The next Northern Rock? Metro Bank has had a troubled week

Could Metro Bank be the next Northern Rock?

That’s not a question that any banker wants to hear, but in this case, some self-reflection seems necessary for the young bank.

This last week has been nothing if not turbulent for Metro, the UK’s most shorted stock, with conspiracies circulating that it had fallen on hard times. Rumours turned into news as queues formed at some branches, with customers big and small emptying their deposit boxes.

In reality, an accounting blunder was to blame. The bank has mis-categorised £1bn of high risk buy-to-let and commercial loans – 10 per cent of its loan book – leaving Metro in desperate need of £375m of capital to steady a usually polished ship.

It found the money quickly, and investors opened a line of credit for a bank with a remarkably short track record.

It is an unexpected fall from grace for Metro, which built an extraordinary customer fan base before its 2016 flotation on the London Stock Exchange.

It marketed itself as a different type of bank altogether, with extended opening and weekend hours, and a relentless customer-centric focus as a not-so-subtle dig at other high street banks.

The reaction this week was understandable – savers are forever jittery about their bank, as the memory of the 2008 banking crisis still sits in the national mindset. Fortunately, cash is not in short supply for Metro.

If anything, the last few days have exposed that the most significant risk for any challenger bank lies not on the balance sheet, but in the arms of public patience.

If rumours are enough to make people get in a queue, the bank needs to work much harder to guarantee public trust in its operation.

But looking at the immediate future, Metro’s problems are far from over. This episode only serves to increase its own cost of borrowing while the housing market, as well as the broader economy, reaches the late stages of the economic cycle. It is not crazy, given the past and the present, to ask: is this a business prepared for the future?

During a period of easy-to-find money, investors and customers ought to worry less – the bank can readily raise the cash in the event of unforeseen circumstances. Intrinsic poor company performance, however, is more of a concern.

Metro’s retail outlets are delivering below the expected return on investment and fighting a losing siege in the mortgage wars, tightening the bank’s profit margins. City analysts have little patience, planting a big red “sell” sign on its shares.

Worst of all, the company has developed an appetite for risky debt, which appears very similar in risk profile to the kind preferred by the casino high street banks that Metro once railed against.

A moral crusade was easily won in the wake of the banking crash, but nine years since its foundation, the signs are becoming more apparent that Metro may have gone native.

Fortunately for its savers and our banking system, Metro lives to see another day, though worries linger. This week is not yet the end for our junior high street bank, but it represents a new phase for the enterprise as growing pains very publicly kick in.

Investors still have faith, but it is ultimately customer confidence that will determine its fate.