Metro Bank has posted its first yearly profit and record growth in lending and deposits, but spooked investors by revealing a decline in its core profitability and capital cushion.
The rapidly expanding challenger bank, founded eight years ago, posted net profits of £10.8m for 2017, compared to a £16.8m loss the previous year. Lending surged 64pc to £9.6bn, while deposits jumped 47pc to £11.7bn.
But its net interest margin (NIM) – the key difference between the interest it receives in loans and pays on deposits – eroded to 1.93pc, down from 1.97pc at the end of 2016.
The lender’s core capital buffer also fell to 15.3pc, down from 18.1pc, raising the prospect the bank could need to raise debt or equity this year.
John Cronin, an analyst at Goodbody, said the decline in the bank’s NIM raised concerns “margin is being sacrificed for volume growth”.
“We believe that rapid growth delivery will come at the expense of margins and, potentially, credit quality,” he added.
Metro Bank shares
The bank’s share price dropped as low as 8pc in morning trading before paring back some of its losses to close down around 3pc at £35.04.
“We are definitely going to have to raise capital in 2019, but we may choose to go in late 2018,” said Craig Donaldson, chief executive of Metro Bank.
Mr Donaldson said he was “really chuffed” with the results despite the market reaction. “It’s been a year of records and we’re well positioned for the next phase of our growth,” he said.
Next year Metro plans to create 900 jobs and to open a further 18 branches, which it prefers to call “stores”.
Mr Donaldson said he had “no concerns” over Metro being able to increase both market share and profits. “The NIM will increase this year as we attract more customers and lending at the right risk,” he added.
He confirmed Metro will bid for a share of the £833m fund RBS is stumping up to boost competition as the price of keeping business lending subsidiary Williams & Glyn.
Metro set a raft of ambitious growth targets for 2020 and 2023, including more than doubling deposits to £27.5bn by the first date and then again to between £50-55bn by the latter. It said the lower NIM reflected the “diluting” effect of its use of cheap Bank of England funding over the year, which is being withdrawn this month.
Its preferred measure of “customer NIM”, stripping out the impact of central bank funds, was 2.69pc.
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