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Metro Bank Warns On EU Referendum Risk

Britain's first new high street bank for more than 100 years has warned investors that an exit from the European Union (EU) could damage its prospects.

In a copy of a circular to shareholders issued this week and obtained by Sky News, the start-up lender said it faced "risks associated with a vote to exit the EU".

The warning came just weeks before Metro Bank plans to admit its shares to trading on the London Stock Exchange (Other OTC: LDNXF - news) in a move that will value it at up to £2bn.

Contained in a list of risk factors highlighting growing pressure on buy-to-let mortgages and the UK's evolving bank taxation regime, the company appeared to defy its domestic focus by pointing to the risk of Brexit.

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"Because a significant proportion of the regulatory regime applicable to Metro Bank in the UK and anticipated regulatory reform is derived from EU directives and regulations, a vote in favour of the UK exiting the EU could materially change the legal framework applicable to Metro Bank’s operations, including in relation to its regulatory capital requirements," the circular said.

"In addition, a UK exit from the EU could result in restrictions on the movement of capital and the mobility of personnel.

"Any of these risks could result in higher operating costs and could have a material adverse effect on Metro Bank’s business, financial condition and results of operations."

While such warnings are frequently inserted by legal and tax advisers in share prospectuses, Metro Bank's reference to the EU referendum is likely to be seized upon by anti-Brexit campaigners.

The document also sets an ambitious target for Metro Bank to expand its branch network from 40 today to 110 by 2020, and discloses that a top-up option may increase the size of a private share sale ahead of its flotation from £500m to £600m.

Its board's determination to list follows substantial interest from existing investors, whose enthusiasm for Metro Bank shares appears to have been undimmed by a difficult start to the year for bank equities and global stock markets more broadly.

Earlier this week, George Osborne, the Chancellor, said he would postpone a £2bn retail offering of Lloyds Banking Group (Other OTC: LLOBF - news) shares because of market volatility.

Metro Bank's new shares will be priced at £24 each, nearly double the £13 they cost when it last raised capital in December 2013.

Known for its dog-friendly branches and commitment to opening customer accounts within a few minutes, Metro Bank has convinced its roughly 450 private shareholders that it has stronger growth prospects than rivals.

If public market investors back the board's valuation when it goes public, Metro Bank would be on course to go straight into the FTSE 250 index - a remarkable rise for a loss-making company.

Its stellar valuation reflects the faith of Metro Bank's investors in its founder and chairman Vernon Hill, but is likely to arouse some scepticism from institutions holding shares in other banks trading at well below their book value.

Metro Bank is, for example, expected to be valued up to six times more richly than CYBG, the owner of Clydesdale and Yorkshire banks, which is seeking to float.

The shareholder circular confirms that Metro Bank's directors expect its shares to be admitted to trading on or around 29 February.

The lender's quarterly results were published this week and revealed that deposits had increased by 78% to £5.1bn in the final quarter of 2015, while total loans more than doubled to £3.55bn.

Bank of America Merrill Lynch (BAML), Goldman Sachs (NYSE: GS-PB - news) , KBW and Royal Bank of Canada (LSE: 0QKU.L - news) (RBC (Other OTC: RBCI - news) ) are working on the IPO, while Moelis is advising the company.

Metro Bank is pursuing a public listing despite the threat of a future hit from the Treasury's new Corporation Tax surcharge, which will target lenders earning more than £25m in annual profits.

Although it has made substantial losses since its launch because of the investment required to open new branches, Metro Bank's board is confident that it will ultimately be highly profitable.

The bank's internal forecasts suggest it is likely to make more than £25m in profit within a few years, meaning that it would fall within the new tax threshold.

Metro Bank declined to comment‎.