UK’s banking big four make life tough for new entrants
British regulators and MPs have long wanted the challengers to take on bigger banks, but progress has been slow
London/Bogota — When Vernon Hill launched Metro Bank in 2010, his Yorkshire terrier tucked under one arm, he vowed the upstart lender would challenge the dominance of Britain's big banks.
But the challenger banks have struggled to shake up a market dominated by the “Big Four” of Lloyds, NatWest, HSBC and Barclays, with Metro's eleventh-hour weekend capital injection highlighting the hurdles they face.
While Metro, which used to offer dog biscuits for customers’ pets, was Britain's first new high street bank in more than 150 years, it was soon followed by other new entrants, such as fast-growing digital lenders Monzo and Starling Bank.
Although Metro’s refinancing package will see its shareholders heavily diluted and some bondholders take a haircut, markets welcomed the deal, with the bank’s battered shares gaining 11% on Monday and climbing further on Tuesday.
“Maybe it’s just the least worst outcome now and a bitter pill that just needs to be necked,” said John Cronin, banking analyst at Goodbody.
Creditors also appear in favour of the deal, with support secured just shy of the 75% threshold needed as of Monday, two sources familiar with the situation said.
Bondholders include Caius Capital, Kite Lake and Varde Partners, another source said. All three declined to comment.
Metro declined to comment on Tuesday.
The fundraising package will also hand Metro’s biggest shareholder, the Colombian billionaire Jaime Gilinski, a controlling stake in the bank. Gilinski, whose daughter Dorita is on Metro’s board, will inject 102 million pounds to take a 53% stake.
The engineer and Harvard graduate — who is Colombia's fourth richest man with a fortune of $5bn, according to Forbes — has further ambitions.
A source with knowledge of the matter said Gilinski planned to acquire further UK banking assets over time and was monitoring other opportunities, building on his experiences buying a string of banks in Latin America.
‘Level playing field’
British regulators and legislators have long wanted the challengers to take on the bigger banks, but progress has been slow as they have largely failed to achieve the scale needed.
While some have made a dent in the current account market — with Monzo for instance amassing 8.4-million customers — few have entered or made real headway in key markets such as mortgage lending.
Britain’s 10 largest mortgage lenders still accounted for 83% of the market at the end of last year, data published by banking trade body UK Finance shows.
Monzo declined to comment.
A Starling spokesperson said the lender was making inroads into the big banks' market dominance.
“We've demonstrated that we can scale,” the spokesperson said. “We reported profits of £195m for the year to the end of March 2023, the second full consecutive year of profitability.”
Some challengers have criticised Britain's capital rules for hampering competition, leading the Bank of England to pledge to introduce a “strong and simple” capital regime for smaller banks, although the reform has yet to be implemented.
Two sources close to Metro said the capital rules had been a key contributing factor to its problems, which began in the years after it floated on the London Stock Exchange in 2016.
“There has to be a level playing field,” one added.
After failing to obtain key capital relief and faced with looming debt maturities, Metro enlisted Morgan Stanley in September to advise it, people familiar with the move said.
The Bank of England then stepped in to find potential buyers for Metro in case refinancing talks failed, which could have been more painful for investors, the people added.
Britain’s principal banking regulator, the Prudential Regulation Authority (PRA), declined to comment.
But some of Metro’s problems were of its own making, said Gary Greenwood, an analyst at Shore Capital, such as an accounting error in 2019 that ultimately led to Hill's departure as chair and marked a turning point for the bank.
Although many of the major setbacks were behind it before its £925m financing package, Metro's share price was down 98% from the time of its float.
Some analysts say several problems remain for Metro, including a high-cost branch model, but the bank is betting a shift into higher margin lending, including specialist mortgages and commercial loans, will pay off.
Tough economic conditions are clouding the outlook for the challenger banks, in some cases raising concerns around potential loan losses and high funding costs.
“It’s hard to see how investors will rally behind [smaller players],” said Rupak Ghose, corporate strategist and former financials analyst.
Interest-rate rises have also bumped up the costs of attracting customer deposits, particularly for those reliant on interest-paying savings accounts, and intensified competition.
Shore Capital’s Greenwood said most challenger banks were profitable and had proven adaptable, but said higher rates could pressure less specialised lenders.
Markets regulator the Financial Conduct Authority said competition had increased in the banking sector and it was continuing its work to improve this.
Metro is not the only smaller bank to have faced problems. In July, shares in OSB Group slid after the midsize specialist lender said it would take a hit of up to £180m due to changing customer behaviour.
OSB Group declined to comment.
One option is for smaller banks to gain scale through mergers and acquisitions. “Is consolidation the only hope?” said Ghose.
One bank which is actively pursuing a sale is Co-op Bank, which invited bids by last week, with rival Shawbrook tabling an indicative offer, Reuters reported. Co-op Bank and Shawbrook declined to comment.
But deals could be tough to strike, as buyers have to mark down assets due to rising interest rates, one source said.
For Metro, the latest funding will likely put it in a stronger position should M&A interest re-emerge, they added. Such decisions will now lie in the hands of Gilinski, as he looks to make further waves in UK banking.
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