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Metro Bank shares crash after loans blunder revealed

Metro Bank said hundreds of millions of pounds of loans should have been categorised as ‘risk weighted assets’.
Metro Bank said hundreds of millions of pounds of loans needed to be categorised as ‘risk weighted assets’. Photograph: Toby Melville/Reuters

Metro Bank has revealed a major blunder in how it classifies its loan book, an admission that drove its share price down by nearly 40% on Wednesday, wiping £800m off the value of the company.

The bank, which has been opening new branches as established rivals cut back, revealed that hundreds of millions of pounds of commercial property loans and loans to commercial buy-to-let operators had been wrongly classified in risk terms, and should have been among its “risk-weighted assets” (RWAs).

After the blunder emerged, Metro’s shares plummeted 39% from £22 to close at £13.45 as analysts feared the bank might have to raise fresh capital, just six months after tapping shareholders for £300m to finance its rapid expansion plans. When a bank has higher risk-weighted assets, regulators require higher amounts of capital to be set aside.

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Metro launched in 2010 and has opened new banking halls in city centres across the south of England. It floated on the stock market in March 2016 at £20 a share, which rose to more than £40 a share in March last year, but has since been falling.

Metro Bank chief executive Craig Donaldson said “credit quality has remained robust” and that “notwithstanding the RWAs, the bank continues to do well”.

The company said it had called in a “big four” accountancy firm to audit the loan classification, and had immediately reported the issue to the Prudential Regulatory Authority, one of the successors to the Financial Services Authority.

When Metro Bank reassessed its loan portfolios, it found that around a 10th of its £14.5bn loan book had been given incorrect risk weightings.

It found that many of the commercial property loans had been assigned a 50% risk weighting when they should have been 100%. The situation was worse in the commercial buy-to-let book, where many loans had been given a 35% risk weighting when they should have been 100%.

The bank also revealed that tougher trading conditions meant underlying profits for 2018 were £50m, significantly below expectations of £59m but 136% up on a year earlier.

Mortgage margins have been hit by harsher competition in the sector and general uncertainty in the property market over Brexit, it said.

Metro insisted its growth plans remained on track, with Donaldson saying the market “should not assume” that the bank would be seeking extra capital. Its total capital ratio fell from 19.1% to 15.8% after the loans reclassification, but Metro said it remained comfortably above the 12.6% regulatory minimum.

It said that in the fourth quarter it opened 100,000 new customer accounts. Six new branches took its total to 66 and further expansion in the West Midlands was planned for 2019.

Donaldson said: “Metro Bank remains well positioned to support our growth strategy as we navigate an uncertain period for the UK.”