Metro Bank plunges on misclassified assets, capital concern

Bloomberg

Metro Bank Plc fell the most since going public after applying an incorrectly low risk weighting to parts of its loan book, with the British lender’s chief saying he doesn’t know how long the mortgages in question had been wrongly classified.
The shares plunged as much as 39 percent and the bank’s bonds also fell on concern it will need to raise more capital as a result. Metro Bank, founded to challenge Britain’s big lenders almost a decade ago by US entrepreneur Vernon Hill, also said profit “softened as the last quarter progressed.”
“It was a misinterpretation of the rules,” and the misclassification dates back through 2018 at least, Craig Donaldson, Metro Bank’s chief executive officer, said by phone. “We are putting it right,” he said, calling it an “isolated incident” that didn’t affect the bank’s earnings.
He said the bank has been in communication with Britain’s Prudential Regulation Authority. A spokesperson for the regulator declined to comment.
The bank previously put a 50 percent risk weighting on its commercial mortgages, but said it has now increased this to the correct level of 100 percent, a spokesperson for the lender said. For buy-to-let mortgages, the portfolio had been held at a risk weighting of 35 percent, but this has also been increased to 100 percent.
“I have never seen this before,” said Timothee Pubellier, a portfolio manager at Financiere de La Cite in Paris who doesn’t own Metro Bank’s shares or bonds. “How can investors trust management from now on? And even more importantly, what is their setup for internal controls? It also raises questions on other parts of the business that could have been misinterpreted as well.”

CAPITAL RATIO
Donaldson, who has been CEO since 2010, said Metro Bank hired a major accounting firm to examine the matter. “We need to get through the process of what we are doing now,” he said. “What will follow will follow.” He said he has no plans to leave the lender.
The bank said it discovered the misclassification as part of an internal review, but transcripts of past conference calls show some observers of the company were perplexed about how the company was categorizing its assets.
“The risk weight on the commercial real estate portfolio, if my math is right, it is 60.4 percent, which just seems low, given where those standardized risk weights should be. Do you mind just helping me understand the disparity there?” Nishil Patel, a financials analyst at Basswood Partners, a New York-based hedge fund, asked in a November call with management, according to a transcript posted on Metro Bank’s website.
David Arden, who became Metro Bank’s chief financial officer in March, responded that he didn’t have the details at hand, but “we continuously look at all the risk weightings we have, and we are constantly reviewing that.” Patel didn’t immediately respond to an email seeking further comment. Christopher Cant, an analyst at Autonomous, wrote a note in October that said his firm had noted a “strangely low risk density relative to peers” when it started coverage a year earlier.
Metro Bank also said on Wednesday that unaudited pretax profit for 2018 was 50 million pounds ($65 million), missing the 59 million-pound average estimate of nine analysts surveyed by Bloomberg.