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Metro Bank expects to raise GBP125 million of capital by the end of the week, as the U.K.'s newest retail bank continues its quest steal market share from more established lenders.
The capital injection from private investors will be used to hire staff and open branches in the U.K., said co-founder Vernon Hill.
Just over 18 months ago, the U.S. businessman set out to take on what he calls the "cartel" of five British banks that dominate the GBP1.5 trillion U.K. retail market. Hill helped create Metro Bank, the first new U.K. retail bank in 100 years, on the premise that better customer service can trump competitive interest rates and lure in deposits.
The model is simple, said Hill: "Attract customers, make them stay with you and they bring their friends." By 2014, the bank should start generating a profit and be listed on the stock exchange, he added.
The Metro bank is still a very small player in the U.K., dwarfed by the "big four"--Lloyds Banking Group PLC (LYG), Royal Bank of Scotland Group PLC (RBS), Barclays PLC (BCS) and HSBC Holdings PLC (HBC).
However, Hill is bullish about Metro Bank's ability to expand and capitalize on what he calls the "shocking treatment" of small businesses by the established banks. Metro Bank targets 125,000 customer accounts by the end of the year, up from 76,000 now, Hill said. Currently, 65% of the bank's lending is to commercial clients. Business customers make up half of the bank's deposit balance. Hill denied that the crisis has dampened demand for loans. "There is a tremendous demand for credit by businesses," he added.
The British government has long complained about the dominance of the "big four," saying more competition is need to spur them to lend more to individuals and businesses.
Metro bank's development is viewed by many as a litmus test to see if a start-up retail bank can make consistent returns in the U.K. Experts have long cited huge barriers to entry, ranging from regulation to the cost of building out IT infrastructure as a break on new banks cracking the market.
Hill has exported the customer-focused model that he championed at Commerce Bank in the U.S. The hope is to skim off a small chunk of the retail deposit market by offering superior service. "We only need 2% or 3% to be a success," he said.
Metro bank branches stay open on late Saturdays and offer dog treats for customer's pets and money-counting machines for loose change. The bank offers business lending, as well as current accounts and a wealth-management service aimed at richer clients. On Friday, it plans to open its 12th store in greater London.
So far it's mostly U.S. investors that are buying into Hill's vision. The vast majority of bank's investors come from across the Atlantic, including fund management company Fidelity and property developers the Reuben Brothers. U.K.-based investors "don't know what a new bank is," said Hill, who owns a 21% stake in the company. "They haven't seen one in over 100 years."
However, analysts warn that Metro Bank's customer service comes at a price. The cost of keeping stores open late and well-staffed is that the bank must cut back on interest it pays out on accounts. It is also struggling to build up mass in the lucrative mortgage business.
Also Metro Bank isn't the only banking minnow looking to lure dissatisfied customers. Swedish bank Svenska Handelsbanken AB (SHB-B.SK) has been expanding in the U.K., opening around 25 branches a year. In 2011, the bank's U.K. branch operations made revenue of GBP150 million.
Virgin Money, which is backed by entrepreneur Richard Branson, has 75 branches in the U.K. and also plans to roll out a current account service. The extra competition isn't a worry, Hill said. "If anything, it will remind people that they can switch accounts."
- By Max Colchester, Dow Jones Newswires; +44 (0) 207 842 9295, firstname.lastname@example.org