Metro Bank has announced this morning that the long-awaited approval for its AIRB application for residential mortgages will not be given this year.
In a statement to the markets this morning (September 12), the bank revealed the Prudential Regulation Authority has informed Metro that more work is required for its AIRB application for residential mortgages, which will now not be approved in 2023.
An AIRB - advanced internal ratings-based approach - refers to a set of credit risk measurement techniques that were set out under Basel II's capital adequacy rules for banking institutions.
As reported by FTAdviser and sister titles in 2015, commentators such as the former Council of Mortgage Lenders (now UK Finance) warned of potential impact of the proposals (see info box, below).
I want to be clear we are comfortable operating within buffers.Daniel Frumkin, Metro BankOne such outcome was that mortgages in affected markets could become more scarce and expensive, as regulators imposed more stringent checks and took their time to grant approval.
A spokesperson for Metro Bank told FTAdviser: “There is no impact on our mortgage business or our mortgage customers. We will continue to run the bank on a business-as-usual basis and service the needs of our existing and future customers."
In its statement to the markets, Metro Bank said it "continues to engage with the PRA on its application, [but] there is no certainty that approval will be obtained, the timing of any approval or the level of any reduction in risk-weighted assets and consequential reduction in regulatory capital requirements that might be achieved".
In 2022, Metro Bank outlined on its H1 results call that it anticipated growth in its residential mortgage market once its AIRB application was successful.
At the time on its results call, Daniel Frumkin, Metro Bank chief executive, said: "I know that people get concerned about us operating within buffers. I want to be clear we are comfortable operating within buffers.
"We believe the regulator understands our position and is comfortable with us operating within buffers, and we will continue to operate within buffers until we can get access to debt capital markets.
"We are making progress on our AIRB application, as I use the analogy at year end and I'll use again, it's like playing tennis. They hit the ball back to us, we hit the ball back to them.
"We do a bit of work, they do a bit of work, and eventually we will get to the resolution we hope to achieve. But the reality is, I don't know if it's a five set tennis match or a four set tennis match or a three set tennis match."
Offset from the PRA
He also told analysts and journalists at the time: "I do not yet know when we will get to it. It is not within my gift to be able to pick a timeline. All we can do is play the game as well as we can.
"And we put a ton of effort and a ton of energy into preparing high class materials and doing high quality modelling.
"That puts us in a good position in the conversations with the regulator, and it'll come when it comes. Our current requirements have been reduced."
He also drew attention to a pillar that Metro Bank got to its offset from the regulator.
Frumkin said: "I think it's a sign from the regulator about their belief in the turnaround, about their belief in the quality of our balance sheet, about the belief and the credit quality of our consumer and mortgage lending that allow them to be comfortable to provide us a bit of Pillar 2A relief."
On January 1 2023 the PRA reduced the bank’s Pillar 2A capital requirement from 0.50 per cent to 0.36 per cent.
But in its H1 results, unveiled in August 2023, Metro Bank stated that the PRA has still not given approval: "The bank’s AIRB application is still in progress. As previously highlighted, the bank continues to review its options, across the capital stack, to strengthen its capital base."
According to Peel Hunt, company management has stated it will not seek to raise capital until it has AIRB so its capital shortfall will remain at least until 2024.
However, analysts at Peel Hunt have put the investment case for Metro Bank as a 'hold', watching to see whether its longer-term progress will meet expectations.
In a note seen by FTAdviser, Robert Sage, Stuart Duncan and Ryan Flight of Peel Hunt, said: "AIRB is a notoriously lengthy process and this delay does not in our view reduce Metro’s chance of obtaining accreditation in the medium term.
"This news is modestly disappointing but not unexpected and does not change our view that the Metro investment case will become potentially attractive once AIRB is achieved and capital ratios are normalised."
