Hill's Wealthy Backers Ponder Keeping Their Faith in Metro Bank

(Bloomberg) -- Vernon Hill is about to find out whether his network of wealthy backers will step up again for Metro Bank Plc.

Last week, the British venture he's been building for almost a decade disclosed that it's being probed by regulators, and will need to tap the market for more money than expected. Backers like hedge-fund manager Steve Cohen and luxury-home builder Bruce Toll have seen the value of their stock fall by almost half this year. Hill, a serial banking entrepreneur, has seen about $50 million wiped off his own net worth.

The strength of those relationships will face a crucial test. Hill's management team is about to embark on an international roadshow to persuade the existing shareholders and potential investors that the bank is still a buy.

“I've known him for years and I've complete faith in him -- that's all I can say,” said Toll, whose family holds more than 3 percent of Metro Bank. He said he'll “probably” invest again.

Read more: Metro Bank Shares Plunge to Record Low as Regulators Circle

Toll's rocky ride as a Metro Bank investor may not end anytime soon. The shares slid 36 percent this week as the bank announced the share sale to shore up its finances -- a step that became necessary when Metro Bank revealed it had been misclassifying some of its real-estate loans, consequently holding less capital than required.

Regulatory Probes

Making it worse, Britain's Financial Conduct Authority and Prudential Regulation Authority are both probing that misclassification. Craig Donaldson, who runs Metro Bank for Hill, offered to quit over the matter, but the chairman is sticking with his executive team for now.

Hill, 73, owns about 5 percent of Metro Bank. He commands loyalty with Toll because of the history of Commerce Bancorp Inc.: Hill started that New Jersey-based lender with one outlet in 1973, and sold 34 years later for $8.5 billion.

“He did it once, and I think he can do it again,” said Toll.

Read More: In 2015, U.S. Billionaires Discuss Investing in Metro

Other well-heeled backers aren't so sure. Glenn Greenberg, principal of Brave Warrior Advisors, invested in Metro years before it went public. He sold much of his stake after Britain voted to leave the European Union in 2016, but still retains an investment amounting to more than 1 percent of the stock.

‘Black Eye'

“You certainly can't excuse that from management,” Greenberg said, calling the regulatory probe a “black eye.” However, he's more inclined to blame Brexit and consistently low interest rates for the bank's difficulties than the more recent travails.

“The problem is the external environment is brutal,” said Greenberg. Investors “have to make up their minds whether they want to give him the resources to carry on.”

Greenberg said he's still analyzing whether to take part in the fundraising.

The shares currently trade just above 900 pence after surpassing 4,000 about a year ago. Among Metro's other problems: it's not expected to get approval to use internal models to calculate mortgage risk for at least a couple of years, hampering its competitiveness as Britain's big, legacy lenders crowd into that market.

“At a fundamental level, we have an issue with the economics of the business model,” wrote Goodbody financial analyst John Cronin, a long-time bear on Metro.

Bank ‘Stores'

Metro has been trying to assuage concern about some of its quirkier aspects. The bank said it could cut the amount of money paid to Hill's wife, who designs the branches -- or stores, as Metro prefers to call them -- and provides other “creative and brand services.”

Shirley Hill's New Jersey-based InterArch has received 26.4 million pounds ($34.9 million) from Metro since it was set up, filings show. The designs help Metro Bank's “exceptionally high brand penetration,” according to a spokesman. InterArch didn't respond to requests for comment.

Shirley Hill designed Commerce's branches, too, before regulators stopped her husband from doing business with firms controlled by his family more than a decade ago. InterArch still designs branches for Republic First Bancorp Inc., a Philadelphia-based Hill investment, and with their glass walls and bold lettering, InterArch's website shows Republic First branches look a lot like those of Metro Bank.

RBS Push

Potential bright spots for Metro Bank's investors include a pot of money earmarked for small-business lending that it will get from Royal Bank of Scotland Group Plc, part of a regulatory push to stimulate competition. Then, there's the prospect of an exit through a merger.

“I'm sure Vernon would not want to sell -- that would be like selling his children,” Greenberg said. “But if interest rates are going to remain low or if he can't raise the money, then that's going to have to be where he turns.''

Willett Advisors LLC, the investment arm for the personal and philanthropic assets of Michael Bloomberg, held a 2.7 percent stake in Metro Bank as of July 2018. Representatives for Bloomberg declined to comment on the stake. Bloomberg is the founder and majority owner of Bloomberg LP, the parent of Bloomberg News.

To contact the reporters on this story: Harry Wilson in London at hwilson57@bloomberg.net;Donal Griffin in London at dgriffin10@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Keith Campbell, Steve Geimann

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