Metro bank in the city of London.
© FT

Some of Metro Bank’s largest customers left the bank after the discovery of a historic accounting error in the first quarter, damaging growth at the under-fire British lender.

Chief executive Craig Donaldson said “adverse sentiment” had led to the departure of a “small number of large commercial and partnership customers”, contributing to a 4 per cent quarter-on-quarter reduction in deposits.

Metro Bank in January revealed that it had miscategorised a large number of commercial loans, meaning it did not have as much capital against them as it should. The discovery prompted a sharp drop in its stock — it is down 54 per cent since the start of the year — and forced the lender to cut its long-term growth plans.

It is also working on a new share issue to prop up its capital levels, but the bank gave no major update on the hotly-anticipated capital raise alongside its quarterly results, which were reported after markets closed on Wednesday. It noted only that the raise was “anticipated” to be completed in the second quarter.

Mr Donaldson said it had been a “challenging” start to the year, as the company also suffered from some of the industry-wide pressures that have affected its rivals. In particular, intense competition in the mortgage sector squeezed profit margins. But he said “the underlying resilience of the bank is evident”.

Chairman Vernon Hill, who has also been the target of recent criticism over perceived governance problems, said it would “adapt” to changing circumstances but stressed that he had “complete faith” in Metro’s underlying model.

Net interest margin — the difference between what a bank pays for funds and what it earns from lending — fell to 1.64 per cent, down from 1.76 per cent at the end of 2018.

Overall revenue for the quarter was £107.5m, a 17 per cent increase year-on-year. Pre-tax profit halved to £4.3m, which the company blamed on accounting changes and interest expenses from some recently-issued debt.

The lender’s statutory profit after tax fell 61 per cent to £2.5m.

On a more positive note, Metro said default levels remained exceptionally low, with non-performing loans making up only 0.18 per cent of its portfolio. It also said that, despite the loss of several high-value depositors, the bulk of its retail and business customers remained loyal.

Joseph Dickerson, a banking analyst at Jefferies who also followed Mr Hill’s previous ventures in the US, said Metro appeared to be “bruised but not broken”, pointing to strong growth in fee income and solid account growth. In contrast, John Cronin, analyst at Goodbody, said the numbers were “truly horrible”.

The number of personal current accounts increased 24 per cent year on year, while business accounts rose 23 per cent. The company added that the deposit outflows stabilised in March and returned to net growth in April.

Chief financial officer David Arden told analysts that the weakness in the first quarter meant its full-year deposit growth rate would be “materially lower” than the medium-term target of 20 per cent, which it outlined earlier in the year. He also said that full-year costs would be at the upper end of previous expectations.

Metro has become popular with customers by emphasising strong customer service and building a large — and expensive — branch network at a time when many banks are closing outlets or slashing opening hours.

However, sceptics have raised concerns about the approach at a time when rivals are emphasising the move to digital services, and Metro became a target for short sellers even before the revelation of the capital error.

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