Metro Bank (MTRO) is attempting to boost growth in the highly competitive challenger bank sector. Its acquisition of almost £600m of mostly buy-to-let mortgages is a clear sign of intent as rivals such as Virgin Money and TSB are also in the residential mortgage market.
The portfolio is made up of 92% buy-to-let mortgages with the remainder owner occupied and was acquired at a discount although Metro did not disclose how much this was. The mortgages were purchased from US private equity house Cerberus.
The bank’s shares are up by 2% to £37.96 and this move has increased its loan to deposit ratio to around 78%. This is getting close to Metro’s own target of 80% which it set out in its 2020 guidance.
Craig Donaldson, chief executive of the bank, says the portfolio ‘demonstrates our willingness and ability to take advantage of opportunities that arise’.
SCEPTICS IN THE CITY
But some brokers are less impressed by Metro’s move. Joseph Dickerson, an analyst at Jefferies, says the mortgage acquisition might have grown the loan book by 9% to £7.1bn but sees ‘this portfolio acquisition as incremental as opposed to transformational’.
Jonathan Goslin, an analyst at Numis, said that ‘low-yielding mortgages will do little to cover the group’s very high cost base’.
MORE POSITIVE VIEW
Peter Leonardos, an analyst at RBC Capital Markets, is more bullish on the deal. He says that not only is the acquisition an ‘interesting way‘ to increase its loan to deposit ratio it will also aid Metro’s move into greater profitability.
In the bank’s trading update in April, Metro revealed a good start to 2017 with year-on-year growth of 57%. With the addition of this mortgage portfolio which has a average loan to value of around 70% and an expected pay rate of 1.5% above Libor, this rapidly growing bank looks set to record its first full year of profit in the current financial year.
