Metro Bank probed over risk weighted asset errors

Metro Bank has revealed it is being probed by both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) who are investigating the circumstances and events that led to the challenger bank making a significant adjustment to its accounting for risk weighted assets (RWA) last month

In its preliminary financial reporting for 2018 at the end of January, the bank said its RWA at full year were expected to be approximately £8.9bn, saying the increase was ‘driven by both net loan growth and an adjustment in the risk weighting of certain commercial loans secured on property and certain specialist BTL loans to large portfolio landlords’.

The bank was then forced to admit that the Bank of England had spotted errors in the way in which it accounts for risk on some loans, which mean it needed to account for an additional £900m in RWA. As a result, the share price fell sharply.

Subsequently Metro Bank announced that it has entered into a standby underwrite agreement with RBC Capital Markets, Jefferies and KBW for a.£350m equity raise. The transaction is expected to be launched in the first half of 2019 after consultation with shareholders.

In its preliminary full year results and Q4 trading update, delivered at the end of February, Metro Bank said: ‘We recognise that the pace of improving operating leverage has been too slow and requires investment to transform back-office functions to scale appropriately with our growth. The previously announced RWA adjustment has also led to the reassessment of our return hurdle rates in certain asset classes.’

The bank said its RWA at 31 December 2018 were £8,936m up 52% year-on-year (31 December 2017: £5,882m). This includes an increase of £900m following the adjustment to the risk weighting of certain commercial loans secured on property and certain specialist buy-to-let loans to large portfolio landlords as previously announced.

Metro Bank said: ‘We have completed a review of classification and risk-weighting across the commercial loan portfolio, supported by an external advisor. We are implementing changes to our internal procedures, are recruiting additional expertise and commenced a remediation of internal systems, process and controls.’

The bank also noted that it has adopted IFRS 16 from 1 January 2019 with an expected £313m increase in RWAs.

Report by Pat Sweet

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