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Metro Bank still adrift

The challenger bank looks desperately challenged
April 30, 2020

Since the start of this year, the share price of Metro Bank (MTRO) has more than halved, taking it below the 100p mark, which represents a truly cataclysmic drop from a peak of over 4,000p two years ago. An abysmal track record as a listed group notwithstanding, we don't think the knock-down share price represents a bargain. In fact, having marked the shares a sell all the way down, we still see further pain ahead.

IC TIP: Sell at 90p
Tip style
Sell
Risk rating
High
Timescale
Medium Term
Bull points

BoE support

Massive discount to BV

Bear points

Costly branch-led model

Deposit base questions

FCA probe

Short positions

A number of hedge funds appear to be of the same opinion, with the 7.3 per cent disclosed short positions making Metro the seventh most shorted share on the London market. Notably, despite the significant de-rating this year, shorts have remained in line with the one-year average this year. Last week, high-profile bear Odey Asset Management, which has bet against the stock since 2018, boosted its short position to 3.32 per cent, having started the year at less than 2 per cent.

Doubts remain well founded. At the start of 2020, analysts at RBC calculated that Metro’s high reliance on funding from UK current accounts made it one of the most exposed banks to an interest rate cut. Three months on, and the Bank of England’s (BoE) base rate is down from 0.75 to 0.1 per cent.

Metro's deposit base – the cost of which is more expensive than larger high-street lenders – has also shown itself to be flighty in times of stress. In the second quarter of 2019, amid increasing concern about Metro’s capital position and management, commercial customers pulled their money, wiping out 13 per cent of deposits in just three months.

There’s little to suggest that something similar is coming, in part because all banks are under immense strain. But Metro cannot avoid the realities of deposit-taking and lending, especially after its net interest margin buckled to just 1.3 per cent in the fourth quarter of 2019. Indeed, analysts at UBS estimate that the interest on Metro’s one-year savings account fell by more than any other UK peer in the first three months of 2020. That will impact the lender’s ability to grow its funding sources, while it is equally unclear how mortgage or small business lending is possible in the current environment.   

Ordinarily, stasis might not be a disaster. But if the Office for Budgetary Responsibility’s worst-case estimate that UK GDP contracts 35 per cent this quarter is even close, then Metro’s exposure to credit cards and corporates mean loan-loss provisions are likely to rise. Worse, the challenger bank’s entire strategy rests on an expensive branch-led model of growth   that resulted in an underlying cost-to-income ratio to 130 per cent in the last three months of 2019.

Metro's shares are not an entirely lost cause. The bank may not be classed as systemically important, but the BoE is not about to let a lender with £21.4bn in assets stumble into liquidity issues. With its shares trading at around a tenth of their trailing book value, Metro could be a target of a larger bank or private equity firm, if regulators give the nod.

However, any potential buyer would need to accept a strategy that did not expect to turn a profit until 2022 even before Covid-19 struck. And while the removal of the so-called counter-cyclical capital buffer means the lender’s pro-forma common equity tier one ratio is 6 percentage points above regulatory requirements – a greater premium to any bank bar RBS (RBS), reckons RBC – the fact remains that Metro’s capacity to generate profits is limited. That makes capital preservation a real challenge.

Metro Bank  (MTRO)   
ORD PRICE:90pMARKET VALUE:£155m  
TOUCH:90-90.02p12-MONTH HIGH:894pLOW:69.0p
FORWARD DIVIDEND YIELD:nilFORWARD PE RATIO:na  
NET ASSET VALUE:918pLEVERAGE RATIO:15.0  
Year to 31 DecTangible book value (p)Earnings per share (p)*Dividend per share (p)
20181,29738.4nil
2019821-9.2nil
2020*760-24.8nil
2021*714-27.6nil
% change+3-17-
Normal market size:1,500  
Beta:1.58  
*RBC forecasts, adjusted  EPS figures