Metro Bank

[hiriskpaul]

price here is line with Paul's post above https://www.boerse-frankfurt.de/bond/xs ... -5-5-18-28

HL is still showing as 55

Thanks for that, looks quite accurate compared to quotes I have obtained from a friend with a Bloomberg terminal. I shall not have to bother him so often in future!

[Jwdool]

Results are out:

londonstockexchange.com/news-article/MTRO/metro-bank-plc-results-for-year-ended-31-december-2022/15858432

u/l rev +31% (NIM up 52bp). Cost of deposits DOWN despite mkt rate changes, cost of risk 32bp vs 18bp. U/L eps -30.5p vs -101.1p. U/L profits in 4Q22. Targeting mid-single digit RoTE by 2024. Resuming store opens (North of Eng.)

The 5.5% and 9.5% bonds have been fantastic investments, having remained money-good throughout the RWA debacle. I would expect Metro bonds to trend back to par in advance of the 2025 call. This should accelerate now the bank has returned to profitability in Q4. A good parallel for Metro is the experience of the Co-op bank, whose profits quadrupled (results out in the last week). The value with Metro is clearly with the bonds, as opposed to the equity, however, if the profitability is sustained, I'd expect to see strong growth in the share price going forward (albeit from very depressed levels).

[hiriskpaul]

Yes results look good. They could really do with some more capital, but seem intent to slowly acquire it by building reserves, for this year at least. I note though that the PRA have only extended MREL compliance on the 5.5% until June 2025 and the senior MREL debt matures a few months later, so they do need to be in a position to issue more MREL compliant debt before June 2025 as there is no way they will build sufficient reserves by then. A rights issue would be nice Or another bid.

They are not out of the woods yet, but are heading that way and I am very happy to continue holding the 5.5% at current prices.

[Swanmore22]

Hi Paul,
Re the 5.5%s
Call is unlikely so we reset to 4.45% plus the average of UK5yr..Say 7.50 to allow a little more softening..7.75% if not ?
5yrs then left to maturity in 2028.
The PRA removes the 5.5% issue from MREL compliance in June 2025.
From latest results :
• "Tier 2 debt remains eligible for MREL after HoldCo insertion (required by June 2023)" 1.
1. Temporary, time-limited, adjustment agreed by the Bank of England – eligibility until 26 June 2025. Tier 2 has a call date on 26 June 2023 and then resets at the reference rate plus 4.45% margin vs. current coupon of 5.5%."

Pre June 2025, Metro need a capital raise. Could be part rights/part debt

Difficult question to answer, but i have indicated my " best bet " of the two options below.

Do you think current holders will be "rolled over" into a new MREL compliant bond ?
Or tendered for ?

Am hopeful that Metro has decent access to capital mkts in 2 yrs..should be profitable and general rate environment more favourable/less panicky !
And that the tender is chosen option.
I rechecked the duration and risk profile of the Treasury book from last results.
Metro hold a low risk Treasury portfolio, as of March 2023.
Composition looks ok.

https://www.metrobankonline.co.uk/globa ... y-2022.pdf"•
Interest income earned on investment securities rose to £67.6m in 2022 from £23.2m in 2021, representing an effective yield of 1.18% (2021: 0.30%).
• Low risk density (2022 RWA of ~£250m)
• Weighted average portfolio repricing duration
- 1.3 years including cash
- 1.7 years excluding cash "

If we back the tender as the most likely exit, it would surely be a big plus for investor relations, before then we have 2 years of cpns at 7.5%appx and a tender to look fwd to.
Reason for todays post is i went to mkt this week to see if there was any firm bid with a view to reducing the 5.5%.
This issue is held with HL...they do not go fishing in the mkt, i think they leave the order with one mkt maker and I gave up.
I believe they have been marked down to a dealable 60-66 .
Am holding , may add on slippage, but would appreciate any comments,

Swan

[88V8]

Reason for todays post is i went to mkt this week to see if there was any firm bid with a view to reducing the 5.5%.
I believe they have been marked down to a dealable 60-66 .
Am holding , may add on slippage, but would appreciate any comments,

Also holding the 5.5%. In view of the clip will not add.
The ords look a good buy at current prices, am likely to top up.

V8

[hiriskpaul]

Hi Paul,
Re the 5.5%s
Call is unlikely so we reset to 4.45% plus the average of UK5yr..Say 7.50 to allow a little more softening..7.75% if not ?
5yrs then left to maturity in 2028.
The PRA removes the 5.5% issue from MREL compliance in June 2025.
From latest results :
• "Tier 2 debt remains eligible for MREL after HoldCo insertion (required by June 2023)" 1.
1. Temporary, time-limited, adjustment agreed by the Bank of England – eligibility until 26 June 2025. Tier 2 has a call date on 26 June 2023 and then resets at the reference rate plus 4.45% margin vs. current coupon of 5.5%."

Pre June 2025, Metro need a capital raise. Could be part rights/part debt

Difficult question to answer, but i have indicated my " best bet " of the two options below.

Do you think current holders will be "rolled over" into a new MREL compliant bond ?
Or tendered for ?

Am hopeful that Metro has decent access to capital mkts in 2 yrs..should be profitable and general rate environment more favourable/less panicky !
And that the tender is chosen option.
I rechecked the duration and risk profile of the Treasury book from last results.
Metro hold a low risk Treasury portfolio, as of March 2023.
Composition looks ok.

https://www.metrobankonline.co.uk/globa ... y-2022.pdf"•
Interest income earned on investment securities rose to £67.6m in 2022 from £23.2m in 2021, representing an effective yield of 1.18% (2021: 0.30%).
• Low risk density (2022 RWA of ~£250m)
• Weighted average portfolio repricing duration
- 1.3 years including cash
- 1.7 years excluding cash "

If we back the tender as the most likely exit, it would surely be a big plus for investor relations, before then we have 2 years of cpns at 7.5%appx and a tender to look fwd to.
Reason for todays post is i went to mkt this week to see if there was any firm bid with a view to reducing the 5.5%.
This issue is held with HL...they do not go fishing in the mkt, i think they leave the order with one mkt maker and I gave up.
I believe they have been marked down to a dealable 60-66 .
Am holding , may add on slippage, but would appreciate any comments,

Swan

They are going to have to replace their MREL compliant debt in 2025, or raise CET1 capital to cover it, but there do not appear to be any plans to do that other than by raise distributable reserves through earnings. Don't forget that in addition to the 5.5% ceasing to be compliant in June 2025, there is £350m of MREL compliant senior unsecured that matures in October 2025. In the current market it would be very expensive to replace either tranche of MREL compliant debt. They need a couple of years of prudent profitable growth to reassure markets and bring down that cost. Hopefully the bank capital and debt markets will be less skittish by 2025 as well!

Hopefully replacement will be voluntary, but you never know how coercive a bank may get these days. There may also be an issue of retail investors being excluded from taking part in future tenders, etc. So if you want out in 2025, you may have to sell in the market. Personally I would be happy to be left alone until maturity, but think that is unlikely to happen.

[Jwdool]

Things were looking fine with MTRO until SVB/ CS. I think the picture has changed. The 9.5s were trading >90 for a short time, but have since come off to around 80/84. The 5.5%s have also come off from >70 to nearer 60. The sort of rate MTRO would have to pay to replace these is now prohibitive. Something will need to change before 2025 for the bank to be able to issue at anything like a reasonable rate. Sadly, with peripheral banks now looking likely to have to raise more conservative levels of capital - even if MTRO is able to produce profits going forward, there is scarcely enough time for any reasonable capital build. They have also committed themselves to increase RWAs - which means the capital problem looks more acute.

I think there are now risks to MTRO paper - which looked far better a month ago than now. Unless and until we can see clarity on how they are going to raise capital - I'd suggest avoiding these notes for the time being, regardless of the yield at current levels. It is worth bearing in mind that the interest MTRO would need to pay on £650m of notes at 25% (roughly where the notes are trading right now), comes in at £162.5m p.a. That is quite some price to pay for capital - when the bank hasn't turned a profit.

Perhaps there will be a white knight at some point - but the chances of an outsider looking to get into retail banking today are certainly lower than they were before the latest debacle a month ago.

[Swanmore22]

Tks Paul,

When,if conditions allow rights issue must be fancied prior to June 2025.
Sitting tight,

Swan

[BondSquared]

Things were looking fine with MTRO until SVB/ CS. I think the picture has changed. The 9.5s were trading >90 for a short time, but have since come off to around 80/84. The 5.5%s have also come off from >70 to nearer 60. The sort of rate MTRO would have to pay to replace these is now prohibitive. Something will need to change before 2025 for the bank to be able to issue at anything like a reasonable rate. Sadly, with peripheral banks now looking likely to have to raise more conservative levels of capital - even if MTRO is able to produce profits going forward, there is scarcely enough time for any reasonable capital build. They have also committed themselves to increase RWAs - which means the capital problem looks more acute.

I think there are now risks to MTRO paper - which looked far better a month ago than now. Unless and until we can see clarity on how they are going to raise capital - I'd suggest avoiding these notes for the time being, regardless of the yield at current levels. It is worth bearing in mind that the interest MTRO would need to pay on £650m of notes at 25% (roughly where the notes are trading right now), comes in at £162.5m p.a. That is quite some price to pay for capital - when the bank hasn't turned a profit.

Perhaps there will be a white knight at some point - but the chances of an outsider looking to get into retail banking today are certainly lower than they were before the latest debacle a month ago.

Good summary. For the very same reasons I've come off the METROLN 5.5% 06/28 - the alternatives for capital raising have narrowed significantly over the past weeks, and as Jwdool says the more likely options are now an equity raise and/or acquisition, but not so much a roll-over of existing subs. New issuance at 25% is not going to happen, so either they need a dramatic tightening - not impossible - or an alternative. If you believe in a Metro Bk recovery story then playing it via common equity make more sense IMV, although I'm not convinced of the prospects; small/midsized banks are not in the best strategic position in the current shaky banking environment, although US midsize/regionals are in a whole lot more trouble than UK-based ones. Happy to watch this one from the sidelines while cheering on Metro Bk purely for the entrepreneurial challenge they present.

[hiriskpaul]

Things were looking fine with MTRO until SVB/ CS. I think the picture has changed. The 9.5s were trading >90 for a short time, but have since come off to around 80/84. The 5.5%s have also come off from >70 to nearer 60. The sort of rate MTRO would have to pay to replace these is now prohibitive. Something will need to change before 2025 for the bank to be able to issue at anything like a reasonable rate. Sadly, with peripheral banks now looking likely to have to raise more conservative levels of capital - even if MTRO is able to produce profits going forward, there is scarcely enough time for any reasonable capital build. They have also committed themselves to increase RWAs - which means the capital problem looks more acute.

I think there are now risks to MTRO paper - which looked far better a month ago than now. Unless and until we can see clarity on how they are going to raise capital - I'd suggest avoiding these notes for the time being, regardless of the yield at current levels. It is worth bearing in mind that the interest MTRO would need to pay on £650m of notes at 25% (roughly where the notes are trading right now), comes in at £162.5m p.a. That is quite some price to pay for capital - when the bank hasn't turned a profit.

Perhaps there will be a white knight at some point - but the chances of an outsider looking to get into retail banking today are certainly lower than they were before the latest debacle a month ago.

Good summary. For the very same reasons I've come off the METROLN 5.5% 06/28 - the alternatives for capital raising have narrowed significantly over the past weeks, and as Jwdool says the more likely options are now an equity raise and/or acquisition, but not so much a roll-over of existing subs. New issuance at 25% is not going to happen, so either they need a dramatic tightening - not impossible - or an alternative. If you believe in a Metro Bk recovery story then playing it via common equity make more sense IMV, although I'm not convinced of the prospects; small/midsized banks are not in the best strategic position in the current shaky banking environment, although US midsize/regionals are in a whole lot more trouble than UK-based ones. Happy to watch this one from the sidelines while cheering on Metro Bk purely for the entrepreneurial challenge they present.

Whilst I agree that the recent issues over banks will not have helped Metro, I think I should correct some of the figures being presented.

To start with, there is £600m of MREL debt, not £650m, both of which need to be replaced in 2025 at the latest. The T2 amortises at £50m a year from the June call date as well, so they will need to raise more capital before long if they want to grow the balance sheet. Furthermore, the notes are not trading at 25%. If it was I would be filling my boots! The £250m of T2 is trading on a yield to maturity of about 18%, assuming the coupon resets to about 7.75% in June. The £350m of senior unsecured is also trading on a yield to maturity of about 18%, up from 15% before the banking panic.

It is not true to say that the bank has not turned a profit. They returned to profit in September and Q4 was profitable. We shall see how Q1 has gone in about a months time, but I am hopeful they will again show a profit. As the base rate rises, so has their NIM. They have a very prudent retail mortgage book (again!), with DTV around 56% and their other assets are similarly conservative. They could shrink their balance sheet should they need to, eg by selling or securitising part of the mortgage book, but they are currently doing the opposite and are trying to grow the business, whilst recognising their growth is being constrained by their capital.

The current management have shown competence in turning round the bank in a difficult market. With the legacy problems now behind them I am confident enough to keep my investment. Sure, the MREL debt is a problem, but if it was not it would not be offering a YTM of 18%.

[Jwdool]

I agree with hiriskpaul's corrections here. The 5.5%s only have £250m outstanding, not £300m. Also, I was being lazy with my finger in the air on YTM estimate - it's 18-20% depending on bid/ offer.

In spite of that, I still stand by the analysis - this is a very difficult situation for MTRO. If you are paying out £28.5m (9.5%s) and £13.75m (5.5s) - i.e.£42.25m in interest and facing an increase to ~18% of £600m, i.e. to £108m - without yet showing a profit - that is challenging for management. We've got no proper numbers on the last quaters' profit - but it would need to knock the ball out of the park to convince investors to buy new debt/ equity at current levels. I guess we will have to see.

[BondSquared]

Indeed 18% T2 yield, should have checked.
I'd love for Metro Bk to succeed, but wouldn't you want to play that via the common equity? Market cap is now £173mm. There's so much cliff risk in the bonds that going long the option via the equity looks more attractive, no?

[hiriskpaul]

Indeed 18% T2 yield, should have checked.
I'd love for Metro Bk to succeed, but wouldn't you want to play that via the common equity? Market cap is now £173mm. There's so much cliff risk in the bonds that going long the option via the equity looks more attractive, no?

Not really no.

Taking action to protect capital ratios, etc. can work out much better for bondholders than equity holders. For example, hiving off the mortgage book, rolling over debt with a 15%+ coupon, a rights issue or partial debt for equity swap. If the bank does really well, then yes the ords will likely do better than the bonds, but I would prefer not to bet on Metro doing really well.

Yes, it might work out, but my experience of B&B, Northern Rock, RBS, Lloyds, BOI, etc. is that backing the debt and/or prefs has been far safer and more profitable than backing ordinary shares.

[BondSquared]

Indeed 18% T2 yield, should have checked.
I'd love for Metro Bk to succeed, but wouldn't you want to play that via the common equity? Market cap is now £173mm. There's so much cliff risk in the bonds that going long the option via the equity looks more attractive, no?

Not really no.

Taking action to protect capital ratios, etc. can work out much better for bondholders than equity holders. For example, hiving off the mortgage book, rolling over debt with a 15%+ coupon, a rights issue or partial debt for equity swap. If the bank does really well, then yes the ords will likely do better than the bonds, but I would prefer not to bet on Metro doing really well.

Yes, it might work out, but my experience of B&B, Northern Rock, RBS, Lloyds, BOI, etc. is that backing the debt and/or prefs has been far safer and more profitable than backing ordinary shares.

Agreed - if the scenario is that Metro Bk will just about scrape through (focus on capital / bondholder value) then stay away from the ords. Partial debt for equity swap is about as scraping through as it gets, and the natural target would be the T2s, well before the seniors, that's one of the manifestations of cliff risks I was referring to and would make me stay away from anything (recoveries in bank debt-for-equity swaps need to be pityful, else they wouldn't serve the purpose of recapitalising the bank).

A proper turnaround expectation/bull case would make me want to go long ords.

The risk seems very digital and of poor granularity - it all hinges on the refinancing of 2 capital/debt instruments. Not a great liability profile.

On the fence, spectating.

[Swanmore22]

Profitable bank focussed on UK mge market, now clear of scandals .
Tidy loan book that may suit the likes of NWide, Lloyds or Santander .
A regulator keen to be seen proactive/helpful ?

An activist shareholder register..a new entrant early this year :
" London-based activist shareholder Caius Capital has taken an £11m stake in embattled challenger bank Metro Bank.The investment brings Caius Capital’s stake to five per cent, making it one of Metro Bank’s ten largest investors. "

Two years to restructure £600m .
Not insurmountable and an issue at least the management are aware of,

Swan

[hiriskpaul]

Profitable bank focussed on UK mge market, now clear of scandals .
Tidy loan book that may suit the likes of NWide, Lloyds or Santander .
A regulator keen to be seen proactive/helpful ?

An activist shareholder register..a new entrant early this year :
" London-based activist shareholder Caius Capital has taken an £11m stake in embattled challenger bank Metro Bank.The investment brings Caius Capital’s stake to five per cent, making it one of Metro Bank’s ten largest investors. "

Two years to restructure £600m .
Not insurmountable and an issue at least the management are aware of,

Swan

Yes, there are a lot of positives. The turn around from underlying losses to profits is actually quite remarkable. The revenue was £50m up in H2, compared with H1. Attributing the increased revenue to Q4, that makes revenue about £168m, with costs of £133m, giving underlying profit of about £35m. If they kept going at the same pace, with no more increase in the balance sheet or NIM, that would mean around £140m profit for the year. Even if they only made half that I really cannot see why capital markets would remain closed to them.

It may be worthwhile having a punt on the equity after all

[hiriskpaul]

5y gilt yields have been on the rise for some time. Currently about 4.7%, implying the coupon would reset to between 9.1% to 9.2%. Fingers crossed the rate stays high until 22 June.

Edit: At the current price of 61.5% and a coupon reset to 9.15%, the YTM would be about 22%!

[Swanmore22]

Paul,
Whilst the coupon reset is welcome, the drag of coupon payments will have a negative impact
The projected profit in 2023 is £14m. A fair effort given preceding years losses but still very "thin"
Recent sharp spikes in rates are yet to filter through to default rates, can only wait til 3rd and 4th qtr updates.
I am a now "twitchy" holder of these.
2 years to sort out a capital raise /find a buyer ..such as Nationwide?
If not then chance they go bust and Odey will be vindicated.


Swan

[hiriskpaul]

Paul,
Whilst the coupon reset is welcome, the drag of coupon payments will have a negative impact
The projected profit in 2023 is £14m. A fair effort given preceding years losses but still very "thin"
Recent sharp spikes in rates are yet to filter through to default rates, can only wait til 3rd and 4th qtr updates.
I am a now "twitchy" holder of these.
2 years to sort out a capital raise /find a buyer ..such as Nationwide?
If not then chance they go bust and Odey will be vindicated.


Swan

Hi Swan, Metro have (at present) sufficient funds to repay the bonds if they cannot raise capital and are forced to shut up shop and liquidate. Not the most desireable outcome, but the option is there. The very rapid rise in interest rates is worrying. We need to see how that feeds through to asset quality. In theory though higher rates should make it easier for banks to increase NIM.

Where did you get the projected profit figure from? That seems very low considering recent reports on return to profitability and may be out of date.

I have not found any announcement on the rate reset, so have just emailed the company secretary. It should be about 9.1%.

[hiriskpaul]

The reset was to 9.14%:

https://www.businesswire.com/news/home/ ... 332993/en/