Metro Bank has reported its first annual profit of £10.8m after the British challenger bank grew its loan book and revenues rapidly — but the bank also ate into its capital ratio as it raised the prospect of a share issue this year.
The bank, which was the UK’s first high street bank to launch for 150 years when it was founded in 2010, said revenues rose 51 per cent to £293.8m and its loan book grew 64 per cent to £9.6bn.
Vernon Hill, founder and chairman of Metro, said: “Our record lending, deposit and customer account growth proves that the Metro Bank model is the future of banking. 2018 will see us . . . create a further 900 jobs and continue to provide real competition to the big high street banks.”
But shares in Metro fell 6 per cent to £33.90 in early trading on Wednesday, dragging them into negative territory for the past year.
With 55 branches and 1.2m customer accounts, Metro made a net profit last year of £10.8m, which compared with a loss of £16.8m the previous year. The bank’s return on equity was 1.2 per cent and its costs wiped out 90p of every pound it earned in revenue.
Some analysts have questioned the challenger bank’s ambition of running a £24bn loan book by 2020, which implies compound annual growth of 40 per cent over the next four years.
But it doubled down on these by publishing a new longer-term set of targets for 2023, including plans to reach deposits of £50bn-£55bn, a ratio of costs-to-income of 55 to 58 per cent, a return on equity of 17 to 19 per cent and between 140 and 160 branches.
Last year, Metro Bank’s rapid growth ate into its capital ratio and its common equity tier one ratio fell from 18.1 per cent to 15.3 per cent, supporting analysts’ fears that it may choose to tap the market again this year to hit its loan growth targets.
Craig Donaldson, chief executive, said he expected the bank to raise capital next year, pointing out that the drain on its capital ratio would be slower now it was profitable. “We are definitely going to have to raise capital in 2019, but we may have to go in late 2018,” he said.
The government’s term funding scheme, which has provided cheap loans to banks to stimulate lending, is due to expire this month.
This means Metro could soon face higher funding costs and squeezed profit margins, as challenger banks are price takers in a market where dominant lenders such as Lloyds and Royal Bank of Scotland have the upper hand.
Metro has drawn £3.3bn of cheap funds from the term funding scheme to invest in residential mortgage-backed securities that pay a higher interest rate.
But Mr Donaldson said he was “pleased it is going” as it has distorted the market and nullified Metro’s funding advantage from its fast-growing deposit base.
Deposits increased 47 per cent to £11.7bn. Metro is seeking to accelerate its loan growth and achieve scale in the UK as competition from other new lenders heats up.
The bank’s loan-to-deposit ratio rose to 82 per cent, up from 74 per cent a year ago.
However, the bank’s net interest margin — the difference between the interest it receives from lending and the amount it pays out — dropped to 1.93 per cent, down from 1.97 per cent at the end of 2016.