It was once hailed as one of the UK’s best up-and-coming challenger banks. But over the past 12 months, investors have quickly turned their backs on Metro Bank (LSE: MTRO).
The decline in the value of the bank’s shares has been swift. Since the beginning of March 2018, the stock has lost 85% of its value, taking Metro’s market capitalisation down to just £520m. That still makes it one of the biggest challengers in the UK, although it’s a fraction of £3bn+ market value the stock touted at the beginning of 2018.
The question I’m going to try and answer today is, could it be worth taking advantage of these declines and snapping up a few shares in Metro on the cheap, or is it best to stay away altogether?
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A bank that can’t count
Earlier this year, it emerged Metro had made an enormous mistake when calculating the value of its risk-weighted assets. Regulators discovered the bank had miss-categorised a large number of commercial property and professional buy-to-let loans, £1.7bn to be exact — a big chunk of the bank’s £15.2bn total loan book (as reported for the fiscal year to the end of March).
To try and boost its capital rating, the firm is now looking to raise £350m through a placing, and there’s talk management may try to offload £1bn of the problem loans.
These revelations have shaken investor confidence, and it’s easy to see why. If Metro can’t even calculate its capital ratios correctly, what else is the bank getting wrong?
Some of Metro’s largest customers have not waited around to find out. The value of customer deposits declined 4% quarter-on-quarter during the first quarter of 2019 after the capital hole was discovered.
Cheap enough?
These problems are enough to scare even the most seasoned investor away from Metro. Before the balance sheet problems were revealed, shares in the lender were dealing at around 2x book value. Today, the ratio is less than 0.5x.
This valuation seems to reflect plenty of bad news, but I think the stock could fall further in the near term. For a start, we have to factor in the upcoming £350m placing, which will dilute existing shareholders by around 67%. As of yet, no concrete date for this placing has been announced. Until it is, I think the uncertainty surrounding this issue will continue to weigh on sentiment.
Then there’s the bank’s falling profitability. Its total loan book grew 38% to £15.2bn in the year to the end of March, but underlying profit before tax and statutory profit before tax declined 31% and 50%, respectively year-on-year.
City analysts are expecting the bank’s growth to return in the second half of the year. They’ve pencilled in an increase in earnings per share of 2.4% for the year as a whole, putting the stock on a forward P/E of 16.5 — what seems like a premium valuation considering Metro’s problems.
Considering all of the above, I think I would continue to avoid Metro after its recent declines. I believe the stock could fall further in the near term as management struggles to bolster the group’s balance sheet and investor confidence.
