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EXCLUSIVE-Challenger Metro Bank targets $3 bln in consumer finance

* Metro Bank aims for 2 bln stg consumer loans in 2-3 yrs - source

* Consumer credit demand to pick up as virus curbs ease - analyst

* Strategy risks higher impairments in uncertain market

LONDON, April 22 (Reuters) - Britain’s Metro Bank aims to expand its consumer finance lending tenfold to 2 billion pounds ($2.78 billion), a source familiar with the plan told Reuters, as it seeks to reverse a sharp downturn in its fortunes in the last two years.

Metro Bank hopes the move into riskier but higher-yielding lending will help the loss-making bank return to profit and revive a stock that has fallen 97% since the discovery of a major accounting error in January 2019.

The success or failure of the strategy will have wider implications for competition in Britain’s high street banking market, with Metro one of the highest profile so-called challenger banks since it launched in 2010.

Banks across the industry are scrambling to increase profits weighed down by rock bottom central bank interest rates and hefty provisions to cover potential bad loans in the pandemic.

Metro started its bid for higher yields by entering the crowded unsecured lending market through its 2020 purchase of RateSetter, a decade-old firm that became one of Britain’s leading peer-to-peer platforms.

The company plans to build out its consumer finance products including those offered by RateSetter, as well as overdrafts, credit cards and personal car loans, the source added.

“In line with our transformation plan, we’re accelerating initiatives to shift our asset mix to deliver higher risk-adjusted returns through consumer lending and specialist mortgages,” a company spokesperson said.

CHASING MARGINS

Metro Bank has scooped up deposits worth more than 16 billion pounds through its high street-focused strategy, but is a newcomer to consumer finance, granting only 200 million pounds of consumer loans, or 2%, of its total loan book in 2020.

After the Bank of England slashed benchmark interest rates to reboot the pandemic-hit economy, British lenders have targeted more lucrative areas to boost profits. Consumer loans generally carry a higher interest rate relative to home or business loans.

The crisis led to a drop in consumer lending in 8 out of 12 months last year mainly because of lockdowns, Bank of England data showed, but with curbs easing as vaccinations are rolled out, banks and analysts expect a rebound.

Metro Bank sold a 3.1 billion pound portfolio of lower yielding mortgages to its much larger rival NatWest last year as it sought to change its asset mix.

Metro’s strategy could help to improve returns but risks higher impairments for bad loans in an uncertain economic outlook, analyst John Cronin at Dublin-based broker Goodbody said.

“The key question is whether this initiative will drive enhanced risk-adjusted returns and I believe that it can.” ($1 = 0.7190 pounds)

Reporting by Muvija M in Bengaluru and Lawrence White and Iain Withers in London; editing by Barbara Lewis

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