Shares in challenger lender Metro Bank (MTRO) surged 15% to 132p at the open on Monday on news that the firm had sold part of its UK residential mortgage portfolio to rival lender NatWest Group (NWG) for more than £3 billion in order to take on more risky loans.
As well as selling the portfolio for more than its gross book value - £3.128 billion against £3.045 billion - and generating a capital gain of £83 million, the deal lifts Metro’s core equity tier one (CET1) ratio to 16.3%, well above the required level.
It also takes the bank’s total capital plus minimum requirement for own funds and eligible liabilities (MREL) ratio from 20.2% to 24.2%, above the 22% threshold, thereby removing the need for it to issue £200 million to £300 million of MREL qualifying debt.
However, the real kicker for the bank is that its larger capital base allows it to chase higher returns. As chief executive Daniel Frumkin commented, ‘The sale of part of our residential mortgage portfolio will provide us with further lending capacity and enable us to shift our asset mix and expand our unsecured lending portfolio’.
The portfolio, which amounted to around a fifth of Metro's loan book as at the end of September, consisted of mainly plain-vanilla repayment, owner-occupier residential mortgages, with an average remaining fixed-rate term of two and a half years and an average loan to value of roughly 60%.
That makes it a fairly low-risk investment for NatWest, added to which £3 billion is only about 2% of its existing mortgage loan book, although its shares were pulled lower by general market weakness.
Meanwhile, Metro Bank wants to ‘enhance its risk-adjusted return on capital’ by taking riskier bets and ‘rebalancing its asset mix’ towards higher-yielding assets like specialist mortgages and unsecured lending, which shareholders clearly like, but which it’s fair to say, given the likelihood of increased defaults due to the economic damage wrought by the pandemic and the experience of previous credit cycles, may not end well.
