Business is booming.

Metro Bank cannot branch out given capital constraints

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Disrupting industries dominated by big, legacy companies that have grown flabby is a tempting prospect for many entrepreneurs. Challengers are often egged on by regulators worried about market dominance by incumbents.

The markets have rewarded those plucky challengers that have changed the face of certain sectors. Take Tesla’s shake-up of the car market. But there are other industries where that kind of disruption is immensely difficult.

UK retail banking offers a prime example. The recent travails of Metro Bank, which this week announced an emergency £325mn capital raise, highlight that challengers will probably remain niche.

 Lex Populi chart showing challenger bank shares, rebased

Launched in 2010, Metro was the first of a new breed of challenger banks that regulators hoped would shake up the banking market after the financial crisis of 2008-09. Its selling point was offering branch availability to its customers, seven days a week. But overcoming the legacy advantages of the big four of Barclays, Lloyds Banking Group, HSBC and NatWest, all with large asset bases, has proved difficult.

Gaining market share has been an expensive and slow process for challengers, frequently involving offering more attractive mortgage or savings rates to tempt customers who are notoriously lazy when it comes to switching. Current account switches reached 1.3mn in the 12 months to June 30, according to data from That was an improvement on the same period a year earlier but still only equates to only about 2.5 per cent of UK adults.

Challengers have also faced regulatory challenges. Banks including Metro and Paragon Bank have lobbied regulators for years to allow them to use less punitive internal models to calculate their risk-weighted assets.

 Lex Populi chart showing share of UK current accounts, per cent

These calculations affect the amount of capital that banks must set aside for potential future losses. Typically, only banks with long lending histories have been allowed to use internal models rather than a standardised version set by regulators.

Metro Bank’s shares took a sharp downward turn when it said in mid- September that regulatory approval to use its own credit model for its residential mortgage business would not come this year. Its market value has fallen more than two-thirds since then.

Other challenger banks are in the same situation. But Metro’s relatively tight capital base made it a particular focus of concern.

Metro’s woes are more than regulatory, however. Its business model, which relies on costly neon-lit branches open for long hours, is flawed. The only way to excuse the higher costs would be to spread this overhead over increasing net income from loans and fees. But without the ability to expand its currently stagnant loan book, the bank cannot easily improve its net income.

Larger rivals have long been shrinking their estates. Nearly three-fifths of UK bank branches have vanished in the past nine years. 

Metro Bank’s chief executive Dan Frumkin is sticking to his guns. Even after this week’s emergency financing package, which also involves £600mn of debt refinancing, he intends to add a further 11 branches to its existing network of 76, mostly in metropolitan areas in the north of England.

Granted, Metro is trying to cut costs. But its £30mn a year savings programme only equates to 5-6 per cent of its current total underlying cost base. That would hardly make much of a dent in its cost to income ratio of 90 per cent. This compares poorly to both Lloyds on 51 per cent and rival challenger OneSavings Bank at around 30 per cent.

Metro has not disclosed whether publicity around its capital raise has led to savers and businesses withdrawing funds this week. Significant withdrawals would be a blow given that its strategy is partly based on continuing to drive growth in current accounts.

Frumkin has the backing of Metro’s largest shareholder, Colombian billionaire Jaime Gilinski Bacal, who believes Metro could in future be used as a base for acquisitions. Analysts have long expected consolidation among the so-called “mid tier” banks and more established challengers. Given Metro’s painful rescue, though, that vision currently looks fanciful.

Pepsi/obesity drugs: snack pack will withstand economies of scales

Another sector that is battling new disrupters is packaged food companies. These have built strong and trusted brands over decades. They have done so by selling crisps, chocolates and sweetened drinks that have contributed to surging mass obesity, particularly in the US. But their gig may be up.

Drugs from the GLP-1 group such as Novo Nordisk’s Ozempic and Wegovy suppress appetite with remarkable effectiveness. Walmart executives recently said that consumer spending was slightly lighter following the use by some Americans of GLP-1 drugs.

On Tuesday, snacks and drinks group Pepsi reported solid earnings and raised its annual guidance. It simultaneously dismissed concerns that consumers are becoming less hungry. Still, stock prices are largely comprised of so-called terminal value — the present value of cash flows from distant years. 

Consumer food companies have typically enjoyed stock price-to-earnings multiples of greater than 20 times stemming from their apparent stability and defensiveness. This is now subject to a novel and potentially serious threat.

Pepsi shares are already down by 15 per cent for the year. Like other food companies, it first benefited from coronavirus pandemic-era home eating and then from the ability to pass input price inflation on to consumers. In the first three quarters of 2023, Pepsi’s overall organic growth rate was a juicy 12 per cent, even as volume growth was slightly negative.

The company remains confident that it can keep growing through the megatrends of urbanisation and global growth. It aims to satisfy changing consumer tastes with healthier products and smaller servings. Investor worries about the impact of weight loss drugs on snack companies are overdone.

Cigarette makers and oil and gas drillers are surviving bigger existential threats remarkably well. Tails remain long. Foodmakers can console themselves with the knowledge that drugmakers face their own nemesis: the patent cliff.

Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore

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