Metro Bank returns from the brink but tough road lies ahead

Metro Bank bosses are breathing a sigh of relief. Less than a year after the bank was forced into the arms of a Colombian billionaire as part of a £925m rescue deal, it is coming back from the brink.

A forecast by the bank last week that it would return to profitability by the end of the year sent shares up more than 35% to 55p, marking their strongest weekly gain since the bank’s IPO in 2016.

But it has not been an easy road. Over the past 10 months, Metro Bank has had to shed more than 1,000 staff and cut back on its famous seven-day openings to slash costs. And under the direction of its new wealthy majority shareholder, it is about to completely change its business model with a brand new blueprint untried on UK shores.

Whether this will help it rise like a phoenix from its near-failure, or fuel an identity crisis, remains to be seen.

But Metro Bank has always taken chances. When it burst on to the scene as the UK’s first new high street bank in a century in 2010, its Trump-supporting billionaire founder Vernon Hill pitched the bank as a rebel among stingy rivals, pumping cash into seven-day openings and extravagant dog-friendly branches. It held massive launch parties for its new sites, and welcomed new staff with American-style exuberance that ended in team-building conga lines – all at a time when competitors such as Lloyds, Barclays and NatWest were cutting back.

But tumultuous times were ahead. Over the subsequent 14 years, Metro managed to miss out on a digital banking boom and fuel controversy over financial ties to the founder’s family business. In 2019, it breached UK regulations with a major accounting blunder that led to a mini-bank run and forced Hill to resign as chair. It also dashed hopes of more lenient capital rules that might have helped Metro compete with larger rivals, prompting panic last autumn that led to the bank being scooped up by Colombian billionaire Jaime Gilinski Bacal, who now owns 53% of the lender.

Bacal, who made his fortune flipping assets of struggling lenders in Latin America, is pushing Metro on to an untrodden business path, albeit a path that positions Metro as an opportunist rather than a rebel.

For one, Metro is ditching its former identity as feisty rival to high street lenders such as HSBC, Nationwide and TSB, competing for a share of the retail mortgage market. That decision was punctuated last month by the sale of £2.5bn of its £7.5bn mortgage portfolio to NatWest, with the rest scheduled to be run off over the next five years, by borrowers either paying off their mortgages or remortgaging with another provider.

Instead, Metro’s chief executive, Daniel Frumkin, said it would be running in a pack of UK specialist lenders. “We compete a little bit with the high street banks today. And in the future, we need to compete more with the Paragons, the OSBs, the Shawbrooks, Hampshire Trusts … We need to start to do a little bit less volume and a little bit more margin.”

That means shifting out of run-of-the mill lending, and aiming for a new mix: with 70% of its loans aimed at small and medium-size businesses, and 30% at specialist mortgages involved in shared ownership, buy-to-let, and high-net-worth individuals paid in bonuses rather than salaries.

Unlike the specialists, however, Metro will keep its network of expensive high street branches, decked out in imported Canadian wood and Italian marble.

When asked how this could possibly succeed, when no other model like it existed, Frumkin said: “That’s why it’ll be a success. I’m not copying anybody else. This is this is clear blue water for us.”

Part of that strategy is undoubtedly due to long and expensive leases on those high street properties, which have left it with £234m in liabilities on its balance sheet. Yet Frumkin insisted it would give Metro the upper hand, particularly in attracting small businesses in the north of England.

Casting around for analogies, Frumkin said: “The reality is a lot of the specialists are rugby sevens … Whereas Metro is a full-size England rugby team. And that is our difference … We can do the niche stuff like the specialists, but we can also compete across the whole pitch.

“We can do corporate, we can do commercial, we can do asset finance, invoice finance. We can do retail, we can compete across the whole pitch, and we’re the only mid-tier [firm] that can do that.”

Metro will still have to prove its strategy can deliver results. As the RBC analyst Benjamin Toms put it: “Execution on the plan from here is key.”