But Marchat adds that innovation and agility cannot replace the security provided by a strong capital position.
“Holding a banking licence is expensive and generates a heavy regulatory cost. Most of the challenger banks absorb these costs through successive capital raising, funding every new phase of their development similarly to tech start-ups.
“But when capital is raised to compensate prospective shortfalls, it creates fear and directly impacts share value, making capital raising even more complicated and costly.”
James Lowen, co-manager of the JOHCM UK Equity Income Fund, which counts Barclays and NatWest among its top 10 holdings, says that he likes to see “well capitalised” businesses. He says that common factors among the banks his fund holds are excess capital, share buybacks and dividends.
Lowen also describes the cost structures of big banks as “well controlled” and, in some cases, going down.
“What these big banks are doing is they’re reducing costs by reducing branches...The other thing that the large ones have is what we call a ‘structural hedge’ – this is money in things like current accounts that they can reinvest.
“As some of these banks have said this week, what’s rolling off now was invested five years ago at 50 basis points, and it’s going to be reinvested at 5 per cent, which is where five-year swaps are.
“So that’s a big tailwind in terms of income. That’s very visible, we can see what’s going to happen next year and the year after and the year after, because it’s five-year focused.
“Whereas the challenger banks have to compete quite aggressively to get current accounts in the first place, and they haven’t got the legacy customer bases that the large banks have got.”
Metro Bank’s capital package came after an update issued in September, in which the bank said the Prudential Regulation Authority had indicated that more work was required by the company on its advanced internal ratings based (AIRB) application for residential mortgages, and that approval would not be attained this year.
“While Metro Bank continues to engage with the PRA on its application, 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,” the update in September read.
And in a presentation following the capital package announcement in October, Metro Bank chief executive Daniel Frumkin said: “We built a £7.5bn mortgage portfolio in anticipation of getting AIRB.
