Metro Bank 'likely' to need new fundraising, analysts say

Metro Bank is now "increasingly likely" to go back to the City with its begging bowl, some analysts suggested after the lender's surprise trading update on Wednesday.

Providing an update on fourth-quarter trading, the bank shocked investors and analysts with adjusted profits that grew much less than expected and news that risk-weighted assets ballooned £900m in the quarter, or 12%, as it was forced to make some adjustments to its model. This then led to a quarter-on-quarter decline of 330 basis points in total capital.

As management did not provide a figure for its CET1 ratio, Goldman Sachs calculated that based on the total capital ratio provided 15.8% and assuming unchanged Tier 2 instruments, the CET1 ratio was around 13% at the year end - a decrease of 270 basis points.

Directors did reveal continued pressure in mortgage pricing, however, but made no comments on capital plans, saying they will provide an update on the outlook at full year results on 27 February.

Expecting the CET1 ratio to fall until at least 2020, broker Panmure Gordon said that "we now believe that another equity raise is increasingly likely if management adhere to their FY2020E targets".

Moreover, with quarterly underlying PBT well short of consensus forecast, it "underlines that both net interest margin and loan growth is below market expectations with management highlighting an uncertain period for the UK".

Panmure felt the ratio of price to total book value of 1.7 for "minimal returns and both the growth and returns targets looking increasingly uncertain", it was maintaining its 'sell' rating and reduced its target price to 1,500p from 2,650p.

Jefferies analysts were more positive, though said the trading update "poses more questions than answers - notably on capital planning".

The profit miss was put down to NIM and seven openings in the quarter, "however the more pressing question is whether management will slow asset growth to offset circa £900m of RWA inflation" or if Metro get to employ the internal ratings based treatment for mortgage exposures in the second half, whether this "supports capital enough to prevent a change in strategy and prevent further de-rating".