- Macroeconomic forecasts left unchanged 11 weeks after interims
- Third quarter sees 110 basis point dip in expanded capital ratios
Things aren’t looking worse than they did 11 weeks ago. That is one reading of Metro Bank’s (MTRO) decision to stick by its half-year economic outlook on the release of a third quarter trading update this week.
Though fears of a second major hit to the UK economy have returned with spiking Covid-19 cases, the challenger bank told the market that the “macroeconomic scenarios applied to the measurement of ECLs [expected credit losses] at H1 remain appropriate”.
In-line with the broader sector, these projections are already severe. Metro’s baseline forecasts, last applied to its mid-year loan book in August, anticipate a fall in house prices of 14.6 per cent, while GDP contracts 7.7 per cent, and unemployment peaks above 8 per cent in 2020. Leaving these unchanged meant the lender has not added to the £111m ECLs booked in the six months to June.
The decision could provide some reassurance to shareholders of larger domestic lenders including Natwest (NWG), Lloyds (LLOY) and Barclays (BARC), each of which booked heavy impairments against the value of their loans in the first and second quarters.
Their third quarter updates, due in the coming days, should provide greater detail on the pandemic’s ongoing effects than Metro offered its own investors.
Loans edged up 2 per cent to £15.1bn in the September-end quarter, largely thanks to the £1.3bn-worth of state-backed business ‘bounce-back’ loans the bank has now processed. Given this figure was already over £1bn at the start of August, momentum appears to have slowed. No update was given on pre-Covid commercial loans, despite their cost of risk surging from 0.11 to 3.49 per cent in the six months to June.
Retail mortgages – which carried the lowest cost of risk at the half-year – provided one source of encouragement, as the proportion of mortgages on payment deferral plans dropped from 16 to 3.5 per cent. However, no figures were given on the proportion of mortgages now in arrears.
Unlike its 2019 third quarter update, Metro did not specify its common equity tier one (CET1) ratio, other than to say it was “materially in excess” of the regulatory minimum. However, once additional buffers are factored in, capital is now below regulatory requirements. Together with the high-wire pivot of its deposit base “towards non-interest-bearing current accounts” explains why we remain deeply sceptical (90p, 30 Apr 2020) of the investment case. Sell at 60.6p
Last IC View: Sell, 115p, 8 Jul 2020
