier and help business owners save time managing their finances, so they can focus on running and growing their businesses.”

David Sosna, Personetics co-founder and CEO, says: “We are delighted to partner with Metro Bank on the launch of Business Insights. Small businesses need help managing their finances, a need that is only continuing to grow with the explosion of the gig economy. Banks such as Metro Bank that step up to the plate by delivering proactive and easy-to-access insight and advice will position themselves as the providers of choice for these small businesses.”

The tool launches with more than 25 business Insights for business customers. With built-in self-learning capabilities based on AI technology, the service will continue to improve as growing numbers of SMEs use these Insights.

Metro Bank supports tens of thousands of SMEs. It is rated no.2 by the Competition and Markets Authority for overall service by business current account customers. Business current accounts grew by 19% year-on-year to 30 June 2019 and 18% of business current account switchers in London and the South East in Q2 2019 chose Metro Bank.

Metro Bank - FT article October 6 2019 Extract and Link Investors’ - Metro Bank victory could be short lived

Metro Bank and vernon hill

After Friday’s sharp share price reversal to send Metro Bank (MTRO) 5% higher on the day after moving down to lows around 181p, plenty of potential for excitement for investors this week.

With Chairman, Vernon Hill departing in the next few weeks, who knows if the Telegraph article to take the bank private will come to pass. With the £350 million bond issue out of the way, at a market cap of less than £340 million, even with all the bad news over the last few weeks looks mighty enticing. It is still a top rated bank for customer service and appears to have much to offer to a predator, especially one that can refinance the latest debt issue at more favourable terms than a 9.5 percent coupon.

It looks like some shorts were closing on Friday given the share price rebound as they bought back shares to settle their positions. I would be very surprised not to see a further rebound today.

See previous posts:

Information on MREL and EU capital requirements, strategic issues and metrics from September bond issue, Telegraph private buy out article etc.

Investors’ Metro Bank victory could be short lived

Kate Burgess October 6th 2019

This summer, as the bank revealed £2bn deposit outflows in the second quarter and post-tax losses, Mr Hill agreed to surrender the Metro chair. But he would stay on the board, he said. No way, responded bond investors stonily last week as Metro’s shares hovered around £2 from a peak in 2018 of above £40.

Neither Mr Vernon’s departure by December, nor the BCR’s funds, nor the rights issue, nor last week’s bond issue will secure Metro’s future. Investors’ spirits may lift a little at the latest news. But the regulators’ probes continue and markets are braced for lower interest rates for longer and rising loan impairments. And Metro has to pay close to 10 per cent in interest on £350m. That will constrain earnings.

Goodbody analysts are calling for “a wholesale strategy recalibration [for Metro] to survive in an independent capacity”. Barclays analysts argue it is “hard to see [Metro’s] returns much above low single-digit any time soon”. They and others reckon Metro may still have to sell non-core assets or raise more equity to facilitate the expansion needed to take on the big high-street banks.

Last week’s news was better for Metro. It has surmounted one Hill. There are many others ahead, though.

Metro Bank Update October 5th 2019 - rumours of private buy out by Chairman

Metro bank share price october 4th 2019

Metro Bank Share price action October 4th

An exceptionally volatile day yesterday, October 4 2019, as the price for MTRO shares dropped at the open to 181p. Following a volatile morning, the shares began to rise after 2pm on news that Boris Johnson, through the Scottish Parliament prorogation of parliament legal action, has notified the court that he will seek an extension of the Brexit deadline of October 31st if a deal with the EU has not been agreed by October 19. As a hard Brexit is expected to have a large effect on sentiment and the banking sector in the UK, this was good news for MTRO as a deal now looks more likely and the risk of a hard exit appears to be dissipating.

The shares then rose sharply in the last couple of hours of trading, finally moving into positive territory by 4pm and closing at 202p, compared with 193p, the day before. up over 4.4% and nearly 10% versus the morning lows. The reason appears to be hopes that Vernon Hill, Chairman, may be making plans to take the bank private as reported in the Telegraph. see further reading below.

At 202p, market cap is £348 million, almost the same as the £350 million raised in the bond offer this week. At these levels, the market is pricing MTRO purely at this cash levels and ignores it substantial assets. As far as I can see from the bond prospectus, as long as there is not a disorderly Brexit, the bank looks well placed with very strong customer satisfaction levels. Something that could be appealing for someone wanting to buy a challenger bank.

I have been buying MTRO, with a 190p average, and look forward to news flow ahead. The departure of Vernon Hill this year means any news on the replacement interesting.

MTRO is bombed out, but maybe too much so. It doesn’t appear to be going bust as the new money means the bank comfortably meets its capital requirements for MREL (minimum requirement for own funds and eligible liabilities). This is a volatile share, but the fundamentals look good enough at these share price levels to make a substantial speculative buy for my portfolio. Please DYOR.

Given the IPO was at £20, placing in 2018 at £34 and 2018 at £5 in May 2019, a private buy out would need to be a lot more than £2 for existing investors to go for it, should the rumours be accurate.

Q3 2019 results are due October 23rd. Vernon Hill replacement in next few weeks?

Update re. Brexit:

Sky News was reporting this morning, that talks between the UK and European Union will not take place this weekend as anticipated after the European Commission said Boris Johnson's new Brexit proposals "do not provide a basis for concluding an agreement".

EU Commission spokeswoman Natasha Bertaud said discussions on the prime minister's plan to replace the Irish backstop would not take place this weekend, but that the UK would be given "another opportunity to present its proposals in detail" on Monday. She said: "Michel Barnier debriefed (officials) yesterday, where Member States agreed that the UK proposals do not provide a basis for concluding an agreement."

Metro Bank (MTRO) background

Metro Bank was founded by Vernon W. Hill, II in 2010 as the first full-service, independent, new High Street bank to open in the UK in more than 100 years. Metro Bank uses a disruptive, deposit-driven funding model and a superior retail and business-focused customer service experience that emphasises simple banking to turn its customers into “FANS” (customers who recommend someone to bank with Metro Bank).

Metro Bank opened its first store in Holborn, central London, in July 2010, and since that time has established a strategically located network of 68 stores (not in the company’s words “branches”) in the key conurbations across the South of England and into the Midlands and the South West with 1.8 million customer accounts, £13,703 million in deposits from customers and £15,020 million of gross loans and advances to customers as of 30 June 2019. Driven by and reflective of its customer service-led model and culture, Metro Bank’s “stores” are open seven days a week, early until late with 24/7 telephony, award-winning digital and mobile banking, all integrated to provide an outstanding customer experience.

Metro Bank’s success in delivering an outstanding customer experience is best evidenced by the results of the competition and Markets Authority (“CMA”) Service Quality Surveys published in August 2019. Metro Bank’s customers rated it number one out of 16 banks and building societies for quality of service for personal current accounts and number two for business current accounts, with 82 per cent. and 69 per cent. of customers “extremely likely” or “very likely” to recommend Metro Bank’s personal and business services, respectively.

Metro bank customer service rating 2019

Unlike most other digital- and mobile-first challengers, Metro Bank has majored on branch-based access, providing free coin counting for customers and non-customers, instant printing and replacements for lost or stolen debit cards and safe deposit boxes for customers’ valuables. Appealing to a nation of dog-lover, the bank operates under the brand 'Dogs Rule', inviting customers to bring their canine companions along with them for tasty treats and fetching bandanas.

Financial information

Having ploughed through the 205 pages of the offer prospectus for the Bond offering £350 million September 2019, here are the key facts and figures from the document (a good few hours of work!). The risks identified for investors are listed later in this blog post. A lot of the latest interesting data on customers, deposits, loans and so on which MTRO have provided to Bond investors.

customer data metro bank 2015 to 2019
Metro bank loans and deposit ratio 2013 to 2019
Deposits from customers 2015 to 2019 metro bank
Retail mortgages by type 2019 metro bank

As of 30 June 2019, the Bank had a total deposit market share of 0.5 per cent. of the total UK deposit base of approximately £2.7 trillion. Deposit growth has been matched by increasing geographic diversity, as Metro Bank has extended its physical network coverage through store expansion into further conurbations in the South East and of late into the Midlands, East and South West.

The grant from the C&I Fund will allow Metro Bank to accelerate its national store coverage by funding the expansion to the North of England with 30 new stores by 2025, increasing Metro Bank’s coverage to over two-thirds of UK SME hot spots from approximately 30 per cent. currently. It has already signed a lease for a new store in Manchester, purchased a freehold for a new store in Liverpool and signed a long lease for a new store in Sheffield.

Customer deposit growth has helped fund £15,020 million of gross loans and advances to customers as of 30 June 2019 (31 December 2018, £14,269 million). Metro Bank had an approximately 0.7 per cent. market share in retail mortgages in the UK as of 30 June 2019.

It has 87 per cent. brand recognition in London (Source: YouGov independent survey, July 2019).

Financial - listing and placings

Metro Bank listed on Thursday 10 March, almost 10 per cent up from their placement price. of £20 amid a sell-off in banking stocks. By mid-morning the stock stood at £21.95. The plan was to list at £24, but this was scaled back.

It is primarily funded by deposits from its Business and Retail customers, drawings from the Bank of England’s TFS scheme, repurchase agreements, capital provided by shareholders, and the £250 million qualifying tier 2 subordinated debt issued by Metro Bank in June 2018. As of 30 June 2019, Metro Bank had total assets and liabilities of £21,357 million and £19,590 million, respectively (31 December 2018, £21,647 million and £20,244 million; 31 December 2017, £16,355 million and £15,258 million).

In May 2019, Metro said it would initially raise about £350 million but later increased the total sum raised to £375 million because of high demand. There were about $1 billion worth of orders for the new stock, mainly from existing investors and RBC Capital Markets, Jefferies and KBW managed the accelerated book-build. The new stock was priced at 500p a share.

The bank first announced the plan to raise £350m alongside its full-year results in February 2019, when it also said it would scale back the pace of its expansion and focus on making more efficient use of its capital.

MTRO’s common equity tier one ratio, a measure of balance sheet strength, fell to 12.1 per cent at the end of the first quarter 2019, above its own minimum level of 12 per cent. After the placing, its CET1 ratio would be 15.6 per cent.

In July 2018, MTRO raised capital through a non-pre-emptive cash placing of 8.85 million new shares at a price of £34.22 per share.

Capital position

The bank has a target of minimum CET1 Ratio of 12 per cent. and regulatory leverage ratio of 4.1 per cent. As of 30 June 2019, Metro Bank had a CET1 Ratio of 15.8 per cent. and a leverage ratio of 7.0 per cent. (13.1 per cent. and 5.4 per cent., respectively, as of 31 December 2018).

It targets a LTD Ratio between 85 per cent. and 90 per cent. over the medium term. Following the net deposit outflows during the first half of 2019, the LTD Ratio was 109 per cent. as of 30 June 2019. It expects to gradually manage the LTD Ratio back towards medium-term guidance in a controlled manner and expects the LTD Ratio to be c.100 per cent. by the end of 2019.

As of 30 June 2019, Metro Bank reported an LCR of 163 per cent. (141 per cent. as of 30 June 2018), comfortably in excess of its minimum requirement of 100 per cent. Metro Bank subsequently executed the sale of a £521 million mortgage portfolio, which further strengthened its liquidity position. The quality of Metro Bank’s liquidity resources is high, with 99 per cent. held as cash, government bonds and AAA-rated instruments.

Medium term objectives guidance

Metro bank guidance


*Vernon Hill will leave by end of 2019

*Vernon Hill will leave by end of 2019

Further reading

Metro Bank founder Vernon Hill seeks support to take lender private

Lucy Burton, banking editor 4 OCTOBER 2019 • 9:00PM

Metro Bank founder Vernon Hill is seeking support to take the embattled lender private.

The American billionaire is understood to have told potential backers in the last few days that he would consider buying his business off the stock market at its current depressed share price.

Mr Hill, who this week announced he will stand down as Metro's chairman within weeks following a plunge in the value of its stock, is understood to have called City figures in a bid to secure backing for the move.

A source said: "Now is the time for a predator to pick this up. "My sense is that this is all very recent and so people will need some time."

Mr Hill owns 3.5pc of the business, meaning he would potentially need to purchase as many as 96.5pc of shares worth £336m from other investors.

The 74-year-old is understood to have tapped up several figures in his bulging contacts book who could lend financial firepower to the scheme, with talks at a very early stage.

A return to private hands would mark an ignominious end to Metro's tumultuous three-and-a-half years on the stock market.

The lender's shares have crashed by 90pc since it listed in 2016. It was plunged into crisis early this year by an accounting scandal when it revealed a mistake in how it calculated the riskiness of some property loans.

Plans to go private may cause consternation at the Bank of England, which has typically preferred struggling firms to be taken over by established rivals or institutional investors.

Mr Hill was backed by a host of wealthy figures including hedge fund billionaire Steve Cohen when he launched Metro in 2010 as the first new British high street bank for more than a century. But this club of longstanding US supporters is understood to have lost patience with him following the accounting disaster in January.

Watchdogs are investigating what happened and Metro has warned the probe could even lead to criminal charges, while Mr Hill has come under fire over his leadership - and for a now-axed agreement which saw Metro pay £24m to his wife Shirley's architecture firm.

He initially sought to head off criticism by agreeing to step down as chairman, but hoped to stay as a director with the role of founder and president.

Matters came to a head this week when Metro was forced to cancel a bond sale due to a lack of investor interest, causing its shares to plummet to an all-time low.

Mr Hill then apparently conceded defeat on Wednesday and said he would leave the bank's board altogether by the end of this year. On the same day Metro managed to successfully raise £350m, sending its shares soaring. The interest payments on this debt as so generous that City analysts have warned the lender likely won't return to profit until 2021.

Metro Bank declined to comment on Mr Hill's recent discussions. Mr Hill declined to comment.

Risks relating to the Macroeconomic Environment in which the Issuer Operates

Source : Bond prospectus Sep 2019

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

Metro bank back below 200p as funding costs worry investors but good potential investment

Metro Bank (MTRO) got its £350 million bond fundraising done this week but at a 9.5 % coupon, compared with the 7.5% bond offer which failed in September. Because of the high cost of the funding to meet minimum regulatory funding constraints (MREL), Metro is unlikely to return to profit until 2021 according to analysts.

Chairman Vernon Hill, and co-founder, has also announced he is leaving by the end of 2019. Hill once said he was so committed to Metro he would "probably die there" It is believed that Hill’s departure was forced on him by the new bond investors. He said over the summer that he would step aside once a new chairman was found but would remain on the board as founder and president , raising concerns that he would still have a major say.

Interest charges on the £350 million of bonds will cost the bank about £33 million a year. "It is an off-the-scale cost," said Ian Gordon, a banks analyst at Investec. "It's the most expensive bond issue by any bank raising this type of debt, which bluntly reflects the fact they were up against a wall with only a small remaining window to accomplish it." John Cronin, a banks analyst for Goodbody, agreed that the "high pricing" of the debt issue means the bank "will be in loss-making territory until 2021".

In March 2018, MTRO was trading just over £40 a share. It is now worth just 193p.

share price October 3

At 193p, the market cap of MTRO is at a bombed-out £333 million. They have just raised £350 million and have £21 billion in assets. It looks a risky, but good investment for thrill-seekers and I bought a few yesterday. The bad publicity over the last few weeks has hugely damaged sentiment and it will be fascinating to see the update of any customer withdrawals. At least the new bond raising stops any issues about Bank of England capital targets etc. Upside potential looks better than the downside risk. Let’s see. The announcement later this year of Hill’s replacement will be a big one for sure and will any other investors like Elliott come in?

Metro H! results summary
H! metro financial summary