Metro Bank plunges on talk of big fundraising to fix finances

By Sinead Cruise and Iain Withers

LONDON (Reuters) -Metro Bank shares closed down 26% on Thursday following reports it was exploring options to raise as much as 600 million pounds ($728 million) in debt and equity to bolster its finances, the latest in a string of setbacks to befall the UK lender.

Shares in Britain's best-known challenger bank have lost 98% of their value since the company went public in 2016, leaving it valued at around just 65 million pounds as of Thursday's close. The bank reported having around 15.5 billion pounds in customer deposits at June 30.

Thursday's share price fall is the latest in a litany of woes for the bank, including accounting errors, leadership departures and delayed regulatory approval for key capital reliefs.

Metro Bank's fundraising could include more than 100 million pounds from selling shares to bolster capital, three sources familiar with the matter told Reuters on Wednesday, following an initial report in the Financial Times.

Sky News reported that Metro has begun sounding out potential bidders including Lloyds and NatWest for a 3 billion pound chunk of its mortgage book, citing City sources.

Lloyds and NatWest declined to comment.

Metro Bank said in a statement on Thursday it was considering its options, adding that it met its minimum capital requirements and had not made a decision on fundraising plans.

"The company is evaluating the merits of a range of options, including a combination of equity issuance, debt issuance and/or refinancing and asset sales," it said.

There is no indication customer deposits could be at risk. Metro Bank's customer deposits are backed by a government guarantee up to 85,000 pounds.

While proving popular with customers, Metro said last month that its principal regulator had signalled it was unlikely at this stage to allow the lender to use its own internal risk models for some products. That means it is subject to higher capital requirements, increasing pressure on its high-cost business model and future earnings prospects, ratings agency Fitch said in a note.

Metro Bank's chairman met with officials from its main regulator the Bank of England's Prudential Regulation Authority (PRA) on Thursday, for a scheduled meeting, a spokesperson for Metro told Reuters.

The PRA and FCA declined to comment.

Metro's volatile share price in early trading on Thursday triggered two brief automatic suspensions in trading.

The bank's bonds hit their lowest price on record.

The 350 million pounds bond maturing in 2025 plunged to 57, down more than 19 pence in the pound from Wednesday's close, according to MarketAxess.

Meanwhile, the 250 million pounds note due to mature in 2028 fell to 30, down over 21 pence in the pound from Wednesday's close, data from Tradeweb showed.

Regulators in Britain have said the banking system is safe and stable following failures of U.S. lenders Silicon Valley Bank, First Republic Bank, Signature Bank and Switzerland's Credit Suisse which rocked financial markets earlier this year.

Nevertheless, some analysts were downbeat about Metro Bank's long-term prospects.

"Supporting a further capital raise for this struggling bank would be akin to throwing good money after bad, in our view," Gary Greenwood, banking analyst at Shore Capital said in a note, adding he believed the bank's issues were company-specific, including the regulatory capital relief delays.

Sources said Metro Bank has brought in Morgan Stanley as an adviser while one person familiar with the situation said Jefferies recently stepped away as broker to the firm. Jefferies declined to comment.

MULTIPLE SETBACKS

Metro Bank grew rapidly after its launch in Britain in 2010, following a blueprint that founder Vernon Hill had honed in the United States with Commerce Bank that prioritised customer service in-branch while rivals were slashing their networks.

Its distinctive red-and-blue coloured outlets typically located on street corners in busy retail areas offered gimmicks such as a dog-friendly policy inspired by Hill's own pet Duffy.

But, Metro Bank was forced to raise shareholder equity in 2019 after an accounting error led to a misreporting of its risk-weighted assets, spooking investors and regulators and wiping hundreds of millions of pounds off its market value.

The ensuing fallout also ultimately led to the departure of the bank's top management team, including chairman Hill and CEO Craig Donaldson.

The Gilinski Group - an investment firm owned by Colombian billionaire Jamie Gilinski, which holds a 9% stake in Metro Bank - declined to comment on Wednesday.

Metro Bank said on Thursday it expected its forthcoming third quarter trading update to show growth in personal and business current accounts, in line with expectations.

"The board retains conviction in the merits of Metro Bank's customer-centric model and strongly believes that there is a significant opportunity set that the company can capitalise on, subject to renewed balance sheet strength," it said in September.

($1 = 0.8239 pounds)

(Additional reporting by Danilo Masoni, Chiara Elisei, Lawrence White and Anousha SakouiEditing by Mark Potter and Elaine Hardcastle)