Metro is to sell £3bn of mortgages to larger rival NatWest
Metro is to sell £3bn of mortgages to larger rival NatWest © Chris J. Ratcliffe/Bloomberg

Shares in Metro Bank on Monday touched their highest level since the coronavirus pandemic began to hit UK markets, after a loan sale removed the need for a potentially crippling debt issuance.

Metro announced on Friday after market close that it had agreed to sell £3bn of mortgages — about 20 per cent of its loan book — to larger rival NatWest. 

The deal lifted Metro’s capital level above a key regulatory minimum. This pushed the bank’s stock up as much as 30 per cent in early trading on Monday, before falling back to a 26 per cent rise. Prices for Metro's existing bonds also climbed to their highest level since March.

Joseph Dickerson, analyst at Jefferies, said: “Investors in Metro should welcome the news, as this removes the near-term need to raise £200m to £300m of likely expensive senior debt.”

Brad Golding, managing director at Christofferson, Robb & Co, a fund manager that owns Metro Bank debt, said: “Investors assumed the bank would not receive any regulatory breathing room nor take any action to meet MREL [minimum required eligible liabilities] requirements. This was a ridiculous assumption.”

Metro has been struggling since the disclosure of a reporting error that affected its capital levels in early 2019, and is attempting to turn itself round under new chief executive Dan Frumkin.

The scandal made it difficult to meet new MREL regulations, which require banks to issue loss-absorbing debt. Although the rules are designed to prevent the need for governments to bail out failing banks, in Metro’s case, it threatened the lender’s survival by forcing it to make record-breaking interest payments on a bond that was issued at the height of its difficulties.

The bank warned earlier this year that it might have to raise up to £300m more of the MREL-eligible debt, but delayed the decision in the hopes that the Bank of England would soften requirements for midsized lenders like Metro.

Before Metro announced its mortgages sale on Friday, the BoE said it would re-examine requirements for midsized banks and extend the deadline to reach “end-state” MREL levels. However, it said that interim rules would continue to apply in the meantime, meaning Metro would have had to sell assets or issue debt in early 2021 to meet the requirements.

Mr Frumkin said that, in addition to removing the need to issue new debt, the mortgage sale “will provide us with further lending capacity and enable us to shift our asset mix and expand our unsecured lending portfolio”.

In August, Metro struck a deal to buy RateSetter, the peer-to-peer lender, to expand its unsecured lending business.

Alison Rose, NatWest chief executive, said growing the bank’s mortgage book was “an important strategic priority” and said the Metro deal would help speed up its expansion.

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