Shares in ‘community’ lender Metro Bank (MTRO) fell 9% to 104.7p after the firm reported swingeing losses for the first half of the year and admitted that it may need to raise capital to meet regulatory requirements.
For the six months to 30 June the challenger bank posted pre-tax losses of £240.6 million on revenues of just £153.3 million as net interest income fell 18% to £116.2 million.
The bank’s net interest margin - the difference between the interest rate it charges on loans minus the rate it pays on deposits - contracted to 1.15% against 1.4% in the six months to December as deposits ballooned by more than £1 billion and net lending shrank by 1%.
Fee and other income also fell as customers were less active during lockdown, while operating costs rose by more than 10% as the firm pushed ahead with its ‘Change the bank’ restructuring programme, resulting in a cost-to-income ratio of 147% compared with 110% in December.
BAD LOANS AND LOSS CAPACITY
Compounding the situation, non-performing loans rose from 0.53% of the portfolio to 0.96% over the six month period and 17% of residential mortgage customers had deferred interest payments as of the end of June, equivalent to £1.8 billion of lending.
Provisions for expected credit losses rose to £112 million, equivalent to 1.55% of outstanding loans against just 0.1% a year ago, with the majority of the increase in charges related to changes in economic assumptions under the IFRS 9 accounting standard.
Although the bank had core equity tier one (CET1) capital of £1.24 billion as of the end of June, equal to 14.5% of its risk-weighted assets and on a par with the large high street banks, it flagged that it may need to raise funds to bolster its regulatory capital under the Bank of England’s rules on minimum requirements for own funds and eligible liabilities (MREL).
‘The Bank of England MREL framework review is expected by end 2020. Depending on the outcome, the Board may consider raising £200-300 million further MREL in H1 2021. Ahead of this, MREL resources may fall below the sum of the firm's MREL requirement and buffers (the loss absorbing capacity) for a period of time.’
