Fitch Ratings has downgraded Metro Bank Plc's Long-Term Issuer Default Rating (IDR) to 'B' from 'B+' and Viability Rating (VR) to 'b' from 'b+'.
The Outlook on the Long-Term IDR is Stable.
Fitch has withdrawn Metro Bank's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor', as these are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned Metro Bank a Government Support Rating (GSR) of 'no support (ns)'.
Key Rating Drivers
Metro Bank's Viability Rating (VR) is below its implied VR of 'bb-' because of the continued challenges it faces in becoming structurally profitable and because it is operating within regulatory capital buffers. We consider both its weak capitalisation and profitability to have higher influences over its VR. The ratings also consider the bank's moderately healthy asset quality, sound liquidity and funding profile, and improving risk management.
Business Profile Weaknesses: Metro Bank has generated around GBP730 million in net losses over the past three years in restructuring and rehabilitating the bank, as well as in improving governance and risk controls. The bank's strategy is now focused on strengthening its revenue by targeting higher-yielding loans (including specialist mortgage loans, unsecured and other consumer loans), and, in the short term, trying to reduce its high fixed cost base.
Return to Profitability Still Uncertain: Fitch expects the bank to remain loss-making for at least one more year (in 2022) and to gradually become profitable from 2023, based on wider net interest margins, helped by higher policy rates in the UK and a changed loan mix. The bank expects the majority of restructuring costs to have been expensed or capitalised, with a return to a more normalised cost base from 2022. Loan impairment charges (
LICs) are budgeted to remain low over the next two years, although uncertainties remain in the current macroeconomic environment.
Capital Constrains Growth: Metro Bank's common equity Tier 1 (CET1) capital ratio and its total capital ratios at 1 January 2022 were 11.5% and 14.8%, respectively, after transitional measures were removed (end-2021 CET1 ratio: 12.6%; total capital ratio: 15.9%). These provide it with a moderate headroom over its 7.6% CET1 and 11.6% total capital minimum requirements including the capital conservation buffer, but excluding the UK countercyclical capital buffer, which is due to rise to 1% by end-2022 from 0%. The bank's capitalisation is constrained by insufficient internal capital generation.
Weakened Asset Quality: The bank reported a higher impaired loans (Stage 3) ratio of 3.7% at end-2021 from 2.1% at end-2020. The deterioration was driven by a combination of a number of single name commercial customers and non-performing government guaranteed Bounce Back Loan Scheme (BBLS) loans. The majority of loans are to retail customers, mainly in the form of mortgage lending, and continue to perform well. There is uncertainty over the level at which LICs will normalise, given the bank's fairly new loan mix, with a greater focus on higher-yielding and higher-risk loans.
Mainly Deposit Funded: Metro Bank obtains funding primarily through customer deposits, which are a mixture of retail and SMEs, resulting in a moderate gross loans/deposits ratio of 76%. It also obtained around GBP3.8 billion through the Bank of England's Term Funding Scheme. Currently access to the debt markets is limited and expensive.
No Support: The GSR reflects Fitch's view that senior creditors cannot rely on extraordinary support from the UK authorities if Metro Bank becomes non-viable. This is because of UK legislation and regulations that provide a framework that is likely to require senior creditors to participate in losses after a failure.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The ratings would be downgraded if losses or other setbacks threaten Metro Bank's ability to meet capital or minimum requirement for own funds and eligible liabilities (MREL) requirements in 2022, without the prospect of a swift remedy, or if we believe that implementation of the bank's turnaround strategy has been impaired with the likelihood of additional losses into 2023. The latter could be caused by higher-than-expected funding costs or an inability to build up the targeted lending mix within its stated risk appetite, or significant exceptional provisions or write-downs.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade would require continued progress in Metro Bank's strategy to achieve structural profitability. This requires additional headroom over the current minimum capital requirements including buffers, which should provide capital relief to support volume and margin growth. This combined with adherence to the bank's cost guidance would together demonstrate execution discipline and provide rating stability.
An upgrade would also likely require a sustained record of improving the bank's business model, leading to near-term prospects of becoming profitable on a sustained basis, and reduced risk over availability of capital and MREL resources for growth.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Senior Preferred and Non-Preferred Debt: Metro Bank's senior non-preferred (SNP) debt is rated in line with the bank's Long-Term IDR and has thus been downgraded to 'B' from 'B+', with a Recovery Rating of 'RR4'. The rating reflects our assumption that the bank will met its MREL with SNP and more junior debt and equity, and average recoveries. The long-term rating of the senior preferred (SP) debt programme is one notch above the bank's Long-Term IDR and has thus been downgraded to 'B+' from 'BB-'. Its rating reflects the additional protection afforded to external senior creditors by the presence of SNP and more junior debt instruments.
The bank's MREL is currently 18% of RWAs (20.5% including non-confidential buffers) and is set to rise to 18.2% of RWAs (20.7% of RWAs including non-confidential buffers) by 1 January 2023 using end-June 2021 data. The bank's MREL ratio at end-2021 was 20.5%; however, by January 2022, due to a reduction in the CET1 ratio, it does not meet the requirement including non-confidential buffers.
Tier 2 Debt: Metro Bank's dated Tier 2 notes are rated two notches below the VR at 'CCC+' with a Recovery Rating of 'RR6' to reflect poor recovery prospects for the notes in a non-viability event.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Metro Bank's SNP debt ratings are mainly sensitive to the bank's Long-Term IDR, as well as to our assessment of recovery prospects. They could be downgraded if loss-severity expectations increase, for example, if Metro Bank is unable to meet its MREL or if requirements are materially reduced or removed. Metro Bank's notched-up senior preferred debt rating could also be downgraded in these scenarios.
The Tier 2 subordinated debt rating is primarily sensitive to changes in the bank's VR and would be downgraded if the bank's VR is downgraded.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Metro Bank's SNP debt, SP debt programme and Tier 2 debt would be upgraded if the bank's VR, and hence the LT IDR, are upgraded.
VR ADJUSTMENTS
The Operating Environment score of 'aa-' has been assigned in line with the 'aa' implied score. The sovereign rating was identified as a relevant negative factor in the assessment.
The business profile score of 'b+' has been assigned below the 'bbb' implied score of due to the following adjustment reasons: Business Model (negative), Strategy and Execution (negative).
The asset quality score of 'bbb' has been assigned below the 'a' implied score due to the following adjustment reasons: Underwriting Standards and Growth (negative), Historical and Future Metrics (negative).
The capitalisation & leverage score of 'b' has been assigned below the 'a' implied score due to the following adjustment reasons: Internal Capital Generation and Growth (negative) and Regulatory capitalisation (negative).
The funding & liquidity score of 'bb+' has been assigned below the 'a' implied score due to the following adjustment reasons: Non-Deposit Funding (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
METO BANK 
