UK Bank Crashes To Record Low After Mismarking Loan Book

Shares in one of the UK's so-called challenger banks have collapsed 35% today to a new record low after being forced to admit that it failed to have enough capital backing some commercial loans because of what it calls an accounting error.

Bloomberg reports that Metro Bank Plc fell the most since going public after applying an incorrectly-low risk-weighting to parts of its loan book, with the British lender’s chief saying he doesn’t know how long the mortgages in question had been wrongly classified.

The bank, which has expanded rapidly to 66 branches since launching in 2010, also issued a profit warning, saying its full-year profits and capital levels would be weaker than expected after a “soft” end to the year with CEO Craig Donaldson blaming the warning on intense competition in the mortgage market.

"It was a misinterpretation of the rules,” and the misclassification dates back through 2018 at least, Craig Donaldson, Metro Bank’s chief executive officer, said by phone.

“We are putting it right,” he said, calling it an “isolated incident” that didn’t affect the bank’s earnings. He said the bank has been in communication with Britain’s Prudential Regulation Authority.

Bloomberg explains that the bank previously put a 50 percent risk weighting on its commercial mortgages, but said it has now increased this to the correct level of 100 percent, a spokesperson for the lender said. For buy-to-let mortgages, the portfolio had been held at a risk weighting of 35 percent, but this has also been increased to 100 percent.

However, this is not a total surprise to many, as The FT reports, investors have long been divided over the merits of Metro’s business model and its controversial chairman Vernon Hill. Mr Hill has been criticised for corporate governance issues including paying tens of millions of pounds to a company owned by his wife. But he has maintained the support of a loyal coterie of US-based investors, many of whom backed his previous venture Commerce Bancorp.

Nevertheless, Metro is down 35% today on massive volume - a new record low.

Gary Greenwood, analyst at Shore Capital, said:

“For a fast-growing business like Metro Bank, where capital constraints are a concern, to warn on both momentum and capital intensity is a real ‘no-no’. It is no surprise therefore that the shares are down so sharply.”

Challenger banks are small, recently-created retail banks in the United Kingdom that compete with the longer-established banks in the country, sometimes by specialising in areas underserved by the "big four" banks. The banks distinguish themselves from the historic banks by modern information technology practices, such as online-only operations, that avoid the costs and complexities of traditional banking. In case you were worried about whether Metro's "error" was more systemic, here are the rest of the 'challenger' banks... Aldermore, Atom Bank, Monzo, N26, OakNorth, Starling Bank, Tandem, Tesco Bank, and Virgin Money.

Among the beneficiaries of Metro Bank's exposure as a cheating bank was none other than Crispin Odey whose fund made about 19 million pounds ($25 million) Wednesday on its short position. As Bloomberg reports, the London-based asset manager increased its bet against the company as recently as Jan. 16 and has shorts worth about $75 million or 2.7 percent of the company’s shares, making it the biggest short-seller of the bank.

Odey’s firm disclosed Metro Bank in its short book in March last year, saying that the bank “has still not grown loans fast enough to keep pace with costs,” and raising concerns over the profitability of its business. He did not immediately respond to a call requesting comment.

The question we should all be asking is a simple one - how did Metro manage to lie to regulators (or perhaps more charitably, how did regulators not spot this?) for so long? Those butterflies you feel in the pit of your stomach are warranted as the awful sense of deja vu all over again rears its ugly head since we all know what happened the last time banks started to get busted for "misclassifying" risk-weighted assets on their books...

Remember, "fortress balance sheets."