Metro Bank's price tag unjustified

Metro Bank was launched in 2010 by Commerce Bancorp founder Vernon Hill as one of the first challenger banks to be introduced to the UK in the wake of the financial crisis. The bank is trying to differentiate itself from its rivals – both the major lenders and challenger peers – by presenting itself as more of a retailer than a bank. Central to this is expanding its branches, or, as management calls them, ‘stores’, which are primarily in London and the south-east of England. At the time of its listing, management had set a target of operating 110 branches by 2020, from the 40 already up and running. At the end of June, 48 stores were operational, with a further eight planned for the second half of this year bringing the Metro chain to half its planned size.

However, opening new high-street branches has come with a high price tag. Operating costs have been rising apace, up a quarter to £106m during the first six months of the year. True, operating income has also been rising at an impressive rate, increasing by more than half to £131m during the same period as the loan book grew two-thirds year on year during the first half of 2016 and deposits were up by half to £9.8bn. This meant Metro was able to produce its first pre-tax profit of £4.4m. 

However, earlier this year management needed to raise a further £278m via a share placing with new and existing shareholders. The funds are to be held as capital to back its growing loan book. That was in addition to the £400m of new money raised at its flotation. As a resultof operating on this enlarged base of equity, management has pushed out its target of making an 18 per cent return on equity by two years to 2022.

Achieving its targeted returns – as well as offsetting its high cost base – depends on Metro Bank maintaining its rapid loan growth in an environment of falling asset yields and weakening macroeconomic data. The challenger bank is highly exposed to the UK's retail banking market, with residential mortgages and personal loans to retail customers accounting for two-thirds of its loan book at the end of June. Given rising competition and post-referendum uncertainty in the UK market, its growth targets look ambitious.