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Metro Bank Loading up on BTL

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Challenger bank greater fool?

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Metro Bank has bought a portfolio of UK mortgages worth almost £600m from US investment firm Cerberus, increasing the size of its mortgage book by around 15pc.

Around 92pc of the portfolio is buy-to-let mortgages, with the remainder held by people who occupy their own homes. Metro Bank said the portfolio was secured on property spread across the UK and has a similar credit risk profile to mortgages it already holds.

According to the firm’s latest figures released at the end of March, it currently has around £4bn of residential mortgages on its balance sheet.

http://www.telegraph.co.uk/business/2017/06/02/metro-bank-buys-600m-uk-mortgage-portfolio/

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According to the FT, they started lending out some of their customer deposits to Zopa a couple of years back.

So all my concerns about fools and their money in p2p are pure bollo€¥$..._

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Cerebrus will have bought the btl at a significant discount and presumably flipped to metro at a profit.

Metro probably think they have paid under the odds compared to the 'headline' price and accept that they needed a 'specialist' like cerebrus to package the loans. Metro might have paid, say, 80p in the pound for them...so feel they have some 'headroom' to protect them from a shock. 

Based on previous experience cerebrus could be paying as little as 5-15% of the face outstanding value fo the mortgage.

why metro want these loans im not sure. Presumably they feel the long term cash flows are worth more than the value they have paid. I've also heard about banks buying loans (in particular credit card business) to meet their risk weighted assets requirements after icb ring fencing rules have been applied - but i would be very surprised if commercial btl lending fell into this criteria. 

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1 hour ago, regprentice said:

Cerebrus will have bought the btl at a significant discount and presumably flipped to metro at a profit.

Metro probably think they have paid under the odds compared to the 'headline' price and accept that they needed a 'specialist' like cerebrus to package the loans. Metro might have paid, say, 80p in the pound for them...so feel they have some 'headroom' to protect them from a shock. 

Based on previous experience cerebrus could be paying as little as 5-15% of the face outstanding value fo the mortgage.

Given the level of impairment in the NRAM accounts prior to the sale there is no way that Cerberus was paying that little.

The NRAM statement on the transaction stated that Cerberus paid above book value.

Quote

UK Asset Resolution announces successful sale of £13bn assets

13 Nov 2015

After a highly competitive six month bidding process, UK Asset Resolution Limited (UKAR) confirms that it has agreed to sell a £13bn asset portfolio to affiliates of Cerberus Capital Management LP (Cerberus).

The sale comprises performing and non-performing residential mortgages and unsecured loans from the legacy book of NRAM, the former Northern Rock mortgage business. It is based on the portfolio position as at 30 June 2015, from which point the buyer acquired the risks and rewards of ownership.

UKAR was advised in the process by Credit Suisse International, a subsidiary of Credit Suisse AG.

Key highlights

  • Total portfolio of £13bn includes £12bn of loans within the Granite securitisation vehicle, plus a further £1bn of non-Granite assets.
  • Proceeds include a c£280m premium over book value at 30 June 2015 and delivers value for money for the taxpayer.

Source

If you look at the NRAM 2014 annual report you find impairments of about £0.5bn against a loan book of almost £30bn. Even if all the impairments were against the BTL loans sold to Cerberus they were still paying more than 95 pence in the pound (even without the premium paid over book value). Once a more reasonable allocation of the impairment and the premium over book value are considered these loans must have changed hands with Cerberus paying damn near £100,000 for each £100,000 of mortgage,

59327e72005d1_NRAM2014loans.png.5dc09a95126507f0fc8535b92a9723db.png59327e702d1e2_NRAM2014impairment.png.78ca47f7117c74ad6623a1ee27469193.png

Source

Edited by Pumpkin Muad'Dib

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The driver in the transaction appears to be that Metro have more deposits than they can lend. From their 2016 annual report.

593285ef61db4_Metroloansanddeposits2016.png.e95c7cee32b11de0e46525831833e756.png

Source

Hence can't spell amazing correctly, calls their customers "FANS" and buys £600m of hand-me-down BTL loans from a vulture fund.

The amazing thing is that those loans have now been through four pairs of hands (Northern Rock, UKAR, Cerberus and now Metro Bank).

Some of the Bradford & Bingley has a similarly colourful history ('originated' by GMAC-RFC, sold to B&B, then off to UKAR, now with either the Prudential or Blackstone - with every chance that Blackstone may in due course sell some of it off).

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20 minutes ago, Pumpkin Muad'Dib said:

The driver in the transaction appears to be that Metro have more deposits than they can lend. From their 2016 annual report.

593285ef61db4_Metroloansanddeposits2016.png.e95c7cee32b11de0e46525831833e756.png

Source

Hence can't spell amazing correctly, calls their customers "FANS" and buys £600m of hand-me-down BTL loans from a vulture fund.

The amazing thing is that those loans have now been through four pairs of hands (Northern Rock, UKAR, Cerberus and now Metro Bank).

Some of the Bradford & Bingley has a similarly colourful history ('originated' by GMAC-RFC, sold to B&B, then off to UKAR, now with either the Prudential or Blackstone - with every chance that Blackstone may in due course sell some of it off).

They have *expensive* deposits.

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Hat tip to The Exile for bringing this to my attention. The Bank of England data shows that Metro Bank's Term Funding Scheme (TFS) drawings at 31/12/2016 were £543m. As of 31/03/2017 they are showing outstanding TFS drawings of £1,235m.

Here's the balance sheet as per their latest annual report:

5932e53ec0cd5_MetroBS31-12-2016.png.848ce75c31a49df7977be5efbd4d5c81.png

Considering the asset side, the investments available for sale expressed as a percentage of loans to customers (in order to see where their funding is being allocated) is 45% (£2.6bn vs £5.7bn)

For Nationwide its about 6% (£10.6bn vs £178.8bn).

Hence despite the fact that they are already sitting on a mountain of liquid assets that could be lent out Metro Bank chose to borrow an extra £700m under the TFS and load up on £600m hand me down BTL mortgages. Also worth noting that whilst the Funding for Lending Scheme was a collateral swap with a fee, the TFS is lending of new base money (electronic printed money conjured into existence ex nihilo de novo).

This is therefore as Tempus suggests arguably the magic money tree in action. UKAR bought the loans with government money, but the government got a lot of that money by borrowing, and the Bank of England then bought those gilts with new base money and hands the government's interest payments (the coupon on the gilts) back to the government. After a while Cerberus buy the loans from UKAR (reducing the amount of money the government is lending to UKAR) and then a little while later Metro Bank buy the loans from Cerberus with new base money that the Bank of England created out of nowhere via the TFS.

And all the while these idiotic buy-to-let mortgages, which should never have been lent in the first place, continue supporting an apparently endless cast of rentiers (BTL portfolio landlords, letting agents, retail bankers, investment bankers, hedge fund investors) and support them still, even now, ten years after the crisis.

 

Edited by Pumpkin Muad'Dib

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Forgve my ignorance (once again), but I am now puzzled why Cerberus bought these loans essentially at close to face value, when they specialise in distressed assets.

Thinking about it, were they interested becasue they weere calculating that defaults would be negligible, and in an environment of falling bond yields, they were purchasing assets in late 2015 with a yield typical of the higher rates that obtained when the loans were made; thus paying book value was actually a bargain ... provided the default rate is zero?

In that case, Metro might make the same assumtion, under which it would be rational to pay more than face value. Cerberus is now shot of the default risk and have their profit, while Metro is holding the hot potato, and from the sounds of it, planning on holding for a long time. That could be fine: nobody knows when or if default rates will tick up, but personally, I wouldn't be betting on "never".

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4 hours ago, Pumpkin Muad'Dib said:

Hat tip to The Exile for bringing this to my attention. The Bank of England data shows that Metro Bank's Term Funding Scheme (TFS) drawings at 31/12/2016 were £543m. As of 31/03/2017 they are showing outstanding TFS drawings of £1,235m.

Here's the balance sheet as per their latest annual report:

5932e53ec0cd5_MetroBS31-12-2016.png.848ce75c31a49df7977be5efbd4d5c81.png

Considering the asset side, the investments available for sale expressed as a percentage of loans to customers (in order to see where their funding is being allocated) is 45% (£2.6bn vs £5.7bn)

For Nationwide its about 6% (£10.6bn vs £178.8bn).

Hence despite the fact that they are already sitting on a mountain of liquid assets that could be lent out Metro Bank chose to borrow an extra £700m under the TFS and load up on £600m hand me down BTL mortgages. Also worth noting that whilst the Funding for Lending Scheme was a collateral swap with a fee, the TFS is lending of new base money (electronic printed money conjured into existence ex nihilo de novo).

This is therefore as Tempus suggests arguably the magic money tree in action. UKAR bought the loans with government money, but the government got a lot of that money by borrowing, and the Bank of England then bought those gilts with new base money and hands the government's interest payments (the coupon on the gilts) back to the government. After a while Cerberus buy the loans from UKAR (reducing the amount of money the government is lending to UKAR) and then a little while later Metro Bank buy the loans from Cerberus with new base money that the Bank of England created out of nowhere via the TFS.

And all the while these idiotic buy-to-let mortgages, which should never have been lent in the first place, continue supporting an apparently endless cast of rentiers (BTL portfolio landlords, letting agents, retail bankers, investment bankers, hedge fund investors) and support them still, even now, ten years after the crisis.

 

So there's a hell of a lot of monetised debt notes floating around, an absolute shed load, like a currency, and if the boe were to cease printing then it's market value would plummet and the game of musical chairs would stop, but we'd all be plunged into a rather large liquidity trap as its effects spilt over into real currency?

If so, wtf is the endgame on that?

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Ok, here's my attempt at a liberal answer. You use money printing as long as necessary in order to prevent said collapse, and hope the problem shrinks in proportion with ongoing economic growth. Perhaps vain hope being the operative word, and moral hazard being it's corollary.

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But while that may make a sensible official policy, an unofficial one may be more short termist, and simply be whatever covers the Boe's collective ass over a short enough timescale to get through a promotion round or two. Printy printy.

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1 hour ago, Toast said:

Forgve my ignorance (once again), but I am now puzzled why Cerberus bought these loans essentially at close to face value, when they specialise in distressed assets.

Thinking about it, were they interested becasue they weere calculating that defaults would be negligible, and in an environment of falling bond yields, they were purchasing assets in late 2015 with a yield typical of the higher rates that obtained when the loans were made; thus paying book value was actually a bargain ... provided the default rate is zero?

In that case, Metro might make the same assumtion, under which it would be rational to pay more than face value. Cerberus is now shot of the default risk and have their profit, while Metro is holding the hot potato, and from the sounds of it, planning on holding for a long time. That could be fine: nobody knows when or if default rates will tick up, but personally, I wouldn't be betting on "never".

Isn't that just valuing a mortgage portfolio the same way you'd value a corporate bond? Wasn't that what screwed the system in the first place?

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This deal seems like a fairly concentrated bet for Metro. The portfolio of loans is £600m but the market cap of the bank is only £3bn, so I hope they know what they've actually bought. They say 'portfolio' like it's a nicely diversified set of loans that are going to mature nicely. I hear 'portfolio' and think "hey, I wonder if the default rates will all be correlated and the value will plummet at the first sign of a recession?"

If you were going to pick a stock as the bell-weather of the coming Minsky moment in credit, could Metro play the same role that Foxtons did in the run up to prime London turning South? Big out-performance vs the FTSE 250 (and banks, which is roughly the same as FTSE 250) since its IPO.

     

Screenshot 2017-06-04 05.05.54.png

Edited by Darby Ram

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9 hours ago, Si1 said:

Isn't that just valuing a mortgage portfolio the same way you'd value a corporate bond? Wasn't that what screwed the system in the first place?

Exactly (for the first), and "quite possibly" (for the second) - although if the default risk had been priced correctly, then valuing even sub-prime mortgages in the same way as corporate bonds (they are, after all, "personal bonds"), would have been fine.

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3 hours ago, Darby Ram said:

If you were going to pick a stock as the bellwether of the coming Minsky moment in credit, could Metro play the same role that Foxtons did in the run up to prime London turning South? Big out-performance vs the FTSE 250 (and banks, which is roughly the same as FTSE 250) since its IPO.

That's a very interesting thought: please do keep an eye on it for us! There seem to be a lot of potential foci for the next financial crisis (prime real estate in global cities, fraudulent commercial loans in China, various countries in southern Europe and south America falling to bits, and a rats' nest of "challenger" banks making jaw-dropping moves). I think it's going to be hard to pin down where the conflagraton started this time: it'll be genuinely multi-focal.

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25 minutes ago, Toast said:

Exactly (for the first), and "quite possibly" (for the second) - although if the default risk had been priced correctly, then valuing even sub-prime mortgages in the same way as corporate bonds (they are, after all, "personal bonds"), would have been fine.

But mortgage backed securities (and similar) have way too complicated back stories and feedbacks to, in my opinion, permit such a valuation. I feel, speaking as an amateur.

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On 03/06/2017 at 10:25 PM, Si1 said:

Ok, here's my attempt at a liberal answer. You use money printing as long as necessary in order to prevent said collapse, and hope the problem shrinks in proportion with ongoing economic growth. Perhaps vain hope being the operative word, and moral hazard being it's corollary.

Or at least hope the bomb explodes on someone else's watch.

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On 6/3/2017 at 10:17 PM, Si1 said:

So there's a hell of a lot of monetised debt notes floating around, an absolute shed load, like a currency, and if the boe were to cease printing then it's market value would plummet and the game of musical chairs would stop, but we'd all be plunged into a rather large liquidity trap as its effects spilt over into real currency?

If so, wtf is the endgame on that?

A deflationary bust ,the biggest since 29-33.This Metro deal looks like base money funded,but base money entering the system is falling in the US and probably here as well.Metro will probably go bust.A lot of pass the parcel debt will be liquidated in the bust.I dont know where it starts,but i think debt liquidation will be greatest in oil companies,service and producers,and property.Those defaults will then take down several big banks and other financial companies as the default swaps are seen as worthless.

Leveraged BTL wont be able to service the debts when this hits.Probably the worst asset class to invest in in the world.Leveraged BTL at the end of a deflation/interest rate cycle.

 

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On 6/4/2017 at 5:07 AM, Darby Ram said:

This deal seems like a fairly concentrated bet for Metro. The portfolio of loans is £600m but the market cap of the bank is only £3bn, so I hope they know what they've actually bought.

Metro Bank see themselves as an intermediary in the market. They do not originate their own loans on the retail side, so it's not surprising that when under pressure to actually use some of their expensive deposits to generate a return that they should go to the likes of private equity to do a deal. 

Is this right or wrong, well let me ask you a question. Say you're running your own Bank of Darby Ram, you have two choices to generate loans. Either you employ good people directly and create an incentive system in order to have them write good quality, low risk loans for your customers. Alternatively, you try to save a little money and do not bother with your own mortgage staff; instead you allow third parties to book the loans, or you buy bundles of loans from god knows who.

I have warned here about the challenger banks. A lot of what they claim to be new paradigm business models are basically just the existing business models with shortcuts taken. Personally, I think it will all end in tears, although the gravy train can keep going for awhile yet.

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