Revelations at the end of January that the bank had made an accounting and capital blunder and miscalculated its risk-weighted assets terrified investors at the time.
It wasn’t so much the raw numbers — Metro Bank’s capital ratios, restated for the screw-up, were still healthy by UK and international standards — but the sense that the bank didn’t know what it owned, or how to run modern risk management operations, sent shares plunging.
That first error was further compounded by the eventual admission that it was not Metro itself, through deep self-analysis, but the regulator which had spotted the errors. A bank that can self-diagnose is worth investing in; but a bank whose regulator chooses to double capital allocation against certain portfolios is a wild card. The FCA and PRA are, in turn, investigating the company’s management of its communications.
Nonetheless, Metro deserves praise for this week’s decision to launch a £350m rights issue.
It’s probably going to come cheap, for a stock which used to be a market darling. Even with the stock 40% down since the accounting failures, it still trades at price to earnings ratio of 31 times.
But despite the last two months of blunders, it’s not a last ditch rescue. Instead, it’s a prudent action to make sure the bank can ride out any further worries. Banks tend to fail through a slow evaporation of confidence and credibility. Capital cushions always seem plentiful, until they aren’t.
Better to act now, take the money before you really need it, and get some breathing space. Metro gets its rights when it counts.