Metro bank’s full year results were hotly anticipated by investors and the industry alike following early scares brought on by an accounting error.
The results, published on February 26, came nearly a month after the challenger’s share price plummeted by as much as 40%.
The results confirmed reports of a miscategorisation of the bank’s risk weighted assets (RWA) and subsequent underestimation of the capital requirements on a number of “commercial loans secured on property and certain specialist buy-to-let loans to large portfolio landlords”, increasing the bank’s RWA to £900m. The report also called for a cash injection of £350m from investors.
“A call for more cash to plug the [accounting] error never goes down well. It’s not good PR. For a financial institution to have added up the numbers wrong it’s never a good position,” says chief market strategist of Capital.com, David Jones.
Despite this, Jones believes that “investors will forgive” the accounting error which reminded him of the Tesco accounting scandal in 2014 and how Tesco’s shares bounced back.
“For contrarian investors, it’s an interesting one for £10 a share down 70% since March 2018. The usual caveat of not trying to catch a falling knife might still apply but you think, how much worse can things get?”
Other market participants have dissected the accounting error and deliberated on the challenges RWA categorisation pose.
“While there are guidelines on how financial institutions should categorise risk weighted assets (RWA), financial markets evolve and events occur which can shift the perspective on risk,” according to the head of the UK financial institutions division at risk specialists, Marsh, Ariel Berman.
“As a result, potentially there are constant changes on RWA categorisation. Changes in RWA,” he said “such as the deliberate sell down of noncore or capital intensive business, is evident by reviewing the balance sheets of financial institutions on a year over year basis.
“Errors can occur; the question would be what are the most effective controls and tools that are available to spot the errors early, and whether the organizational risk culture is sufficiently robust,” said Berman.
Lack of clear governance and resulting errors is also something echoed by Anastasia Dokuchaeva, head of partnerships at regtech ClauseMatch, and banks must ensure that policy is kept up to date and communicated effectively throughout the organisation.
“The Metro Bank case was most likely made by mistake, and people who were involved in that did not have clear guidance related to procedure information that they should be following.
“For those people on the front line, it can purely not be their intention, because they sometimes just don't know any better: they were not given clear processes and procedures, in other words, those highly important things were not communicated.
“If you have precise procedures on how to be compliant with the law around the loans, as management, you have two problems. Firstly, the management needs to ensure that those procedures are up-to-date. And that's very serious. And secondly, those procedures need to be communicated effectively to the people who execute them,” said Dokuchaeva.