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Shares in challenger bank dive on balance sheet fears

Shares in challenger bank dive on balance sheet fears

Shares in Metro Bank are 7.5% lower today, having earlier fallen 11% on a warning that the business may have to raise up to £300 million in debt to shore up its balance sheet by the end of the year.

A series of analysts said that the bank may have to break an earlier commitment to not tap markets if it kept up its recent rate of loan growth, which was at risk of violating capital buffers.

Shares in the business dropped to a 15 month low of £30.66 earlier, before recovering to £32.52.

The bank’s common equity tier 1 ratio (CET1), a core measure of the balance sheet risk, has fallen from 18.1% last year to a 13.6% at the end of last month. Chief executive Craig Donaldson insisted that the business would hold his promise to limit any 2018 refinancing to debt issuance.

Goodbody analyst John Cronin remained sceptical that this would be sufficient, however.

‘Despite the company's efforts to assuage on capital concerns by referencing a tier 2 debt issuance in 2018, we believe it is without question that more CET1 capital will be needed – and we expect that this could come in July,’ he wrote, Reuters reported.

‘The standout negative today is capital – with 170 bps of CET1 capital ratio erosion in 1Q (more than we had expected)... the timing of an equity capital raise has to be getting closer.’

Analysts at Citigroup echoed that view, saying that they expected a minimum raise of £200 million while Investec earmarked £300 million.

Metro’s core balance sheet resilience has fallen as it has rapidly expanded its loan book, up 69% over the last 12 months to £10.9 million. Operating profit rose more than a third to £79.5 million over the period on revenue 48% higher at £91.7 million.

Despite those successes, the balance sheet warning arrived at a testy time for the bank’s relationship with its backers.

While not facing a major challenge at this week’s AGM, a series of shareholder advisory bodies have protested payments made to an architectural practice owned by the wife of the chair, and a substantial, opaque increase in the total remuneration on offer to Donaldson.  

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