Growth comes at a cost for UK's Metro Bank

By Esha Vaish and Noor Zainab Hussain

(Reuters) - Metro Bank could need to raise more capital later this year, its CEO said, as the British challenger bank looks to more than double its loan book within three years.

Metro Bank, which was founded in 2010 to help break up the dominance of the UK's biggest banks, posted its first annual profit on Wednesday, but its shares tumbled as the growth in its loan book came at a cost to its profit margins and liquidity.

Metro also set out more aggressive growth targets for 2020.

It forecasts a loan-to-deposit ratio rising to between 85 and 90 percent by 2020, ahead of a previous target. This implies a loan book of between 23.37 billion pounds and 24.75 billion pounds compared with 9.6 billion pounds as at Dec. 31.

Metro's higher growth targets renewed speculation among analysts that the group will be forced to return to the market to seek fresh capital and CEO Craig Donaldson confirmed on Wednesday that could happen as early as this year.

"We are definitely going to have to raise capital in 2019, but we may choose to go in late 2018," he said via email.

Metro, which currently has 55 branches and aims for about 100 by 2020, had in July raised about 280 million pounds by selling new shares without any discount to investors.

RBC analysts, who have a "sector perform" rating and 40 pounds target price on the stock, said Metro could raise about 300 million pounds through another share issue.

The bank's shares were the third biggest FTSE midcap loser, having fallen 6 percent to 33.88 pounds by 1140 GMT. Its market value stood at about 3 billion pounds ($4.2 billion).

MARGIN CONCERN

Metro reported an underlying pretax profit of 20.8 million pounds for 2017, compared with a year-ago loss of 11.7 million pounds. Its loan-to-deposit ratio increased to 82 percent from 74 percent.

However, analysts flagged a 7 basis points quarter-on-quarter fall in net interest margin (NIM) - the difference between the interest it receives and the amount paid out - to 1.87 percent in the fourth quarter ended December 31.

"We believe that rapid growth delivery will come at the expense of margins and, potentially, credit quality," Goodbody analyst John Cronin said, adding that Metro's CET1 capital ratio of 15.3 percent at Dec. 31 missed his estimate of 15.9 percent.

Metro's NIM was hit by drawdowns taken against a UK scheme that allows banks to borrow cheap credit, but Donaldson forecast that NIM would increase in 2018.

"We aren't taking any more from (the scheme) and therefore... as we grow, NIM will grow," he told Reuters.

Metro also said it was preparing its bid for RBS's remedies package, designed to encourage competition by providing smaller banks with funds totalling about 835 million pounds.

(Reporting by Noor Zainab Hussain and Esha Vaish in Bengaluru; Editing by Amrutha Gayathri and Elaine Hardcastle)