Metro Bank shares plunged to all-time lows on Thursday after it revealed an accounting error contributed to a 50% drop in quarterly profits and the loss of some of its bigger customers. The challenger bank’s share price fell as much as 21% in reaction to it’s first-quarter earnings report. It detailed the fallout from the accounting blunder centred on how it classifies its loan book.
Metro’s chief executive, Craig Donaldson, said the bank suffered a 4% drop in deposits following an “adverse” reaction to the disclosure in January. He said a “a small number of large commercial and partnership customers” had withdrawn their funds, while pre-tax profits halved to £4.3m, from £8.6m a year earlier.
The lender confirmed in January 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” . Metro is being investigated by the Financial Conduct Authority and Prudential Regulation Authority over the error.
Bank analysts downgraded their price targets for the upstart lender and warned of more tough times to come, as it battles to complete a £350 million capital raise in the second quarter against a difficult market backdrop.
Metro Bank shares were down by 18 percent by 0720 GMT, hitting record lows.
The company has lost more than 60 percent of its value this year following the disclosure in January of a misclassification of the risk weighting on a large book of loans, triggering regulatory probes and pressuring Metro to raise funds.
“It’s been the most chastening experience of my career, a chastening experience for the organisation but people know we are taking this exceptionally seriously,” Chief Executive Craig Donaldson told reporters.
Donaldson said the bank is ‘doubling the team’ who work on assessing its risk weightings as it tries to establish what went wrong and prevent a repeat, adding tens of bankers to its staff.
The bank had no update on when it expects the results of twin regulatory probes by Britain’s Financial Conduct Authority and Prudential Regulation Authority, Donaldson said.
Analysts and equity capital markets bankers expect the lender may have to offer a deep discount on its shares to complete the 350 million pound capital raise, and some said it may need to raise more funds after that, a notion Donaldson rebutted.
“We’ll get this one done in the second quarter and then I don’t expect to be talking about capital raises in the short term after that,” he said.
Ian Gordon, a banking analyst at Investec, said the latest earnings revealed an “awful quarter for the bank”, saying the accounting issue “continued to snowball for Metro”.
Donaldson, who is giving up his £800,000 bonus over the accounting fiasco, tried to soothe markets by saying that deposits started to bounce back in April, but investors seemed wary, with shares falling to all-time lows of 609.5p on Thursday morning before recovering some ground to 667p, down 14%.
Metro Bank shares have lost about 70% of their value since the accounting issue was announced.
In February, Metro shocked markets with plans to raise a further £350m just months after its last cash call. Metro has denied capital-raising plans were influenced by the loans misclassification.
John Cronin, a financials analyst at stockbroker Goodbody, said the drop in deposits was the most worrying for investors and “flies in the face of Metro’s ‘revolutionary’ expansionary strategy”.
He now expects a heavy drop in shares. “We believe that the wider market was none-too-pleased [on Wednesday] too and we expect an aggressive sell-off today and, in time, a successful deeply discounted rights issue, followed by further strategy recalibration.”