In its preliminary results for the full year to December the bank posted £50m of pre-tax profits against consensus estimates of £59m.
This is still a big jump from the £21m of profits delivered in 2017 but the shares were trading on a mighty 50 times consensus earnings before today’s miss.
LOANS & DEPOSITS UP BUT QUESTIONS ABOUT QUALITY
The underlying business seems to be trading well with lending up 48% to £14.2bn and deposits up 34% to £15.7bn.
The bank added more customers with over 100,000 new accounts opened in the fourth quarter alone although management noted that growth ‘softened as the quarter progressed'.
However the revelation that it had increased the ‘risk-weighting’ on certain loans last year has added to investors’ unease.
Banks have to increase their risk weighting when some of the loans they have made have a greater chance than normal of turning bad.
Metro’s risk-weighted assets now total £8.9bn against forecasts of £8bn.
The increase was driven by the growth in overall lending and ‘an adjustment in the risk weighting of certain commercial loans secured on property and certain specialist buy-to-let (BTL) loans to large portfolio landlords’.
Given the slowdown in the buy-to-let market, which we flagged some months ago, making big loans to large portfolio owners is an increasingly risky business.
While this doesn’t put the firm’s core tier one equity ratio at risk – the bank says it was 15.8% at the end of December against a regulatory minimum of 12.1% - it is unwelcome news.
It also raises the question of whether the bank might need to raise more capital if it wants to keep to its growth targets.
It raised £300m last July when the shares were trading at £34 and if it wanted to raise the same amount at today's price it would have to issue twice as many shares.
THE EXPERT'S VIEW
Russ Mould, investment director at AJ Bell, comments: ‘A profit miss from Metro Bank has put a large dent in its share price and left the market wondering what’s gone wrong with the once-shining star in the banking sector.
‘Full year pre-tax profit guidance of £50m is 15% below the consensus forecast among analysts of £59m. The fourth quarter saw a big drop in profit and the market will want a full explanation of what’s happened when the next set of results are published on 27 February.
‘Metro Bank seems to have no problem attracting new customers, helped by its branches having prime locations on the high street and being open seven days a week. However, banking remains a highly competitive industry and this issue is certainly going to be a key reason behind the profit warning.
‘Intense competition in the mortgage market is a major issue at the moment and has been flagged by other lenders. Savings rates are also going up across the industry as the Bank of England has started to slowly lift base rates.
‘This has created a perfect storm for some banks and is likely to have put pressure on Metro Bank’s net interest margin, which compares the money paid on savings to the interest customers pay on loans.
‘Its trading update also reveals is a sharp jump in its risk-weighted assets, partially down to an adjustment in the weighting given to some of its commercial property and other specialist buy-to-let loans. That means its total capital ratio will have fallen, much to the market’s dismay.
‘Banks have to ensure their own funds as a proportion of risk-weighted assets (money owed by other people, allowing for non-payment risk) exceed a set regulatory target.
‘Analysts last year expressed concerns about Metro Bank potentially falling below its minimum capital targets unless it raised more money. It subsequently raised £300m in the summer to boost its capital reserves.'