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Is Metro Bank’s future safe?

When Metro Bank (LSE:MTRO) opened its doors in the summer of 2010 it promised a new way of banking. Emerging from the financial crisis of 2008, it was the first high street bank to launch in Britain in 100 years and it pledged that it would be doing things differently.

Fast forward nine years and a series of blunders and errors now sees this dynamic, challenger bank that promised so much change behaving like its financial counterparts. Investigations over securities fraud, questions over executive bonuses and accounting errors have knocked this bank off its moral high ground. So the question is, where does it go from here?

Where did it go wrong?

After years of rapid growth, Metro Bank hit a roadblock in January 2019 when it came to light that a misclassification of £900m worth of loans had left them without enough capital to meet regulatory requirements. Cue an investigation from the Financial Conduct Authority and Prudential Regulation Authority and a substantial drop in the bank’s share price.

This came along at the same time as three US law firms announced they were investigating the lender’s bosses for securities fraud and 20% of shareholders registered their anger over executive pay plans. Instead of making headlines about a new way of banking, Metro Bank was now garnering more attention for its troubles than for its innovative service for customers.

Back on track?

The beacon of light for the bank has been that it has raised £375m from shareholders to cover gap in capital requirements, above its original target of £350m. This has allayed concerns registered by the Prudential Regulation Authority, which stated the bank is ‘profitable and continues to have adequate capital and liquidity to service its customer base’. The support shown from shareholders was encouraging, with 92% voting in favour of the deal.

But is this enough to allay the fears of banking customers? Confidence in the bank has definitely been impacted. This can been seen just from the fact a rumour on social media led to queues of customers demanding their safety deposit boxes as they were worried about the lender’s financial health.

The financial crisis showed that the banking system is not without its flaws, and the impact of what happened in 2008 is still very much present in the social consciousness of customers. If you layer that with economic uncertainty surrounding Brexit and you have yourself some very jittery savers and borrowers.

Maybe because Metro Bank promised a different way, it seems that the fall has been harder. Customers feel like their trust has been misplaced and it make take some time for the bank to rebuild the level of confidence it once had.

What does the future hold?

For the moment the bank looks stable. The fundraising will go along way to shoring up its balance sheet. However, investors remain nervous which means the bank is unlikely to stay out of the news for the time being.

Added to that its decision to stop lending to new commercial real estate customers, the area in which the accounting error was made. This could either indicate that the bank is wisely minimising its risk for the future, or it could signal that it’s troubles will continue as it reduces its services.

The timing of these crises is unfortunate for the bank, with the general public anticipating some sort of negative fallout due to the UK leaving the EU and the current uncertain political climate. Nervous customers tend to go for a safer bet, placing their money with more established and mature financial institutions who have worked hard to untarnish their images since the fallout of 2008.

If Metro Bank wants to keep the customers it already has, and gain some more, it needs to restore confident and quickly. If you type ‘Is Metro Bank…’ into your Google search engine, the first result is ‘Is Metro Bank safe?’. For the next year it needs to be on its best behaviour, as another mistake or negative headline could prove to be costly.

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