(Sharecast News) - Metro Bank reported a solid set of full year results and tweaked its strategic targets overnight, after announcing an emergency fundraising and saying that financial regulators were to investigate its accounting error last month.The challenger bank is being probed by the Prudential Regulation Authority and Financial Conduct Authority after it revealed last month that an internal blunder had led to the incorrect classification of millions of pounds of commercial property loans.Preliminary financial results for 2018 showed deposit growth of £4bn or 34% to £15.7bn, with lending growth up 48% to £14.2bn.Net interest margin, the banking industry's crucial measure of the difference between interest paid on savings and earnt on loans, fell to 1.81% from 1.93% a year ago, reflecting strong competition in the mortgage market and a rising cost of funding following the August rate rise from the Bank of England.Underlying profit before tax of £50.0m was up 140% from the prior year and compared against wide range of analyst forecasts with average of £53.6m. This fed though to underlying earnings per share of 39.4p, which was short of the average EPS estimate of 42p.Asset quality remained strong, with non-performing loans representing just 0.15% of the portfolio, while the CET1 capital ratio was 13.1% after the risk-weighted assets restatement of £900m, both of which were pre-announced last month.Chief executive Craig Donaldson said: "These are a strong set of results demonstrating progress across all key areas despite an uncertain and challenging environment.He said Metro needed to "evolve to ensure continued progress over the medium term" and, taking into account the winning of a £120m grant from the Capability and Innovation Fund fund last week, was resetting its growth, cost efficiency plans and capital requirements.Given the tight margins in the UK at present, deposit growth of around 20% per year will be the new target, by reducing the proportion of higher-cost term deposits and managing the loan-to-deposit ratio within a 85-90% range. Metro will aim to add around eight bank branches per year, on top of the 30 stores added by 2023 thanks to the RBS fund.The lending mix will be rebalanced to "optimise capital allocation and returns centred around Mortgages and SME, whilst maintaining our low risk appetite", with plans to develop capabilities in higher-returning SME lending and move into unsecured consumer and business lending within a new integrated platform, with other services added too.As part of an efficiency drive a cost:income ratio of 55-60% will be targeted in the medium-term, with plans in place to automate more back office processes and share services across the group.A revised return on investment to low double-digit by 2023 is lower than the previous guidance of around 17%-19% by 2023.Metro Bank also announced a £350m standby fundraising to support future growth and maintain a CET1 ratio of 12%, which it expects to launch before the end of June, after consultation with shareholders.MARKET REACTION & ANALYSISShares in the bank were down 23% to 998.5p by Wednesday afternoon.Olivetree Financial said Metro could face fines or further fallout from the PRA and FCA investigation, so a secondary question becomes, "are they raising enough equity?".The answer, Olivetree analysts said, "is entirely dependent on the internal model approvals and highly sensitive to the quantum of benefit. If they do receive approval, without any further slippage on timing, and the benefit is to halve mortgage risk-weights, then the answer is probably yes. But we are unlikely to know until 2021."Another equity raise was widely expected, said analysts at Panmure Gordon, but was disappointed that growth targets have been "significantly curtailed" as management now seek to preserve margins and profitability at the expense of strong growth, with the reduction in the RoE target highlighting the increasingly competitive landscape among high street banks."Moreover, with FY2020 targets abandoned, we find it difficult to make an investment case given the lack of short-term visibility and the uncertainty regarding the potential equity required to achieve the new medium-term targets," Panmure said.Metro shares were also downgraded to 'market perform' at KBW, where analysts had their outlook under review after the RWA misstep, and "after hearing the plan this afternoon it is apparent to us that the shares have more headwinds than tailwinds, which when combined with a premium relative valuation, could make it challenging to outperform over the next 12-24 months".These headwinds are seen to include £350m equity raise, the issuance of £500mm of debt, the prospects for limited near-term ROE improvement, a challenging NIM environment and high expense growth."While the fundamental underbelly of the story (creating "fans") remains intact, we believe the core issue facing the bank, its sub-par ROE, wasn't addressed as much as we would have hoped with the announcement."Looking forward, KBW said Metro's path towards ROE improvement "appears long and challenging", which when combined with the upcoming capital need and a premium valuation relative to its peers of 20+%, resulted in the downgrade.
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