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Metro debacle shows the strength of UK banking

By Jasper Cox
14 May 2019

Metro Bank shareholders are nursing losses of around 70% since the start of the year. But if this is the worst of UK banking’s problems right now, the sector is in pretty good shape as it faces Brexit and digital disruption.

It is easy to be declinist about UK banking, what with Brexit and all, and Metro’s woes were one in the eye for the optimists. A much-vaunted challenger bank reliant on ploughing through more and more capital to fund growth is now in a sticky situation, after messing up the accounting of certain loan portfolios.

But the wider picture is a more positive one in the UK.

For one, the regulators are competent. It was the UK’s Prudential Regulation Authority that contacted Metro about its accounting practices in the first place. Perhaps it was too late, but it appears to have taken a tough line. It is also likely to kick into the long grass letting Metro use an internal ratings based (IRB) approach for measuring risk-weighted assets.

This would be welcome, showing the regulator can combine its own competition mandate to help smaller banks with applying stiff standards on capital.

Compare the situation with the German reaction to allegations of accounting irregularities in a financial firm. When digital payments firm Wirecard was under the cosh in the markets, the regulator, Bafin, banned shorting the firm’s stock and filed a complaint against journalists from the Financial Times in relation to market manipulation. The newspaper denied any such manipulation or unethical reporting.

In the UK, investors have had no regulatory obstacle to shorting Metro shares, racking up positions against the lender over the past months. Given the problems at the bank, it is hard to argue the shorts are somehow undeserved or do not reflect underlying weakness.

The bank is the most shorted in the whole of Europe, with 11.56% of the stock shorted, more than double any of the others on the list, according to Breakout Point, which compiles and analyses shorting data.

While distrust of shorting in other European countries appears to be based partly on the idea of foreign speculators swooping in and profiting on misery, with Metro, UK firms Odey Asset Management and Marshall Wace are the big winners, according to Breakout Point. Shorting may be an ugly game, but it rewards investors from anywhere who foresee scandals. Shorts in Metro are the sign of a market working well, even if the company in question is not.

And Metro is not at a point of collapse, despite bizarre social media rumours of a bank run. The UK state is not faced with the prospect of intervening in the market to engineer a recapitalisation, like in Italy with Banca Carige.

In a strange Brexit parallel, at the end of March the European Central Bank extended its supervision of Carige until the autumn. Does Italy go the Brexit Party route, diverging radically with at least the spirit of the EU’s rules and plugging state money into the bank? Or does the EU conclude nothing can be done and let Carige die? Like the UK, Carige is caught in limbo, still scouting around for private capital that does not appear to be forthcoming.

Digital foresight

Meanwhile, the UK’s banking sector remains in pretty good health. No big bank looks to be severely threatened by Brexit. Barclays is weathering challenges in investment banking just as well as, or better than, most European competitors.

And the picture with the challengers is also not too gloomy.

Even with Metro, its problems appear mostly down to accounting mishaps and governance rather than the fundamental business model. It has made a decent fist at bricks and mortar banking even as analysts call for banks to shut branches across Europe. It opened 10 stores last year.

And the UK is also home to experiments in disrupting financial services digitally, such as through the Financial Conduct Authority’s sandbox, and this should give its firms an edge over European peers.

New digital banks like Monzo and dozens criticise banks cross-selling products, perhaps paving the way for a different conception of banking. A new model would involve deposit takers acting as a platform for a wide range of other financial firms to sell their products. Monzo has recently been exploring a feature allowing its customers to switch energy supplier, partnering with Octopus Energy.

CYBG, which owns Clydesdale Bank, Virgin Money UK and Yorkshire Bank, is a more traditional challenger regarded as being forward-looking when it comes to tech. In a report in March it pointed to the need to work with fintechs, but also found that the vast majority of consumers still want to visit a branch or speak to other humans.

No one knows how banking will look in the future. But at least UK firms are looking at these issues rather than waiting for foreign firms (Google? Amazon?) to capture the market.

Metro and Brexit are the stuff of news because so much is wrong with them, but beyond the headlines is something of a good story for UK banking.

By Jasper Cox
14 May 2019