“And I think one of the things that we need to decide strategically at the board level over the next handful of months is whether we need to reposition that £7.5bn of mortgages, make it maybe a bit smaller or a bit more specialist and really start to stretch our legs in commercial and corporate funding.”
Indeed, in its capital package announcement, Metro Bank said its “envisioned growth strategy includes a gradual shift in asset side growth towards specialist mortgages and commercial lending to maximise risk adjusted returns”.
JOHCM's Lowen, who holds Paragon in the top 10 of his portfolio, says that smaller banks are gradually making applications to use internal models.
“We expect we’ll see Paragon’s internal model be allowed by the PRA in the first half of next year; and that means their capital requirements will come down.
“So those companies that are able to move onto their internal models over the next year, two years, three years, four years, will be at a competitive advantage because they can write the same business for lower capital requirements, so return on capital will be higher.”
While Metro Bank has said it is unlikely in the near term, whether its AIRB application will get the regulator’s approval remains to be seen.
Chloe Cheung is a senior features writer at FTAdviser
