In a move we knew was coming, Vernon Hill, the chair and co-founder of Metro Bank (LSE: MTRO), stepped down from his position “with immediate effect” last week, as the company’s latest quarterly results showed yet more fallout from its reporting error earlier this year. Senior independent board director Michael Snyder is set to takeover as interim chair.
The change, far from coming across as a move of strength, is seemingly more of a negative – Hill in essence being forced to resign his position amid a number of controversies and poor performance for the challenger bank. Indeed Metro Bank and some of its senior managers are under investigation by the Financial Conduct Authority and Bank of England over its reporting mistake.
Too little, too late?
The problem for Metro is that a change of chair, particularly coming so late after its reporting controversy, may not be enough to offset its current problems. Earlier this year some of its larger customers began withdrawing funds after it emerged the bank miscategorised commercial loans when calculating how much capital it needed to offset against them.
As well as damaging investor confidence (if you can’t trust reporting numbers how can you truly value a company?), the problem also meant the bank was forced to raise new equity.
More recently, a failed attempt to raise financing through a bond issuance meant Metro only succeeded in selling the bond a week later by offering a much higher interest rate – one that will weigh on its finances for the next few years.
Similarly, in order to win back customers, Metro Bank has increased the interest rates it offers to savers – its latest quarterly results showing this is already weighing on its net interest income, which fell 10% in Q3.
Meanwhile, the bank admits that the bungled bond issue led customers to make withdrawals to the tune of £213m in September, setting back its efforts to return to deposit growth.
What next?
Looking at both customers and investors, Metro Bank still seems to suffer from a lack of confidence across the board. Put simply, if it can’t show the world it will last, customers won’t put their money in and investors won’t back it – its financials will all drop as a result and the cycle will keep going down.
CEO Craig Donaldson stated his preference for “organic growth”, but refused to rule out the potential for a takeover. In regards to a takeover offer, he said “should something occur we will treat it with the right respect because that’s the fiduciary duty of the board”, it seems more that he is hoping for an offer rather than planning against it.
For me, there are just too many problems or potential issues with Metro Bank to go near it, even at its current low price. The investigation of the reporting error (as well as the fact the error occurred in the first place) is a worry, but the lack of confidence could be far more detrimental.
If people don’t save with the bank, it will not be able to offer loans and therefore not be able to make any money. Unless there is a substantial shift in confidence for Metro, I find it hard to see how things are going to get better.
