Metro Bank shares post record gain as lender boosts capital

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Metro Bank shares jumped the most since listing after the British lender sold 375 million pounds ($479 million) of new stock to repair its finances, a step that was welcomed by the Bank of England.

The stock surged more than 26% to close at 677 pence as trading volumes hit their highest on record. The bank, founded by U.S. entrepreneur Vernon Hill, priced new stock at 500 pence on Thursday — less than a third of the market price before it announced it was raising money.

The Bank of England said in a statement Friday that it “welcomes the steps taken” by the lender. “Metro Bank is profitable and continues to have adequate capital and liquidity to serve its current customer base. It has raised additional capital in order to fund future growth.”

A prospectus issued on Friday after the placing offered fresh details about Metro, including plans to cease its controversial practice of purchasing architectural, design and branding services from InterArch, a business wholly owned by Hill’s wife, Shirley.

The prospectus also revealed that:

  • Metro has frozen the vesting of share options and awards for its leadership pending “further analysis and the ongoing investigations” into the capital issues discovered in January.
  • Plans to issue bail-in debt this year could be more expensive as the “external environment for raising such capital is more challenging.”
  • The bank could face possible criminal liability stemming from regulators’ investigations into its faulty reporting of some loan risks.
  • Existing shareholders who did not take part in the placing had their holdings diluted by 43.5%

The travails of the bank began in January when regulators found Metro was using the wrong risk weightings for some of its mortgage book, pushing down its capital level.

The share sale, announced in February and completed Thursday, was “significantly oversubscribed” and attracted the bank’s existing shareholder base as well as new investors, Hill said in a statement.

Hill has personally bought about 5 million pounds of stock in the offering, although his stake dropped from 5.3% to 3.6%, according to the prospectus.

RBC Capital Markets, Jefferies International and Keefe, Bruyette & Woods led the sale, which which was increased from an initial 350 million pounds. The three investment banks are Metro’s longtime advisers, leading share sales last year and in 2017.

“One should not underestimate the founder and the CEO’s ability to source fresh investment, as well as tap existing shareholders for monies,” John Cronin, an analyst at Goodbody, said in a note.

Metro Bank also announced a revamp to its business model, moving away from commercial real estate and landlord loans, while indicating it may cut jobs.

The bank also said it will move away from the loans that produced its capital shortfall, and “adjust lending mix with significantly less commercial real estate and professional buy-to-let.” Meanwhile, it aims to grow in trade services and foreign exchange.

Friday’s rally goes some way to reverse the decline in recent days after false rumors about the bank spread on social media. While the bank quickly moved to reassure customers, photos of queues at a branch in London intensified analysts’ concern about dependence on deposit growth.

Even after Friday’s surge, shares in Metro have lost more than half of their value since the fundraising was announced in February. Metro was the first challenger bank that appeared in Britain after the financial crisis to take on the nation’s four big established lenders. The bank has been opening sites across southeastern England as legacy lenders have been paring back their branch networks, and it has plans to expand into the north.

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