Metro Bank CEO says confident on lender's future despite cash call

By Iain Withers and Noor Zainab Hussain

LONDON (Reuters) - The chief executive of crisis-hit Metro Bank said there were "absolutely no question marks" over the future of the lender after a major accounting blunder triggered a hefty investor cash call, sending its shares into a tailspin.

Chief Executive Craig Donaldson said he had offered to resign when the accounting error was uncovered last month but he retained the confidence of the board. He would, however, forego his bonus as a consequence.

Shares in the bank fell as much as 24 percent on Wednesday after it said late on Tuesday it would tap shareholders for £350 million to support a balance sheet heavily exposed to higher-risk mortgages.

Donaldson said Metro Bank had not misled investors when it reported that bank management had discovered the accounting mistake. It later admitted the error had been found by the Prudential Regulation Authority (PRA) instead.

"I deeply regret what happened, but no, we absolutely did not [mislead investors]. As soon as we found the issue, we investigated what the issue was and when we understood the quantum, we announced that to the market."

Donaldson said the PRA flagged the error as part of "ongoing supervision" of the bank and said the problem was first identified in the fourth quarter, weeks before Metro informed the market on January 23.

Donaldson said the mistake was made public as soon as its full impact had been calculated.

News of the cash call caps a rollercoaster week for Metro Bank, after it a won a £120 million grant from a fund designed to boost competition in business banking.

Despite the uncertainty thrown up by the planned cash call - still yet to secure full underwriting support - Donaldson said he was confident investors would back Metro.

"We are a growth organisation focused on providing great service to our customers," he told Reuters.

But it gave no guidance on pricing or terms of the capital raise and is yet to determine fees payable to the banks involved - RBC, KBW and Jefferies.

SLOWDOWN

Founded in 2010 to help to break up the dominance of Britain's biggest lenders, Metro also told investors it would slow its expansion plans amid challenging market conditions, despite more than doubling its annual profits in 2018.

The lender also said the Financial Conduct Authority and PRA would investigate the circumstances around the accounting blunder.

Spooked investors have fled the stock since the mistake was disclosed, shaving more than a billion pounds off its market value. Shares were trading 19.6 percent down at 1200 GMT.

Ashley Hamilton Claxton, head of responsible investment at Royal London, a minor Metro shareholder, said she wanted greater reassurance the company had learned its lessons.

"Governance issues are always the canary in the coal mine. This case is no different."

Several hedge fund managers who placed big bets against Metro will likely be celebrating the bank's fall from grace.

Reuters calculations suggest including high profile financier Crispin Odey would have made a profit of around £10 million on its short position of 3.35 percent of the bank's stock on Wednesday's low alone.

Metro Bank shares hit all time low: https://tmsnrt.rs/2VkfpfC

The cash call overshadowed a boost in 2018 pretax profit to £40.6 million, up from £18.7 million in 2017.

However, both its net interest margin - a closely-watched measure of underlying profitability and its core capital ratio - showed weakness.

In a further blow, the bank said its negotiations with the PRA to use its own risk models for its mortgage portfolio to help boost its capital buffer would take longer than expected and not complete before 2021.

Analysts at KBW said the Metro Bank now faced more headwinds than tailwinds, while Goodbody analysts said Metro's update was more downbeat than anticipated, adding that short term trading in the stock "won't be pretty".

"If confidence falters and the rights issue looks like it won't be supported, we believe that private equity could be waiting in the wings," Goodbody said.

(Additional reporting by Simon Jessop and Lawrence White; Editing by Sinead Cruise/Keith Weir)