Metro Bank’s tug-of-war between shareholders, debtholders and regulators

Successful banks typically prefer to avoid negative press and speculation. On that basis, Metro Bank has not had a successful year.

The bank, like other UK ‘challenger banks’, continues to face significant headwinds from the very competitive landscape, the low interest rate environment, Brexit uncertainty and much higher regulatory costs, especially around the amount of capital and “bail-inable” debt that banks are required to hold since the financial crisis.

Unlike its peers, Metro Bank has also been in the news for its own failings, from risk and accounting controls to governance issues, and as recently as last week a botched attempt to come to the market to issue “bail-inable” MREL (Minimum Requirement for Own Funds & Eligible Liabilities) debt instruments.

The bank came back to the market yesterday, and this time successfully issued £350m of senior non-preferred instruments at 9.5%. The very high coupon, as well as its structure to allow US investors to participate and the longer tenor, helped attract around £550m of interest from the debt market, with the bonds trading up around the 101.5-102.0 level.

Whilst Metro Bank’s management team will be relieved to have met its upcoming regulatory requirements, questions will remain around the sustainability of its business model. The new debt transaction – and the £33.25m annual interest cost attached to it – will have a material negative impact on the bank’s profitability metrics, and likely their medium term strategic direction.

Whilst Metro Bank share price has now partially retraced the move related to its failed debt issuance, there should be no doubt that there has just been, yet again, a material transfer of value between stakeholders. Shareholders are picking up the tab to the benefit of debtholders and, ultimately, regulators.

Kames holds bonds from Metro Bank in its fund range

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One bride, a few suitors and a keen match-maker

Commerzbank reported better than expected results yesterday. Now, “better than expected” doesn’t necessarily translate to “good”, with Commerzbank once again seeing top line revenue pressure from the low interest rate environment and intense competition in the over-banked German market. Add a somewhat bloated cost base, and you have the archetype of a commercial German bank – one that trades at a low multiple-to-book value and generates a return on equity that doesn’t cover its cost of equity.

Following the failed merger discussions with Deutsche Bank, M&A rumours surrounding Commerzbank have continued unabated. The bride does have some attractions – it’s trading at a deep discount to its book value, offers access to the largest economy in Europe and potentially – to the right suitor – material cost synergies.

Separately, and importantly, there is also a very keen match-maker. Indeed, the ECB, in its banking supervision role, views banking consolidation as a way of strengthening the wider European banking system, helping in particular with the on-going issues of deep market fragmentation and cost (in)-efficiency.

Will the suitors show their hands? The prize is undoubtedly attractive, especially for banks like Unicredit, ING or BNP that have large in-market operations and should in theory extract better synergies from a tie-up, especially under the auspices of a keen match-maker.

On the other hand, will everyone – and in particular some people based in Berlin – view such a proposal positively? And how many banking tie-ups have lived happily ever after?

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