Metro Bank shares dip after SME lending pivot sees profit balloon
Metro Bank has swung back into profit as the firm’s pivot into small business lending led to a bump in revenue.
The FTSE 250 lender returned to profitability with a pre-tax profit of just north of £98m – a 15-year high and major clawback from losses of £14m last year.
The swing came as Metro notched 67 per cent growth in new corporate, commercial and small and medium-sized enterprise (SME) lending – an area the bank has locked its sights on in its turnaround strategy.
Shares in the firm rose as much as seven per cent on the news to 122.36p, before tumbling down into the red. By mid-morning the stock was down 0.2 per cent.
Revenue at the firm rose 16 per cent to just over £585m as lending in the group’s target segment grew 56 per cent year-on-year to £5.2bn.
Metro is one of a number of banks that have stormed into the SME lending space amid a row back from industry giants, with the area typically providing higher margins for lenders as they are able to charge higher interest rates.
The segment also focuses more on relationship-building with business’ compared to lending to massive corporations, which can shop around globally for the cheapest debt.
“We are capturing market share in our target segments and have a deep pipeline of attractive lending opportunities,” said Daniel Frumkin, Metro’s chief executive.
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He added the lender’s focus on the “execution of our strategy and pivot to high margin business” had helped profits balloon whilst cutting costs.
Operating costs tumbled seven per cent year-on-year to £473m, ahead of previous guidance of a four to five per cent fall.
“Recent turnaround efforts are starting to gain traction and suggest there may be something to salvage from the Metro Bank brand,” Russ Mould, investment director at AJ Bell, said.
“This may have meant abandoning its signature seven-day opening model, but potentially a necessary sacrifice in the quest to secure a long-term sustainable future for the bank.”
The bank laid out plans for it its return on tangible equity – a key metric of profitability – to more than double from current level of 6.4 per cent over the next 6 months and nearly triple over 18 months.
The lender is also expected to benefit greatly from the changes to the MREL regime announced in Rachel Reeves regulatory reforms at Mansion House last year.
Introduced in the fallout of the 2008 financial crisis, minimum requirement for own funds and eligible liabilities (MREL) rules dictate strict tailored requirements for banks possessing assets between £15-25bn. The Bank of England is set to hike the threshold following consultation.
Metro has been reclassified as a transfer firm under the system in a move that frees up the bank’s balance sheet with costs slashed. The firm said it releases “significant capacity for growth”.