Metro Bank fell to a £241m loss in the first half of the year, becoming the latest lender setting aside hefty sums to deal with expected loan losses as it predicted an even more severe economic downturn than its peers.
The bank, which is dealing with the first recession since it was established a decade ago, reported £112m of expected credit losses, up from just £4.4m in the same period last year.
The majority of the total — £97m — was due to changes in economic forecasts rather than actual customer defaults. Government rescue schemes and programmes such as loan repayment holidays have so far kept customer default rates low, but banks are predicting sharp increases later in the year as more businesses collapse and the unemployment rate rises.
Metro’s “baseline scenario” now includes a drastic 14.6 per cent drop in house prices in 2020, with a further decline next year.
David Arden, Metro’s chief financial officer, said the bank’s estimates were “at the most severe end of the range” compared with rival banks. As a result, he said its first-half provisions were higher than some peers as a proportion of its loan book but the bank was less likely to have to take further significant provisions later in the year.
“We should be in good stead for the second half whatever Covid throws at us,” he added.
Shares in the bank dropped 6 per cent in morning trading on Wednesday, as it also warned it may fall below some capital requirements in the second half of the year. Metro said it might raise up to £300m in loss-absorbing debt in the first half of 2021 but said it would delay the decision until after regulators finish a review of capital requirements.
The Bank of England is examining how much so-called MREL smaller banks need after complaints that the current requirements create disproportionately high costs for them. Last year Metro was forced to pay a record-high interest rate to raise debt in the wake of a reporting scandal.
Dan Frumkin, Metro’s new chief executive, said the bank was in close contact with regulators and had warned them about the potential dip below its required levels, but added that he was hopeful the review would have a positive outcome.
“If we were [anywhere else], Metro could be five times larger than it is today before it would be caught by a loss-absorbing capital regime . . . it would not be prudent for the organisation to raise MREL until the review concludes,” he told analysts.
However, the bank insisted the disruption caused by coronavirus had not derailed its turnround plans. Metro recently announced a four-year restructuring programme based on cutting costs and shifting its focus towards more profitable areas of lending, after abandoning its previous strategy of rapidly expanding its branch network and focusing on the highly competitive mortgage market.
This week it agreed to buy peer-to-peer lender RateSetter in a £12m deal to help it push into other types of consumer lending.
Mr Frumkin said the company had made solid early progress in its turnround efforts: “We’re pretty sure we’re the only retail business in the world that’s opened new retail sites during the pandemic — we did it because there are communities we wanted to support during these difficult times.”
In the short term, however, restructuring costs added to its losses due to a number of one-off costs such as write-offs relating to the early exit from an expensive central London office.
Total revenue in the first half of the year dropped 29 per cent year on year, to £153m, while operating costs rose 13 per cent mainly due to the restructuring and a slight increase in day-to-day costs as it adapted to the pandemic and opened six new branches.
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